Wanrun mainly engaged in lithium iron phosphate, the positive electrode material of lithium-ion batteries; and ranked top3 in shipments for three years in a row. The company mainly produced lithium iron phosphate, iron phosphate, and manganate, serving as an important supplier to CATL and BYD. In 2021, it achieved revenue of RMB2.2bn (+224%, YoY), and revenue from lithium iron phosphate accounted for 99% of the total revenue. Its market share in domestic lithium iron phosphate was 16.70%/13.50%/11.8% during 2019-2021, ranking top3 for consecutive three years. In 2022H1, it achieved revenue of RMB3.4bn and net profit of RMB494mn, +387%/+252%, YoY.

Lithium iron phosphate is in strong demand and manufacturers’ profits will return to a reasonable level after gradual capacity ramp up in 2023. Lithium iron phosphate batteries are rapidly picking up as power batteries in the recent two years, with the installed share increasing significantly from 29% at the beginning of 2021 to 58% in August 2022, and are still expected to see a slight rise next year. As the large-scale capacity expansion began in early 2021 and will release gradually from 2H22 to 2023, the supply shortage will ease significantly in 2023 and market shares of leading manufacturers are expected to improve due to aggressive expansion. The industry's average profit was about RMB10,000 per ton due to tight supply in 2022, which may return to RMB3,000-5,000 in the medium-term, while manufacturers who are integrative and advanced in technology will be generally more profitable.

Deeply bounding up with the two major battery manufacturers, Wanrun saw a rapid production rise. The productions of Wanrun are supplied to both CATL and BYD, which will be 50,000 tons to each in 2022 according to our estimates. With the gradual release of production capacity in 2023, its market share may increase significantly.

Wanrun saw a significant expansion in 2022-2023: its production capacity in 2021 was 43,000 tons, which will reach to 240,000 tons and 480,000 tons at the end of 2022 and 1Q23. Therefore, we estimate the company's shipments in 2022/2023 to be 100,000- 120,000 tons and 300,000-350,000 tons respectively, with a YoY growth of 170%+, driving its market share to rise from 11% in 2021 to 18% in 2023.

The company’s self-made iron phosphate in ammonia method builds cost advantage and further cost reductions deserves expectation after new capacity in Shandong was put into production. Its new production capacity of 240,000 tons in Binzhou, Shandong will be put into production in 1Q23, with lower electricity cost than current average, which will further reduce the company's unit cost.

Earnings Forecast & Rating: Given the company's capacity expansion, customer and cost advantage, we estimate its 2022-2024 net profit to be RMB1.32/ 1.82/2.14bn, with a YoY growth of 274%/38%/18%, corresponding to P/E of 13x/9x/8x. We give a target price of RMB319.8 and a "Buy" rating in our initial coverage.

Risks: Lower-than-expected production progress; risk of technical route change; fiercer competition in the industry; risk of centralized customers and going concern; risk of stock price’s sharp fluctuation as new share