Core views:

Tengyuan is a leading cobalt manufacturer with a significant cost advantage backed by its core technologies such as a leading smelting process, self-sufficiency in key equipment and the recycling of wastewater/waste gas/waste residues and may expand this advantage to battery recycling and precursor production. Coupled with production capacity expansion for cobalt and copper, all these bode well for its earnings growth in the long term. We forecast 2022E-24E attributable net profit (ANP) of Rmb1,541mn/2,145mn/2,712mn, equivalent to 2022E-24E EPS forecast of Rmb6.80/9.46/11.96. Considering the average 2022E PE multiple of 18x for comparable companies, we assign 17x 2022E PE to derive a target price of Rmb116 and initiate coverage with a "BUY" rating.

Abstract:

A leading cobalt manufacturer with complete coverage along the industrial chain

Tengyuan has been involved in the cobalt industry for more than ten years since the start of its cobalt salt business in 2005. In 2016, Tengyuan built its presence in cobalt and copper raw materials in the Democratic Republic of the Congo (the DRC). In 2020, the Company finished the relocation of its production base and accelerated the development of its new energy materials business. It got listed on the ChiNext Market of the Shenzhen Stock Exchange in Mar 2022 and raised Rmb5.2bn. In 1H22, the Company achieved attributable net profit (ANP) of Rmb547mn, hitting a historical high.

Cobalt and copper prices are well supported, and the integration trend has been established for the ternary precursor industry.

Since Jun 2022, the prices of cobalt and copper plummeted. However, benefiting from the increased demand from power batteries, consumer electronics, alloys and other fields, we expect cobalt consumption to maintain a rapid growth rate of more than 10% in 2022-25. Cobalt resources show strong dependence, resulting in resilient raw material prices that provide underlying support for cobalt prices. Copper, as a key metal for the green economy, is increasingly constrained by mine resources, and the price uptrend for copper is likely to remain intact in the long run. EVTank predicts that the lithium battery recycling market in China will likely reach Rmb100bn in 2026. Venturing into the recycling business to create an integrated industrial chain has become an important trend in the development of the ternary precursor industry.

With the lowest costs for cobalt and copper product refining, Tengyuan could expect stable earnings growth driven by capacity expansion.

Backed by its core technologies such as a leading smelting process, self-sufficiency in key equipment and waste recycling, Tengyuan’s processing cost of cobalt/cobalt-copper products is lower than that of comparable companies by 20%/more than 10%, respectively, pointing to impressive cost advantages. The Company currently has an annual cobalt/copper production capacity of 6.5kt/20k at present and may expand to 20kt/40kt by the end of 2022, and the long-term copper production capacity is planned to reach 60ktpa. The substantial increase in cobalt and copper production capacity and the bottoming out of prices are likely to drive Tengyuan’s earnings to show a steady upward trend.

Expanding into battery recycling and ternary precursors

Tengyuan has planned an annual production capacity of 15kt for battery recycling and 40kt for ternary precursors while expanding the production capacity of cobalt and copper products. Battery recycling and precursor production generate synergies with its existing businesses, and Tengyuan is likely to extend its leading cost advantage in cobalt products to battery recycling and precursor production. The Company announced its five-year strategy in Aug 2022, aiming to actively participate in the fields of energy metals such as nickel and lithium, expand to upstream mine resources and secondary resource recovery, and become the most competitive enterprise in the field of new energy materials.

Potential risks: Earnings fluctuations due to volatile cobalt and copper prices; changes in the technical route of battery materials; disappointing progress in expanding into ternary precursor and battery recycling business; risks associated with overseas operations; less-than-expected progress of production capacity expansion.

Investment recommendation: Tengyuan is a leading cobalt manufacturer, with a significant cost advantage that may expand to battery recycling and precursor production. We forecast 2022E-24E ANP of Rmb1,541mn/2,145mn/2,712mn, equivalent to 2022E-24E EPS forecast of Rmb6.80/9.46/11.96. Considering the average 2022E PE multiple of 18x for comparable companies, namely Huayou Cobalt (603799.SH), Hanrui Cobalt (300618.SZ), GEM (002340.SZ), and Chengtun Mining (600711.SH), and the fact that the Company’s precursor business is at the early stage, which justifies a moderately lower multiple than the industry average, we assign 17x 2022E PE to derive a target price of Rmb116 and initiate coverage with a "BUY" rating.