China Metals & Mining_ Lithium - limited net supply improvement, maintain Sell on Tianqi-H_A and Ganfeng-A

Summary of Key Points from the Conference Call Industry Overview - Industry: Lithium Market - Key Players: Tianqi-H/A, Ganfeng-A, QHL, Yongxing, Huayou Cobalt, Yahua Core Insights and Arguments - Market Fundamentals: The lithium market has seen improvements in both demand and supply, driven by strong demand from China's electric vehicle (EV) and energy storage systems (ESS) sectors. However, the supply response has been disappointing despite significant cuts in output and capacity from ongoing projects [1][2] - Price Forecasts: The spot price of lithium carbonate is expected to stabilize at around US$11,000 per ton for 2H25E and 2026E, reflecting a mild improvement offset by lower marginal costs [2][4] - Supply Dynamics: The supply from Chinese producers accounts for nearly half of the global lithium supply, with 45 projects tracked across China, Africa, and South America. However, nearly 40% of these projects are experiencing delays or suspensions due to low prices [3][19] - Earnings Revisions: Earnings forecasts for battery metal stocks have been revised downwards by as much as 46% for 2025E and 2026E, with target price changes ranging from -13% to +24% [4][76] Supply Chain Insights - Capacity Expansion: The net capacity growth for Chinese producer projects is projected to be 23% for 2025E, with significant reductions in expected capacity due to project delays and suspensions [18][19] - Project Status: Among the tracked projects, 18% are delayed, and 18% are suspended, with the highest suspension rates in South America [19][39] - Cost Reductions: Chinese lithium producers have managed to reduce cash costs by 6-25% compared to early 2024, with unit production costs for lithium carbonate dropping significantly [46][50] Demand Insights - Demand Growth: Global lithium demand is expected to grow robustly by 25% in 2025E and 28% in 2026E, driven primarily by increased EV penetration in China [58][59] - Market Balance: The lithium market has been in a tight balance since September 2024, but the inherent supply surplus remains elevated, limiting significant price improvements [57][61] Regional Insights - China: Domestic integrated lithium project capacity is expected to grow from 0.49 million tons in 2024E to 0.84 million tons in 2027E, but many projects are facing delays or suspensions [24][33] - Africa: Projects in Africa are mostly on track, with a projected capacity increase from 272kt-LCE in 2024E to 443kt-LCE in 2027E [33][38] - South America: The majority of projects in South America are delayed or suspended, with nearly 70% of the tracked projects facing issues [39][45] Investment Recommendations - Sell Ratings: Maintain Sell ratings on Tianqi-H/A, Ganfeng-A, QHL, Yongxing, and Huayou Cobalt, while downgrading Yahua to Sell from Neutral due to valuation risks [4][76][77] - Upside Risks for Yahua: Potential positive factors include stronger lithium prices, better project execution, lower raw material costs, favorable government policies, and reduced geopolitical tensions [78] Additional Important Insights - Environmental Costs: Current environmental costs for lepidolite projects are estimated to be lower than US$0.5k/t-LCE, with risks easing as supply growth decelerates [52] - Market Sentiment: The overall sentiment in the lithium market remains cautious, with producers adjusting their strategies based on price movements and market conditions [57][61]