1H22 results in line with our expectations

Lopal Tech announced that revenue rose 371.1% YoY (116.4% HoH) in 1H22 to Rmb6.01bn, and attributable net profit increased 196.3% YoY (111.8% HoH) to Rmb433mn, implying an EPS of Rmb0.77/sh. The results are in line with our expectations.

In 2Q22, revenue rose 407.2% YoY (34.9% QoQ) to Rmb3.45bn, and attributable net profit jumped 157.0% YoY (3.4% QoQ) to Rmb220mn. The firm’s sales volume of lithium-iron phosphate (LFP) materials increased 24% QoQ in 2Q22, due to the strong demand for LFP.

Trends to watch

LFP business remains robust; capacity expansion boosts revenue. Gaogong Industry Institute (GGII) reports that LFP output in China rose 122% YoY (31% HoH) in 1H22 to 340,000t. The LFP price is now around Rmb156,000/t, down 7.7% from end-1Q22, as prices of raw materials such as lithium carbonate and yellow phosphorus fell. We believe that the sales volume of alternative-fuel vehicles will remain high, which should boost demand for LFP. We expect Lopal Tech’s 120,000t LFP production projects in Sichuan and Shandong to come online in 3Q22. As the firm is accelerating construction of LFP production facilities and it is making progress in integrating its businesses, we expect revenue and earnings to continue growing in 2H22.

Breakthroughs in LFP No.1 and LMFP to bolster growth. On April 15 at its conference, the firm pointed out the pain point of poor performance of traditional LFP products and introduced its LFP No.1, which improves the performance of batteries in low temperatures and increases energy density. At the conference and on its official WeChat account, the firm introduced small-scale LFP No. 1 and announced cooperation with Phylion in lithium-manganese iron phosphate (LMFP). We are upbeat on the growth of its new products and technological upgrading in the long term.

Upbeat on growth of automotive chemical business as China VI emission standards, green & low-carbon policies are implemented. In 1H22, the sales volume of diesel exhaust fluid (DEF), engine coolants, and vehicle maintenance products at Lopal Tech dropped 23.9%, 7.6%, and 7.7% YoY, due to weak demand amid a resurgence of COVID-19. We expect its DEF business to regain rapid growth, supported by China VI emission standards. We are also upbeat on long-term growth potential of the DEF business, as raw material prices (e.g., for urea) pull back following falling coal prices on easing of current geopolitical tensions.

Financials and valuation

As the firm increased investment in Changzhou Liyuan New Energy Technology and the LFP business is robust, we raise our 2022 and 2023 net profit forecasts 8.4% and 12.7% to Rmb814mn and Rmb975mn. The stock is trading at 25.3x 2022e and 21.1x 2023e P/E. As we expect competition in the market to intensify, we maintain OUTPERFORM and our TP of Rmb45.00, implying 31.2x 2022e and 26.1x 2023e P/E with 23.6% upside.

Risks

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