1Q22 results in line with our expectation

Lopal Tech announced its 1Q22 results: Revenue increased 329.9% YoY and 47.2% QoQ to Rmb2.56bn, and attributable net profit equaled Rmb213mn, implying an EPS of Rmb0.44 (up 252.0% YoY and 36.0% QoQ), in line with our expectation. Gross margin (GM) grew 4.5ppt QoQ to 26.7%. By business, sales volume of lithium iron phosphate (LFP), lubricating grease, and vehicle maintenance products rose 15%, 6%, and 5% QoQ, while that of diesel exhaust fluid (DEF) and engine coolant dropped 7% and 33% QoQ. ASP of LFP and DEF grew 48% and 1% QoQ in 1Q22, while that of lubricating grease, engine coolant, and vehicle maintenance products dropped 8%, 1%, and 1% QoQ.

Trends to watch

LFP earnings increase; the firm is technologically advanced; capacity expansion continues. In 1Q22, Lopal Tech’s LFP output and sales volume increased 47% and 15% QoQ to 22,500t and 17,800t. We calculate earnings of LFP rose 24% QoQ to around Rmb14,000/t, due to lithium carbonate inventory gains and high earnings amid tight LFP supply. Although COVID-19 resurgence weighs on manufacturing and sales of alternative-fuel vehicles (AFV), we think downstream demand will likely increase rapidly in 2H22 rather than dropping continuously. At its press conference, Lopal Tech announced that its LFP No.1 and lithium manganese iron phosphate (LMFP) projects are proceeding smoothly, and will likely enter the stage of industrialization in one or two years. The firm’s LFP products have outperformed common products in terms of the low-temperature performance and energy density.

From early 2022 to date, the firm’s 162,500t new capacity in Sichuan, Shandong, and Hubei has started operating. Lopal Tech is accelerating the construction of LFP facilities in Hubei and Shandong to bolster integrated development. It has strengthened cooperation with Contemporary Amperex Technology (CATL) and Ruipu Energy, and continues to expand client base in overseas markets such as Japan and South Korea. The firm has entered stages of small test, pilot test and small batch orders in overseas markets. We are optimistic that Lopal Tech’s LFP business will see rapid earnings growth.

Upbeat on continued growth of the firm’s automotive chemical business amid implementation of China VI emission standards and China’s green and low-carbon development. We calculate that Lopal Tech’s earnings from automotive chemical business trended upward moderately in 1Q22, but we note the business still faced pressure from high prices of raw materials such as urea. Looking forward, we expect the firm’s DEF business to maintain rapid growth, supported by China VI emission standards. We are also upbeat on long-term growth potential of the firm’s DEF business as raw material prices (e.g. urea) pull back following falling coal prices on dissipation of current geopolitical factors. In addition, we think engine coolants can be widely used in new fields such as data centers. We are upbeat on the medium- to long-term growth of its engine coolant business.

Financials and valuation

We keep our 2022 and 2023 earnings forecasts unchanged. The stock is trading at 18.7x 2022e and 16.3x 2023e P/E. We maintain an OUTPERFORM rating and our TP of 45, implying 28.9x 2022e and 25.1x 2023e P/E with 54.2% upside.

Risks

Progress of LFP projects and/or sales of DEF disappoint; intensifying competition.