Ganfeng Lithium: Staying Neutral Following Recent Investor Briefing

Elevator Pitch

I have a Hold rating for Ganfeng Lithium Group Co., Ltd. (OTCPK:GNENF) (OTCPK:GNENY) (1772:HK) stock. With my earlier write-up published on February 3, 2024, I highlighted the company’s recent vertical integration move and its negative profit alert for fiscal 2023.

Ganfeng Lithium recently hosted a briefing for investors on April 12, 2024, and the company published the transcript (translated using Google) of this investor event on the same day. There are both favorable and unfavorable takeaways from GNENF’s latest investor meeting.

On the positive side of things, I think that the company will continue to grow its revenue generated by the downstream segment, and pay a meaningful proportion of its earnings as dividends going forward. On the flip side, I have a negative view of the short-to-medium term lithium price outlook, and I am worried about potential provisions for its assets in Mexico for the future. As such, I stay Neutral on Ganfeng Lithium after evaluating the read-throughs from the company’s investor event last week.

Investors should be aware that the company’s shares can be traded on the OTC market and the Hong Kong equity market. Ganfeng Lithium’s Over-The-Counter shares and Hong Kong shares boasted three-month average daily trading values of $0.04 million and $15 million (source: S&P Capital IQ), respectively. US stockbrokers such as Interactive Brokers can allow their clients to deal in the company’s shares listed on the Stock Exchange of Hong Kong, which have better trading liquidity than the OTC shares.

Shareholder Capital Return

At the investor briefing on April 12 this year, Ganfeng Lithium noted that it will “actively respond to the call from the China Securities Regulatory Commission and other regulatory authorities to increase the dividend payout ratio.”

A March 7, 2024, Yicai Global news article cited comments from the China Securities Regulatory Commission’s chairman indicating that “the stability, timeliness, and predictability of (dividend) payments (for Chinese companies) needs further work.” The Chairman of China Securities Regulatory Commission also highlighted that the government agency will pay more attention to Chinese companies with a “low dividend (payout) ratio” as mentioned in this news report.

It is worthy of note that Ganfeng Lithium raised the company’s dividend payout ratio from 10% for fiscal 2022 to 32% in the most recent fiscal year. The stock’s trailing twelve months’ dividend yield was 3.5% with a 32% dividend payout on depressed earnings last year. The company’s net income attributable to shareholders fell by -76% from RMB20,504 million in FY 2022 to RMB4,983 million for FY 2023, which was mainly driven by asset impairments and lower selling prices.

Assuming that Ganfeng Lithium’s bottom-line performance improves, and the company maintains or even increases its dividend payout ratio, the stock’s future dividend distribution should be better than what it paid out in the past.

Expansion In Downstream Lithium Battery Segment

In my prior November 12, 2023 update for GNENF, I drew attention to the fact that the company’s plans to “move downstream into the lithium battery space are progressing well.” I also outlined my expectations in the mid-November 2023 article that “the market will assign a higher valuation to a fully vertically integrated lithium company” like Ganfeng Lithium in time as it continues to expand downstream.

Ganfeng Lithium disclosed at the April 12 investor meeting that “its first generation of solid-state lithium batteries with an energy density of 240-270 Wh/kg has reached mass production scale.” The company is also in the process of “researching and developing its second generation of solid-state lithium batteries with a potential energy density exceeding 400 Wh/kg” as per the management’s comments at the investor event this month.

The company’s revenue generated by its lithium battery business as a percentage of its top line rose from 16% in 2022 to 24% for 2023 as highlighted in its recent fiscal year results announcement. Judging by GNENF’s comments on the good progress of its lithium business, it is realistic to think that Ganfeng Lithium’s sales contribution from the downstream lithium business will continue to grow going forward.

Lithium Price Outlook

When asked about the outlook for lithium price at the April 12, 2024 investor meeting, Ganfeng Lithium indicated that it expects “the price fluctuation for lithium carbonate to be less volatile in 2024 as compared to 2023.” At the recent investor briefing in the earlier part of April, GNENF also emphasized that it will leverage on “upstream resource projects to optimize costs” and “make the necessary adjustment to production to minimize the impact of cyclical fluctuations.”

It is reasonable to say that the company has a cautious view of the lithium price outlook, and there might be good reasons to have a conservative opinion on lithium prices. A March 5, 2024, CNBC article cited Goldman Sachs’ (GS) forecast of a “25% downside” for “lithium carbonate” on “a 12-month basis.” A more recent April 9, 2024, Bloomberg report made reference to data from Mysteel indicating that “lithium inventory” is at “elevated levels along the battery chain.”

Ganfeng Lithium is expected to report its Q1 2024 results at the end of this month. The company’s upcoming quarterly financial performance might be boosted by a low-teens percentage increase in the price of lithium carbonate for Q1 2024. But this might not be sustainable as oversupply and the resulting inventory overhang remain a key headwind for the lithium market as highlighted above.

Potential Write-Down For Mexican Assets

In its FY 2023 results announcement, GNENF mentioned that the company “did not make any provision for the pending legal cases” relating to “the cancellation of nine lithium mine concessions” for “three controlled subsidiaries of the company registered in Mexico.”

Ganfeng Lithium explained at the company’s April 12 investor briefing that it is “unable to reliably estimate the possible outcome and impact of the legal proceedings as per the lawyers’ opinions and the progress of this case thus far.” This accounting treatment is in line with International Accounting Standard or IAS 37 on “Provisions, Contingent Liabilities and Contingent Assets.” IAS 37 states that “an entity must recognize a provision if, and only if” the “payment is probable” and “the amount can be estimated reliably.”

I didn’t find disclosures of the carrying values of the Mexican subsidiaries based on my review of Ganfeng Lithium’s past annual reports. But there is a risk that the company might have to recognize provisions or impairments for its Mexican assets, assuming that the future outcome of the lawsuits turn out to be unfavorable.

Final Thoughts

My Hold rating for Ganfeng Lithium stays unchanged. There are both positive and negative read-throughs relating to the company’s latest management comments and disclosures, so I stick to a Neutral view for the stock.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.