[institutional Review] Huayou Cobalt Industry: the Transformation from Copper and Cobalt Enterprises to Integrated Enterprises of Lithium and Electric Materials

Lithium materials industry chain integration gradually landed: Huayou Cobalt Industry has realized the integrated layout of cobalt and nickel resources-smelting processing-ternary precursors-cathode materials. After the high-speed expansion of the precursor and positive capacity supporting the Indonesian nickel project was put into production, the company integrated upstream and downstream, and gradually transformed from a resource enterprise to a lithium material production enterprise. According to the progress of the company's production capacity, we expect the company's net profit structure to change from 54.60% of copper and 45.4% of lithium (cobalt, nickel, ternary precursors and cathode materials) in 2021 to 15.36% of copper and 84.64% of lithium plate in 2025.

The net profit of ternary precursor + cathode material will increase from 600 million yuan in 2021 to 2 billion yuan in 2023.

1) Ternary precursor: the company's existing production capacity is 100000 tons / year (equity 64000 tons), and is expected to reach 325000 tons / year (equity 270000 tons) in 2023.

2) cathode materials: the current production capacity of Bamo Technology, which is to be controlled, is 56000 tons / year (43000 tons of ternary cathode), and will reach 140000 tons / year by the end of 2022, with an increase of more than 2 times. The cooperation with LG will add more certainty to the company's future production capacity release. In 2023, the net return profit of ternary precursors and cathode materials will reach 2.041 billion yuan, and the share of profits will rise from 19% in 2021 to 37% in 2023.

The net profit of the nickel sector will rise from 67 million yuan in 2021 to 1.3 billion yuan in 2023. The company's Huayue 60, 000-ton metal wet project (70% equity, put into production by the end of 2021), Huake 45000 metal-ton fire project (57% equity, put into production by the end of 2022) and Huafei 120000 metal-ton wet project (20% equity, put into production in 2023) will contribute profits from 2022. The wet project adopts the third-generation high-pressure acid leaching process, which has obvious cost advantages. based on the LME nickel price of US $15000 / ton (the current price of US $19390 / ton on August 3, 2021), it is conservatively estimated that the net profit of nickel plate in 2023 is about 1.3 billion yuan, and the profit share will increase from 2% in 2021 to 24% in 2023.

The operation of cobalt and copper is stable, and the share of net profit has dropped from 78% in 2021 to 38% in 2023: with the increase in the proportion of nickel and lithium materials, the profit share of the copper business has dropped sharply, from 55% in 2021 to 27% in 2023; the overall operation of the cobalt plate is sound, and considering the increase in the amount of self-supplied cobalt, the profit share of the cobalt sector will fall from 23% in 2021 to 11% in 2023. The share of profits in the copper business will fall to 15% in 2025, when profits will be mainly contributed by the lithium industry chain.

Profit forecast, valuation and rating: with the release of nickel and lithium materials production capacity, we believe that the profit share of the company's lithium industry chain will increase from 45% in 2021 to 85% in 2025. We are optimistic about the investment opportunities brought by the company's rising performance and valuation. It is estimated that the company's net profit from 2021 to 2023 will be 3.084 billion yuan, 4.014 billion yuan and 5.512 billion yuan respectively, an increase of 164.78%, 30.14% and 37.31% over the same period last year. The current share price corresponds to 48x, 37x and 27x respectively. Cover for the first time, giving a "buy" rating.

Risk hint: the price of cobalt and copper fluctuates sharply, the progress of the company's investment projects is not as expected, and the sales of new energy vehicles are not as expected.