Core views:

Jiuwu Hi-Tech is the domestic leader of ceramic membranes and has achieved the industrialization of its self-developed aluminum-/titanium-based adsorbents with high added value and barriers, warranting a full presence across the entire value chain of membranes and adsorbents. Jiuwu has won the bid for several projects of adsorbents and membranes for brine lithium extraction, which will gradually verify its ability to commercialize adsorbents, while its venturing into brine lithium extraction bodes well for the release of its earnings elasticity. We forecast its 2022E/23E/24E attributable net profit (ANP) to be Rmb65mn/109mn/209mn. We assign 23x 2024E PE to derive a target price of Rmb39 and initiate coverage with a "BUY" rating.

Abstract:

As a leader in ceramic membranes, Jiuwu has built a full presence along the value chain of membranes/adsorbents for brine lithium extraction. Jiuwu is hatched by Nanjing Tech University, with a solid inheritance of its innovation genes, and has built a sophisticated business portfolio including membrane material production, the manufacturing of membrane modules and full-set equipment, and membrane integration solutions, consolidating its leading position in the domestic ceramic membrane market. Jiuwu has long ventured into brine lithium extraction by supplying membranes. At present, the Company has achieved the capability of large-scale production for lithium extraction adsorbents and warranted the presence along the whole value chain of membranes and adsorbents, effectively enhancing its competitiveness in brine lithium extraction for long-term development.

Adsorbents are the key to brine lithium extraction, with a likely market size of about Rmb10bn in 2025. The market size of membrane separation is huge with a wide range for downstream applications. However, competition in this field is getting increasingly fierce in recent years. The demand for adsorbent- and membrane-based brine lithium extraction technology is surging, and the scale of domestic projects under construction for brine lithium extraction has exceeded 400ktpa. We expect that the domestic market size of adsorbents and membranes for lithium extraction will likely rise to Rmb10bn in 2025. The adsorbents for brine lithium extraction boast high entry barriers, whose added value is quite considerable, far outrunning that of membranes. At present, the application of aluminum-based adsorbents is relatively mature, while manganese titanium-based adsorbents are gradually moving towards large-scale commercialization.

The legacy business of membranes continues to be stable, and absorbents are up for launching the second growth curve. As early as 2018, Jiuwu completed the construction of the world's first 10ktpa full-film brine lithium extraction project, and its contracting capability of a whole lithium extraction project had been verified. The Company has developed aluminum- and titanium-based adsorbents, and its titanium-based adsorbents are poised to be industrialized very soon. According to Jiuwu’s announcement, its adsorbent project with a planned capacity of 6ktpa has been gradually put into production. The Company has won the bid of several projects for brine lithium extraction, and adsorbents have so far performed well in the winning projects. Considering its full presence along the value chain of the contracting of a whole project, membranes and adsorbents, we believe that 2023 will likely be the year of industrialization verification of the Company's adsorbent cost performance in the winning projects, and a sound performance may push its earnings to post rapid growth in 2024. If the Company’s earnings are in line with expectations, it will shift from the prudent membrane-dominated stage in the early days to an accelerated growth cycle.

Potential risks: Disappointing macroeconomic recovery; changes in the technical routes of brine lithium extraction; the construction and capacity expansion of the Company’s brine lithium extraction project failing expectations; less-than-expected sales of membrane materials and equipment; incremental adsorbent order intakes missing expectations.

Investment recommendation: Jiuwu’s traditional membrane business will return to the normal with the waning of Covid-induced impact, and its adsorbent business is poised to surge driven by the verification of the product cost performance in the winning projects and the expanding demand for brine lithium extraction. We forecast its 2022E/23E/24E ANP to be Rmb65mn/109mn/209mn (-7%/+67%/+92% YoY), corresponding to 61x/36x/19x PE at the current price. Considering that the Company’s adsorbent business is in the initial stage of large-scale industrialization and the growth of membranes is relatively slow, and with the comps valuation of 33x 2024E PE for Sunresin New Materials (300487.SZ) based on Wind consensus estimates as a reference, we give a 30% discount to the Company’s valuation and arrive at a target price of Rmb39 on 23x 2024E PE. We initiate coverage with a "BUY" rating.