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Deutsche Bank Markets Research
Rating
Buy Asia
China
Resources
Metals & Mining
Company
Easpring
Date
6 June 2017
Initiation of Coverage
Initiate with Buy for exposure to cathode (NMC) demand
Reuters Bloomberg Exchange Ticker 300073.SZ 300073 CH SHZ 300073
Forecasts And Ratios
Year End Dec 31 2015A 2016A 2017E 2018E 2019E
Sales (CNYm) 860.4 1,334.5 2,294.4 3,177.2 5,200.0
Reported EPS FD(CNY) 0.07 0.54 0.54 0.83 1.40
Reported NPAT (CNYm) 13.3 99.3 198.9 305.2 511.6
PER (x) 189.0 44.2 31.3 20.4 12.2
Source: Deutsche Bank estimates, company data
Earnings forecast to grow at CAGR of 70% in FY17-19, initiating with Buy.
________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017.
Price at 2 Jun 2017 (CNY) 17.00
Price target - 12mth (CNY) 21.00
52-week range (CNY) 39.04 - 16.28
HANG SENG INDEX 25,924
James Kan
Research Analyst
(+852 ) 2203 6146
Price/price relative
0
10
20
30
40
6/15 12/15 6/16 12/16
Easpring
HANG SENG INDEX (Rebased)
Performance (%) 1m 3m 12m
Absolute -12.9 -37.2 -29.7
HANG SENG INDEX 5.9 10.1 23.8
Source: Deutsche Bank
Easpring is one of the largest cathode producers in China, focusing on producing NMC (lithium nickel manganese cobalt oxide). The company plans to aggressively expand NMC capacity at its Jiangsu factory in the next three years to catch up with the strong industry demand for NMC. We believe Easpring will be able to maintain high profitability, due to its capability to regularly research and launch leading cathode products like 622/811 NMC. We estimate earnings to rise from c.RMB100m in 2016 to c. RMB500 in 2019E, generating a 3Y CAGR of c.70%. Current trading prices imply 31x/20x FY17/18E EPS. We initiate coverage of Easpring with Buy.
Aggressive capacity expansion to catch up with downstream demand We forecast that global cathode demand for lithium batteries will rise from c.200kt in 2016 to c.400kt in 2019, a 3Y CAGR of 23%. Among all major cathode types, we estimate that NMC demand could rise the quickest, registering a 3Y CAGR of c.45%, due to a structural change in demand. See our FITT report, “Supplying the charge – evaluating the battery component sector” published on 6 June, 2017. In order to catch up with strong downstream demand, Easpring has shifted its focus from LCO (lithium cobalt oxide) to NMC since 2015 and plans to aggressively expand its total capacity from 8ktpa in 2016 to 31ktpa in 2020, mainly for NMC, at its factory in Jiangsu.
Stable profitability stemming from continuous launch of leading products Easpring should be one of the key beneficiaries of the structural industry demand shift to NMC from LFP (lithium iron phosphate). For Easpring, NMC sales volume accounted for c.75% of total cathode shipments in 2016. This proportion should rise further, as more NMC production lines are built and ramped up. We also believe Easpring should be able to stabilise its profitability by: 1) researching and launching leading products (622/811 NMC and NCA) with higher ASP; and 2) lowering unit costs stemming from leading technology and higher utilisation rates, due to a better product mix.
Earnings CAGR of c.70% over 2017-19E; initiating with Buy; risks The machinery business, acquired by Easpring in 2015, should remain a high-margin division, but we estimate that its gross profit contribution could drop from c.30% in 2016 to c.10% in 2019, due to the fast-growing cathode business. Overall, we expect Easpring’s earnings could grow from c.RMB100m in 2016 to c.RMB500m in 2019, implying a 3Y CAGR of c.70%. We use P/E methodology in view of fast earning growth and set our TP at RMB21, 25x FY18E DBe EPS, the average the lithium battery components industry implying ~24% upside potential. Risk: significant China EV policy changes (p.3).
Distributed on: 05/06/2017 22:52:27 GMT
0bed7b6cf11c
6 June 2017
Metals & Mining
Easpring
Page 2 Deutsche Bank AG/Hong Kong
Model updated:05 June 2017
Running the numbers
Asia
China
Metals & Mining
Easpring Reuters: 300073.SZ Bloomberg: 300073 CH
Buy Price (2 Jun 17) CNY 17.00
Target Price CNY 21.00
52 Week range CNY 16.28 - 39.04
Market Cap (m) CNYm 6,223
USDm 913
Company Profile
Beijing Easpring Material Technology develops, manufactures and sells cathode active materials for lithium battery. It is one of the largest cathode producers in China, focusing on producing NMC (lithium nickel manganese cobalt oxide). The company plans to aggressively expand its NMC capacity at the Jiangsu factory in the next three years.
Price Performance
0
10
20
30
40
Jun 15Sep 15Dec 15Mar 16Jun 16Sep 16Dec 16Mar 17
Easpring HANG SENG INDEX (Rebased)
Margin Trends
-8-4048
1216
14 15 16 17E 18E 19E
EBITDA Margin EBIT Margin
Growth & Profitability
-5051015202530
-20
0
20
40
60
80
14 15 16 17E 18E 19E
Sales growth (LHS) ROE (RHS)
Solvency
0
5
10
15
20
-20
0
20
40
60
80
14 15 16 17E 18E 19E
Net debt/equity (LHS) Net interest cover (RHS)
James Kan
+852 2203 6146 [email protected]
Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E
Financial Summary
DB EPS (CNY) -0.16 0.07 0.54 0.54 0.83 1.40
Reported EPS (CNY) -0.16 0.07 0.54 0.54 0.83 1.40
DPS (CNY) 0.11 0.54 0.11 0.11 0.17 0.28
BVPS (CNY) 5.1 6.8 7.3 4.1 4.8 5.9
Weighted average shares (m) 160 183 183 366 366 366
Average market cap (CNYm) 1,388 2,513 4,391 6,223 6,223 6,223
Enterprise value (CNYm) 1,205 2,252 4,315 6,532 7,221 7,536
Valuation Metrics P/E (DB) (x) nm 189.0 44.2 31.3 20.4 12.2
P/E (Reported) (x) nm 189.0 44.2 31.3 20.4 12.2
P/BV (x) 1.72 2.85 2.93 4.15 3.57 2.89
FCF Yield (%) nm nm nm nm nm nm
Dividend Yield (%) 1.3 3.9 0.5 0.6 1.0 1.7
EV/Sales (x) 1.9 2.6 3.2 2.8 2.3 1.4
EV/EBITDA (x) nm 48.2 30.1 24.1 16.5 10.4
EV/EBIT (x) nm 176.7 40.5 28.4 19.2 12.4
Income Statement (CNYm)
Sales revenue 625 860 1,335 2,294 3,177 5,200
Gross profit 46 104 259 484 705 1,227
EBITDA 0 47 143 271 438 727
Depreciation 27 33 37 41 63 119
Amortisation 0 1 0 0 0 0
EBIT -28 13 106 230 375 608
Net interest income(expense) -1 2 2 -13 -42 -49
Associates/affiliates 0 0 0 0 0 0
Exceptionals/extraordinaries 0 0 0 0 0 0
Other pre-tax income/(expense) 0 0 0 0 0 0
Profit before tax -29 14 109 217 334 559
Income tax expense -3 1 9 19 28 48
Minorities 0 0 0 0 0 0
Other post-tax income/(expense) 0 0 0 0 0 0
Net profit -26 13 99 199 305 512
DB adjustments (including dilution) 0 0 0 0 0 0
DB Net profit -26 13 99 199 305 512
Cash Flow (CNYm)
Cash flow from operations 0 10 -71 -106 -72 194
Net Capex -12 -37 -48 -236 -556 -405
Free cash flow -12 -27 -120 -342 -628 -210
Equity raised/(bought back) 0 98 0 0 0 0
Dividends paid -4 -1 -4 -40 -62 -104
Net inc/(dec) in borrowings 97 101 379 200 900 1,100
Other investing/financing cash flows -101 -126 -305 0 0 -800
Net cash flow -20 45 -50 -183 210 -14
Change in working capital -7 -26 -211 -346 -441 -436
Balance Sheet (CNYm)
Cash and other liquid assets 89 206 252 67 278 263
Tangible fixed assets 316 326 360 555 1,048 1,334
Goodwill/intangible assets 16 338 337 338 338 338
Associates/investments 120 122 136 136 136 136
Other assets 475 746 1,076 1,706 2,339 3,217
Total assets 1,016 1,738 2,161 2,803 4,138 5,288
Interest bearing debt 26 67 312 512 1,412 1,712
Other liabilities 175 432 510 794 986 1,428
Total liabilities 201 499 822 1,305 2,398 3,140
Shareholders' equity 818 1,242 1,341 1,499 1,743 2,151
Minorities 0 0 0 0 0 0
Total shareholders' equity 818 1,242 1,341 1,499 1,743 2,151
Net debt -63 -139 60 444 1,134 1,448
Key Company Metrics
Sales growth (%) -0.8 37.7 55.1 71.9 38.5 63.7
DB EPS growth (%) na na 646.5 0.2 53.4 67.6
EBITDA Margin (%) 0.0 5.4 10.7 11.8 13.8 14.0
EBIT Margin (%) -4.4 1.5 8.0 10.0 11.8 11.7
Payout ratio (%) nm 744.0 20.3 20.3 20.3 20.3
ROE (%) -3.1 1.3 7.7 14.0 18.8 26.3
Capex/sales (%) 2.0 4.3 3.6 10.3 17.5 7.8
Capex/depreciation (x) 0.5 1.1 1.3 5.8 8.8 3.4
Net debt/equity (%) -7.7 -11.2 4.5 29.6 65.1 67.3
Net interest cover (x) nm nm nm 17.9 9.0 12.5
Source: Company data, Deutsche Bank estimates
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 3
Investment thesis
Outlook
Beijing Easpring Material (Easpring) is one of the key cathode producers in
China, focusing on NMC. Its major clients include major lithium battery makers
such as Samsung, LG, Sony, Lishen and ATL.
We forecast that global cathode demand for lithium batteries will to rise from
c.200kt in 2016 to c.400kt in 2019, implying a three-year CAGR of 23%.
Among all major cathode types, we estimate that NMC demand could rise the
quickest, registering a three-year CAGR of c.45%, due to a structural change in
demand for NMC lithium batteries.
Easpring should be one of the key beneficiaries of the structural industry
demand shift to NMC from LFP. For Easpring, NMC accounted for c.75% of total
cathode shipments in 2016. In order to catch up with strong downstream
demand, Easpring plans to grow its capacity from 8ktpa in 2016 to 31ktpa in
2020, mainly by expanding its factory in Jiangsu. The new factory will focus
mainly on producing high-nickel NMC products 622/811 and maybe NCA in
the future. We also believe Easpring will be able to stabilise its profitability by:
1) higher ASP, positioned by its capability of launching leading products
(622/811) regularly; and 2) lower unit costs, stemming from a higher utilization
rate, due to a better product mix.
Overall, we believe Easpring should improve its bottom line from c.RMB100m
in 2016 to c.RMB500m in 2019E, implying a three-year CAGR of c.70%.
Valuation
We set our target price at RMB21, based on 25x FY18E EPS, which is the
average for the lithium battery components industry. Given that Easpring may
achieve a bottom-line CAGR of c.70% in the next three years, we believe a
25x PE valuation is not demanding.
Risks
Industry downside risks: 1) significant changes in China EV subsidy policy,
boosting China EV sales; 2) larger-than-expected supplier capacity expansion;
and 3) a lower-than-expected unit spread for ternary cathodes, especially high-
nickel NMC.
Company downside risks: 1) Easpring decelerating its capacity expansion and
being unable to ramp up its expanded capacity on time, although we believe
the risk is low − Easpring has mature technology and plenty of experience to
ramp up its production lines; 2) Easpring being unable to raise ASP and enlarge
its unit spread, due to intensifying competition; and 3) Easpring being unable
to cut costs significantly.
6 June 2017
Metals & Mining
Easpring
Page 4 Deutsche Bank AG/Hong Kong
Valuation and risks
Strong growth; initiating coverage with a Buy rating
We forecast strong growth for Easpring in the next several years, driven by
volume expansion and relatively stable profitability. Easpring currently trades
at RMB17, implying 31x and 20x our FY17/18E EPS. Earnings growth should
be strong, in our view, with a three-year CAGR of c.70%. We set our target
price at RMB21, implying 25x our FY18 EPS estimate (the industry average of
lithium component stocks listed on A-shares). Our target price implies ~24%
upside potential. We initiate coverage on Easpring with a Buy recommendation.
Figure 1: Easpring’s 12-month forward P/B vs. ROE
-9%
-4%
1%
6%
11%
16%
0
1
2
3
4
5
6
Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
12m Forward P/B (LHS) Average= 1.88 + 1 SD= 2.87 -1 SD= 0.89ROE (RHS)
P/B
(x)
RO
E
Source: Deutsche Bank, Bloomberg Finance LP
Figure 2: Major players in the lithium battery supply chain as of 2 June, 2017
Market cap. Long term ROE PB PE GrowthSubsector Company Bbrg Ticker Current Price US$ m ROIC 2016 2017E 2018E 2017E 2018E 2017E 2018E 2016 2017E 2018E 1 month 3 months 6 months YTD
Tianqi Lithium 002466 CH Equity 42 6,107 9 39 27 20 7 6 29 32 510% -6% -10% (14) 13 11 29 Ganfeng Lithium 002460 CH Equity 39 4,351 13 22 39 38 9 7 28 20 265% 131% 37% (10) 36 36 49 Youngy 002192 CH Equity 22 841 8 1 na. na. na. na. na. na. -9% na. na. (4) (8) (14) 1 Jiangxi Special 002176 CH Equity 8 1,795 9 6 9 11 3 3 29 25 401% 83% 32% (15) (28) (35) (30) Average 11 27 27 23 7 5 27 25 380% 52% 12% (12) 13 11 26
Luoyang Molybdenum 603993 CH Equity 4 8,889 27 6 10 11 3 3 38 29 31% 91% 22% (11) (23) 1 9 Huayou Cobalt 603799 CH Equity 41 3,601 6 2 11 14 5 5 50 36 -128% 685% 39% (17) (31) 26 18 Average 19 5 10 10 3 3 31 25 4% 193% 24% (8) (22) 12 18 Easpring 300073 CH Equity 17 901 6 9 14 19 4 4 31 20 648% 100% 53% (25) (37) (30) (22) Xiamen Tungsten 600549 CH Equity 19 3,021 12 3 6 8 3 3 55 38 -134% 70% 45% (7) (22) (27) (14) GEM 002340 CH Equity 5 2,777 9 4 10 11 3 2 27 21 71% 180% 19% (9) (21) (10) (2) Average 10 4 8 10 3 3 40 29 56% 122% 33% (10) (24) (21) (10) CZMZ 002108 CH Equity 21 1,977 15 22 20 20 4 4 23 20 127% 21% 13% (17) (1) (5) 3 Senior 300568 CH Equity 37 1,049 15 18 20 20 7 5 26 20 31% 51% 25% (16) (17) 74 (27) Average 15 20 20 20 5 4 24 20 94% 36% 18% (17) (6) 22 (7) Tinci 002709 CH Equity 37 1,699 14 28 21 22 6 5 28 25 298% -6% 25% (12) (30) (26) (16) Do-fluoride 002407 CH Equity 18 1,700 10 22 16 12 4 4 20 25 1219% -12% -20% (19) (38) (39) (32) Capchem 300037 CH Equity 19 1,051 14 12 13 15 3 3 23 18 100% 25% 25% (21) (24) (35) (23) Jiangsu Guotai 002091 CH Equity 9 2,095 19 17 13 11 2 2 19 16 28% 24% 20% (9) (13) (15) (11) Average 15 20 16 15 4 3 22 21 419% 21% 10% (14) (26) (27) (20)
Total average 12 14 16 17 5 4 30 25
Electrolyte
Performance %
Lithium
Colbat
Cathode
Separator
Source: Deutsche Bank estimates, Bloomberg Finance LP
Major risks
Industry downside risks:
Significant changes in China EV subsidy policy, boosting China EV sales.
Quicker-than-expected supplier capacity expansion to catch up with
strong downstream demand.
Lower-than-expected unit spreads for ternary cathodes, especially for
high-nickel NMC.
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 5
Company downside risks:
Easpring decelerating its capacity expansion and being unable to ramp
up the expanded capacity on time, although we believe the risk is low
− Easpring has mature technology and has had plenty of experience in
the past to ramp up its production lines.
Easpring being unable to raise ASP for new products and enlarge the
unit spread, due to intensifying industry competition.
Easpring being unable to cut costs significantly, benefiting from
economies of scale or improved manufacturing know-how.
6 June 2017
Metals & Mining
Easpring
Page 6 Deutsche Bank AG/Hong Kong
Business overview
Cathode remains primary operation, with quicker growth
Established in 1992, Beijing Easpring Material has focused on producing
lithium battery cathodes, including LCO (lithium cobalt oxide), which
represented 25% of total shipments in 2016, and NMC, which represented
75% of total shipments in 2016. With a c.4% market share in 2016, Easpring is
one of the most important cathode producers in China. Major clients include
battery makers such as Samsung, LG, Sony, Lishen and ATL. We expect its
cathode business to continue to grow, with aggressive capacity expansion to
satisfy strong downstream demand and stable profitability, stemming from
researching and launching leading products.
Zhongding High-tech, a newly-injected asset in 2015, produces automatic
machinery for various component makers in different industries. Zhongding
High-tech contributes a significant profit for the company, having provided
c.48%/32% of Easpring’s NPAT in FY15/FY16. However, its growth rate is likely
to be mild in the next several years, at c.10-15%. We estimate that the
proportion of its profit contribution could decline sharply, to only c.10% in
2019, due to Easpring’s quickly expanding cathode business.
Figure 4: Cathode capacity expansion should be aggressive, driving strong earnings in 2017 and beyond
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
Revenue – cathode RMBm 648 603 572 593 792 1185 2130 2996 5001
Revenue – automatic machinery RMBm 69 150 165 181 199
GPM – cathode 5% 4% 5% 2% 8% 13% 17% 19% 21%
GPM – automatic machinery 50% 48% 48% 48% 48%
NPAT RMBm -0.7 14.9 9.7 -25.6 13.3 99.3 199 305 512
Capacity – LCO kt 3.6 3.9 4 4.4 3 2 2 2 2
Capacity – NMC kt 3 6 11 14 25
Source: Deutsche Bank estimates, Company data
Overall, we project that Easpring’s revenue and bottom line should register
CAGRs of 57% and 73%, respectively, in the next three years, implying ROEs
of 8%/14%/19% for 2017E/2018E/2019E. We believe strongly growing profit,
with capacity expansion, is highly likely.
Figure 5: Cathode business is the major sales contributor Figure 6: Cathode is major GP contributor as well
-
1,000
2,000
3,000
4,000
5,000
6,000
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
RMB mn Automatic machinery Cathode
-
200
400
600
800
1,000
1,200
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E
RMB mn Cathode Automatic machinery
Source: Deutsche Bank estimates, Company data
Source: Deutsche Bank estimates, Company data
Figure 3: Global cathode players’
market share in 2015
11%
9%
9%
8%
7%5%5%
4%4%
2%
36%
Hunan Shanshan
Nichia, Japan
Umicore, Belgium
L&F, Korea
Reshin
PU Lead
BYD
Sumitomo, Japan
Easpring
Hunan Shenghua
Source: Deutsche Bank, company data
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 7
Cathodes
High growth industry, with a CAGR of c.30% in demand over the next three years
High growth of lithium-ion battery industry set to continue
Strong global intentions to reduce carbon emissions will continue to endorse
the high growth of electric vehicles (EV) and energy storage systems (ESS).
Thus, accelerated investments to cater to demand growth of EV/ESS will assist
in reducing lithium-ion battery costs/prices. We believe that a decrease in the
ASP of lithium batteries will create an economic incentive to replace lead-acid
batteries, whose market volume is five times larger than that of lithium
batteries. Combined with new applications and replacement demand, we
expect aggregate lithium battery demand to grow to c.290Gwh in 2020,
representing a CAGR of 30%. Meanwhile, the capacity expansion announced
by lithium-ion battery makers will add up to c.400Gwh of capacity completed
by 2020. Thus, upstream lithium-ion battery components should experience
similar rapid growth.
Figure 7: Driven by strong global EV sales, global lithium
battery demand likely to post a CAGR of 30% over next
three years
Figure 8: Cathode demand set to grow strongly, in line
with lithium battery demand, over next three years
0
50
100
150
200
250
300
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Portable Power Lead acid replacement ESSGwh
0
50
100
150
200
250
300
350
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
LCO NMC NCA LFP LMO Lead acid replacementGwh
Source: d1ev, GBII, MIIT, Evtank, CIAPS, Deutsche Bank estimates
Source: d1ev, GBII, MIIT, Evtank, CIAPS, Deutsche Bank estimates
A structured cathode demand outlook: NMC should grow the fastest
In Figure 9 we depict a summary of key component material demand in
conjunction with Deutsche Bank’s estimates of global lithium battery demand,
based on our battery component demand model. Owing to the mixture of
power and energy lithium battery demand, components are likely to grow at
different speeds. However, we estimate all these components will register
CAGR of more than 20% in demand over the next five years. In terms of
cathode demand, we see a structural change. Because of strong demand for
power LiB and a clear preference for high-energy density, we believe demand
for NMC cathodes will likely grow the fastest among all major cathode types.
We estimate a CAGR of c.45% in demand up to 2020, quicker than the
industry average CAGR of c.23%.
6 June 2017
Metals & Mining
Easpring
Page 8 Deutsche Bank AG/Hong Kong
Figure 9: Summary of estimated material content (weight) of a lithium battery cell
Quantity (kg) Part (%) Quantity (kg) Part (%) Quantity (kg) Part (%) Quantity (kg) Part (%) Quantity (kg) Part (%)
Cathode 2.64 47% 3.49 43% 3.16 40% 2.09 32% 1.39 30%
Active material 2.31 41% 2.88 35% 2.55 32% 1.50 23% 0.97 21%
Carbon 0.08 1% 0.07 1% 0.07 1% 0.07 1% 0.05 1%
Binder 0.15 3% 0.13 2% 0.13 2% 0.13 2% 0.09 2%
Current collector (Aluminum) 0.10 2% 0.41 5% 0.41 5% 0.40 6% 0.28 6%
Anode 1.29 23% 1.23 15% 1.25 16% 1.20 18% 0.86 19%
Active material 0.92 16% 0.87 11% 0.88 11% 0.85 13% 0.61 13%
Binder 0.11 2% 0.06 1% 0.07 1% 0.06 1% 0.05 1%
Current collector (Copper) 0.25 4% 0.30 4% 0.30 4% 0.29 4% 0.21 4%
Electrolyte 1.01 18% 0.92 11% 0.94 12% 0.90 14% 0.64 14%
Separator 0.10 2% 0.34 4% 0.35 4% 0.34 5% 0.24 5%
Others 0.59 10% 2.14 26% 2.17 28% 2.09 32% 1.49 32%
Tabs, end plate, terminal Assemblies0.11 2% 0.67 8% 0.68 9% 0.66 10% 0.47 10%
Core 0.00 0% - 0% - 0% - 0% - 0%
Container 0.48 8% 1.47 18% 1.49 19% 1.44 22% 1.02 22%
Total 5.62 100% 8.12 100% 7.87 100% 6.62 100% 4.62 100%
LCO
Estimated materials content of ideal lithium ion cells
NCALMO
High-Power (kwh)High-Energy (kwh)
NMCLFP
Source: Deutsche Bank estimates
More oversupply in LFP than in NMC
We believe the industry supply shift tilted towards NMC is occurring so as to
cope with downstream structural changes in demand, driven by a high-energy
density preference. We have seen large investments announced in quick
response to upcoming demand, and we do not see a significant supply
shortage of NMC until 2019 at least (see Figure 10). In contrast, we believe LFP
could face significant oversupply in the middle-range to low-end market in
early 2017/2018. Overproduced LFP may be being dumped into the lead-acid
replacement market. Overall, we believe the NMC market is much better than
the LFP market, in terms of the demand-supply balance.
Figure 10: Ternary demand/supply forecast through 2020 Figure 11: LFP demand/supply forecast through 2020
-
50
100
150
200
250
300
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
2015 2016E 2017E 2018E 2019E 2020E
ktSupply announcedCapacity expansion may react to short supplyTotal traditional demand
-
20
40
60
80
100
120
140
160
180
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
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Dem
and
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Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
2015 2016E 2017E 2018E 2019E 2020E
kt Supply announcedCapacity expansion may react to short supplyTotal traditional demandDemand of lead-acid replacement
Source: Deutsche Bank estimates, industry data, CIAPS
Source: Deutsche Bank estimates, industry data, CIAPS
High-nickel NMC is highly preferred and quickly developed
NMC uses a combination of LiNiO2, LiMnO2 and Li2CoO2, and was first
developed by 3M. The initial proportion of the three is 1:1:1. Adopting a high
proportion of nickel is a clear R&D trend for NMC as the industry consensus.
The larger proportion of LNO helps to increase energy density, while the
smaller proportion of LCO helps to reduce costs, as cobalt is expensive.
Multiple options for mixture proportions have been tried in the laboratories.
622 and 811 are typical types, with higher energy density but lower safety
options. Figure 13 demonstrates our assumptions of the ternary cathode
demand breakdown by type. 622 and 811 NMC should be highly developed in
the next two years, and NCA will be applicable later, due to a more difficult
manufacturing know-how for Chinese players.
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 9
Figure 12: NMC is becoming the mainstream amid a
high-energy density preference
Figure 13: Development and adoption of high nickel-type
NMC is likely to be NMC’s major trajectory
0
100
200
300
400
500
600
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
LCO NMC LFP NCA LMOkt
-
40
80
120
160
200
2014 2015 2016E 2017E 2018E 2019E 2020E
NMC 333/532 NMC 622 NMC 811 NCAGwh
Source: Deutsche Bank estimates, estimates, GBII, CIAPS, Avicenne, industry data
Source: Deutsche Bank estimates, estimates, GBII, CIAPS, Avicenne, industry data
Aggressive capacity expansion with good product pipeline
Aggressive capacity expansion, with a CAGR of c.40%
Easpring has two manufacturing bases, in Beijing Yanjiao and Jiangsu Haimen.
The Beijing Yanjiao factory produces both LCO and NMC (532), while the
Jiangsu Haimen factory manufactures NMC 622 and may produce NMC 811 or
even NCA in the future (see Appendix B for more information on NMC
532/622/811). Figure 14 demonstrates the total cathode capacity of Easpring.
Figure 14: Aggressive capacity expansion in detail (kt)
2014 2015 2016 2017E 2018E 2019E 2020E
Total capacity 5.7 6.7 8.0 10.7 18.7 26.7 30.7
Yanjiao 3.7 6.0 6.0 6.0 6.0 6.0 6.0
LCO 3.7 3.0 2.0 2.0 2.0 2.0 2.0
NMC 532 2.0 3.0 4.0 4.0 4.0 4.0 4.0
Jiangsu Easpring 0.7 2.0 4.7 12.7 20.7 24.7
Haimen 1st/2nd phase ( NMC 622) 0.7 2.0 4.7 6.7 6.7 6.7
Haimen 3rd phase (NMC 811/NCA) 4.0 14.0 18.0 Source: Deutsche Bank estimates, Company data
Easpring is quickly developing its new manufacture base for NMC at the
Jiangsu Haimen factory. According to its 2016 plan, it aims to almost double
new capacity at the Haimen factory every year through 2018, to satisfy strong
downstream demand. Easpring’s total capacity should rise to c.11ktpa by the
end of 2017. The new high-energy preferred subsidy policy announced in
December 2016 gives further visibility on the quick development and industry
adoption trajectory for high-nickel NMC in the next several years. Easpring
thus recently announced a new equity-raising plan to expand capacity more
aggressively, to 31ktpa in 2020, and to fully focus on high-nickel NMC,
especially 622/811, and even NCA potentially.
6 June 2017
Metals & Mining
Easpring
Page 10 Deutsche Bank AG/Hong Kong
Figure 15: Aggressive capacity expansion, with a CAGR
of 40%, to catch up with downstream demand
Figure 16: High-nickel NMC will become the major
product of Easpring
0
5
10
15
20
25
30
35
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
Haimen 3rd phase (NMC 811/NCA) Haimen 1st/2nd phase ( NMC 622)
Yanjiao NMC 532 Yanjiao LCO
kt
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
NMC 811/NCA NMC 622 NMC 532 LCO
Source: Deutsche Bank estimates, company data
Source: Deutsche Bank estimates, company data
New product pipeline should be able to stabilise margins
We expect NMC to account for more than 90% of total sales by volume in
2019, and we believe high-nickel NMC (622/811) sales volume should
represent more than 80% of total sales volume. Easpring has already started to
sell its NMC 622 in volume to battery makers, and it should be able to enlarge
sales volume once new capacity at Haimen ramps up.
Easpring is also sending NMC 811 to several selected battery makers for tests
and is conducting R&D in NCA as well. According to its scheduled sales
timeline and capacity expansion, Easpring may be able to sell 811 by the end
of 2018 or early 2019.
We prefer the product pipeline of cathode products and believe that the new
type of NMC – high-nickel NMC – will be able to keep Easpring’s margin high
and stable in the next several years, with increased visibility.
Easpring disclosed that the gross profit margin of its new high-nickel NMC 622
is c.16-20%, better than that of NMC 532, at c.10-12%, and LCO, at only 3-5%
currently. Although NMC 811 has not been ready for selling, Easpring believes
that the return will be better than that of the current NMC 622. Although the
industrial average profitability of cathodes could deteriorate with time, we
believe Easpring’s pipeline of leading products should sustain its margin at a
high level.
Figure 17: NMC 622 delivers a better
gross profit margin than NMC 532
and a much higher margin than LCO.
The new NMC 811 is expected to
offer even better returns.
0%
5%
10%
15%
20%
25%
30%
LCO NMC 532 NMC 622 NMC 811
Source: Deutsche Bank estimates, Company data
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 11
Figure 18: High-nickel NMC should sustain higher gross
profit per tonne
Figure 19: High-nickel NMC should have higher gross
profit margin as well
-
5
10
15
20
25
30
35
40
45
50
2015 2016 2017E 2018E 2019E 2020E
LCO NMC 532 NMC 622RMB k
0%
5%
10%
15%
20%
25%
30%
2015 2016 2017E 2018E 2019E 2020E
LCO NMC 532 NMC 622
Source: Deutsche Bank estimates, Company data
Source: Deutsche Bank estimates, Company data
Impressive client list
Client relationships have been less important than for other components like
electrolytes and separators, but they could start to become more important as
Tier 1 automakers are building a supply chain data pool, and may require
lithium battery makers to select only a few qualified suppliers within the pool.
We are impressed by Easpring’s client list, which includes most of the leading
battery makers, such as Samsung, LG, Panasonic, CATL and Lishen. As the
industry is developing fast, it offers Easpring opportunities to collect more
feedback to improve product quality and catch up with the new product
development trajectory, in our view.
Figure 20: Most leading battery makers are clients of Easpring
SupplierPanasonic SDI LG CATL/ATL BYD Lishen SK Toshiba BAK Sony Sanyo Coslight
Easpring √ √ √ √ √ √ √ √ √ √ √ √
Reshine √ √ √ √ √ √ √
Shanshan √ √ √ √
Umicore √ √ √ √
BYD √ √
Xiamen Tungsten √
Hunan Shenghua √ √ √
Sumitomo √ √
Ningbo Jinhe √ √ √ √
PU Lead √ √ √
3M √
L&F √ √
Ecopro √
Customers
Source: Deutsche Bank, Industry data
6 June 2017
Metals & Mining
Easpring
Page 12 Deutsche Bank AG/Hong Kong
Machinery
Zhongding High-tech – moderate growth with high margins
Easpring acquired 100% of Zhongding High-tech in 2015. Zhongding High-tech
specialises in manufacturing automation equipment, especially die-cutting
machines. It provides downstream customers with tailored products and
related services, its main products being rotary die cutters of various types and
applications. The rotary die-cutting machine has advantages in both speed and
accuracy – its cutting speed is more than 10 times that of a flat knife-cutting
machine. The accuracy can be controlled within 1mm. Zhongding’s rotary
cutting machines are targeted mainly at electronic product manufacturers that
eventually supply their products to lithium battery manufacturers such as
Samsung, LG, Apple, and Panasonic. Easpring is planning to further develop
and sell its next-generation product, a laser die-cutting machine, to maintain its
growth. In the long term, Easpring plans to list Zhongding High-tech
independently on the NEEQ.
Figure 21: Zhongding product:
sealing machine
Figure 22: Zhongding product: rotary
die cutter
Figure 23: Zhongding product: chip
mounter
Source: Easpring
Source: Easpring
Source: Easpring
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 13
Financial analysis
Private placement to fund capacity expansion
Easpring announced a private placement from five specific investors on 2
March 2017. The plan was approved by SASAC on 6 April 2017. The total
placement will raise c. RMB1,500m with the issue of 73m shares (c.20% of the
total shares outstanding). The proceeds collected will be used to expand
capacity at the Jiangsu plants, mainly NMC 811 and NCA. As the private
placement has not happened yet, in our model we assume equivalent debt will
be raised to support capacity expansion first.
Financial snapshots
We estimate Easpring’s revenue should register a CAGR of 57% in the next
three years, driven mainly by the company’s planned sales volume expansion
from 8ktpa in 2016 to c.27ktpa in 2019. See Figure 24. We believe 2016 should
be an inflection point for the company, since 1) its focus changed to NMC from
LCO, and 2) owing to strong industry demand, growing at a CAGR of 30% in
the next three years.
Figure 24: Easpring’s revenue outlook Figure 25: Easpring’s NPAT outlook.
-40%
-20%
0%
20%
40%
60%
80%
0
1000
2000
3000
4000
5000
6000
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
E
20
18
E
20
19
E
Revenue YoYmn RMB
0%
20%
40%
60%
80%
100%
-100
0
100
200
300
400
500
600
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
E
20
18
E
20
19
E
NPAT YoYmn RMB
Source: Deutsche Bank estimates, Company data
Source: Deutsche Bank estimates, Company data
Easpring has maintained a very healthy balance sheet, with net cash since
2010 (see Figure 27). Debt has been raised to support capacity expansion since
2016. Since the cash flow from operations is not strong enough to support its
aggressive capacity expansion (see Figure 28), Easpring plans to issue a
private placement before the end of this year. Given that the private placement
has not yet happened, we assume that Easpring will raise debt of equivalent
capital first. Figure 26 demonstrates Easpring’s capex plan in detail.
Figure 26: Easpring’s major capex plans
Projects Jiangsu 1st phase Jiangsu 2nd phase Jiangsu 3rd phase
Cathode capacity kt 10 6 18
Capex RMBm 229 347 1,500
Capex/t RMB/t 21,927 57,833 83,333
Source: Deutsche Bank, Company data
6 June 2017
Metals & Mining
Easpring
Page 14 Deutsche Bank AG/Hong Kong
Figure 27: Easpring’s net debt/net gearing Figure 28: Easpring’s cash flow from operations/capex
-60%
-40%
-20%
0%
20%
40%
60%
80%
-500
0
500
1000
1500
2000
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7E
201
8E
201
9E
Net debt Net gearingmn RMB
-800
-600
-400
-200
0
200
400
600
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
E
20
18
E
20
19
E
Cash flow from operations CAPEXmn RMB
Source: Deutsche Bank estimates, Company data
Source: Deutsche Bank estimates, Company data
Figure 29 shows Deutsche Bank estimates vs. Bloomberg consensus estimates.
We are relatively more conservative over the next two years, but we are more
positive in 2019, when large capacity and advanced product construction start
to contribute profits.
Figure 29: Deutsche Bank estimates (DBe) vs. Bloomberg consensus for Easpring
2017E 2018E 2019E
RMBm DBe Consensus DBe/Cons. DBe Consensus DBe/Cons. DBe Consensus DBe/Cons.
Revenue 2,294 2,504 92% 3,177 3,188 100% 5,200 4,126 126%
Gross profit 444 460 97% 642 623 103% 1,108 805 138%
Operating income 211 229 92% 356 418 85% 588 619 95%
Net profit 199 214 93% 305 278 110% 512 356 144% Source: Deutsche Bank estimates, Bloomberg Finance LP
Figure 30: Easpring’s income statement summary
RMBm 2013 2014 2015 2016 2017E 2018E 2019E
Revenue 630 625 860 1,335 2,294 3,177 5,200
COGS 593 607 790 1,112 1,851 2,535 4,092
Gross profit 37 18 70 222 444 642 1,108
SGA 38 55 78 135 233 286 520
Operating income 0 -37 -7 87 211 356 588
Operating profit margin
0% -6% -1% 7% 9% 11% 11%
EBIT 10 -28 13 106 230 375 608
Financial costs -1 1 -2 -2 13 42 49
EBITDA 30 0 47 143 271 438 727
PBT 10 -29 14 109 217 334 559
Tax 1 -3 1 9 19 28 48
PAT 10 -26 13 99 199 305 512
NPAT 10 -26 13 99 199 305 512
YoY -364% -152% 646% 100% 53% 68%
Minority interest 0 0 0 0 0 0 0 Source: Deutsche Bank estimates, Company data
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 15
Figure 31: Easpring’s balance sheet summary
RMBm 2013 2014 2015 2016E 2017E 2018E 2019E
Non-current assets 448 461 826 866 1,063 1,555 1,841
Investment property 77 84 82 80 80 80 80
PPE 317 316 326 360 555 1,048 1,334
Others 53 61 418 426 427 427 427
Current assets 545 557 915 1,297 1,742 2,586 3,449
Cash and cash equivalents 85 89 206 252 67 278 263
Restricted cash 279 297 476 789 1,257 1,741 2,279
Inventories 26 21 16 10 10 10 10
AR & NR 153 147 203 243 404 553 893
Others 3 3 13 4 4 4 4
Total assets 993 1,018 1,741 2,163 2,805 4,141 5,291
Current liabilities 128 183 451 717 1,101 1,593 1,535
Accounts payable 6 26 67 252 352 652 152
Other payables and 121 155 269 427 710 903 1,345
accruals 1 1 10 8 8 8 8
Short-term borrowings 0 0 104 31 31 31 31
Non-current liabilities 19 18 49 105 205 805 1,605
Deferred revenue 0 18 47 43 43 43 43
Others 19 0 2 62 162 762 1,562
Total liabilities 147 201 499 822 1,305 2,398 3,140
Share capital 846 818 1,242 1,341 1,499 1,743 2,151
Total equity 846 818 1,242 1,341 1,499 1,743 2,151 Source: Deutsche Bank estimates, Company data
Figure 32: Easpring’s cash flow summary
RMBm 2013 2014 2015 2016E 2017E 2018E 2019E
Net profit 10 -26 13 99 199 305 512
Depreciation 19 27 33 37 41 63 119
Amortisation 0 0 1 1 0 0 0
Decrease in inventory -12 5 -56 -39 -161 -149 -340
Decrease in AR -142 -51 -178 -293 -469 -484 -538
Increase in AP 52 39 208 121 284 193 442
Cash flow from operations -73 0 10 -71 -106 -72 194
Capex -126 -12 -37 -48 -236 -556 -405
Cash flow from investments -126 -12 -31 -145 -236 -556 -405
Borrowing 105 97 101 379 200 900 1,100
Receipts from equity securities 0 0 98 0 0 0 0
Payback -99 -77 -61 -131 0 0 -800
Dividend payment -8 -4 -1 -4 -40 -62 -104
Cash flow from financing -3 17 138 165 160 838 196
Source: Deutsche Bank estimates, Company data
6 June 2017
Metals & Mining
Easpring
Page 16 Deutsche Bank AG/Hong Kong
Appendix A
Company background
Easpring focuses on researching and producing cathodes for lithium batteries.
It was the first Chinese company to export to Japan and Korea. Easpring
started its business by producing and delivering LCO for portable electronic
products in 2002. It initiated NMC in 2008, mainly for power lithium batteries.
Today, it has become one of the major NMC producers in China, with leading
technology and product quality.
Figure 33: Easpring − major shareholder structure
Source: Deutsche Bank, Company data
Figure 34: Easpring − key events/developments
Beijing General Research Institute of
Mining and Metallurgy set up Electronic powder material research group
Beijing Beikuang electronic materials development center
was established, producing ultrafine cobalt oxide/nickel
oxide/bismutch oxide.
The research group was restructred as Beijing
Easpring and launched a LCO production line
with annual capacity of 150t.
Easpring started to export LCO to Korea
after technology
breakthrough and annual capacity was enlarged to 1.5ktpa
The company became China's largest lithium
battery cathode material provider with annaul capacity of LCO
increasing to 3ktpa.
The company successfully convert to shareholding structure
and prepare to list on Shenzhen stock
exchange.
The company entered Japan's high-end lithium battery market and won tenders from B&K, BYD and Japanese clients. It also completed a joint-stock transformation.
Easpring was listed on Shenzhen GEM
exchange
Easpring, jointly with Shenzhen Capital injected capital to Hunan Shinzoom and expanded to anode materials market.
The group set up Jiangsu Easpring, a
wholly-owned subsidy
Easpring acquired Zodngoc, which focused
on automation
equipment field.
Easpring proposed to invest RMB242mn to
expand Jiangsu Easpring's second phase,
cathode production lines, increasing capacity
to 4ktpa.
19981992 2001 2006 2007 2008 2009 2010 2011 2012 2015 2016
Source: Deutsche Bank, Company data
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 17
Senior management
Figure 35: Easpring’s senior management
Name Age Position Background
Mr. Xia Xiaoou
(夏晓鸥)
60 Chairman - Mr. Xia was appointed Chairman in 2016. - He is also Director of BGRIMM Magnetic Materials & Technology Co., Ltd. - He obtained a doctor's degree in metallurgy from the University of Science & Technology Beijing. - He is receiving a special government allowance from the State Council.
Mr. Yu Yueguang (于月光)
52 Director - Mr. Yu was appointed Director in 2011. - He is also Director at BGRIMM Magnetic Materials & Technology Co., Ltd.. - He obtained a doctorate in metallurgy from the University of Science & Technology Beijing.
Mr. Li Jianzhong (李建忠)
50 Director and General Manager
- Mr. Li was appointed Director and General Manager in 2013. - He is also Chairman of the board at Hunan Xingcheng Technology and Beijing Zhongding Technology. - He graduated from Macau University of Science and Technology with a master’s degree in business administration.
Mr. Zou Chunge (邹纯格)
37 CFO - Mr. Zou was appointed CFO in 2013. - He obtained a master’s degree in accounting from Dongbei University of Finance and Economics. - He is also a supervisor at Beijing Zhongding Technology.
Ms. Qu Xiaoli (曲晓力)
51 Director, Vice General Manager and Board Secretary
- Ms. Qu is currently Director, Vice General Manager, and Board Secretary of the company. She was appointed Board Secretary in 2009. - She graduated from Peking University with a master’s degree in business administration. She is a senior engineer. - She is also a Director at Deyi Technology (Beijing) and Beijing Zhongding Technology.
Source: Deutsche Bank, Company data
6 June 2017
Metals & Mining
Easpring
Page 18 Deutsche Bank AG/Hong Kong
Appendix B
Cathodes introduction – key differentiator of lithium battery
Its role in a battery cell Provides lithium-ion in a lithium battery, accounting for c.30% of the
total cost of a lithium battery cell.
Decides the major characteristics of the lithium battery and its final
functions or applications.
Global demand/supply We do not expect a significant shortage of cathodes in the next five
years, due to the aggressive capacity expansion announced and lower
entry barriers.
Demand: CAGR of 23% till 2020E
Supply: CAGR of 28% till 2020E, (based on current capacity
expansions announced)
Capacity expansion: easy:
Construction period: within 1-1.5 years
Capex/t: RMB 30-40k/t
Competitiveness and profitability Low entry barriers:
Highly commoditized/standardized products.
Relatively lower manufacturing knowhow and technology.
Pricing – raw material plus processing fee (spread); the price of
cathodes highly depends on raw material cost.
Gross margin: medium-low; c.5~15% for a long-term average.
How to obtain exposure? Prefer NMC producers, due to a structural demand shift from LFP to
NMC.
Prefer high-nickel NMC producers like Easpring for higher profitability
resulting from leading technology.
Figure 38: LFP demand/supply vs. spread Figure 39: Ternary demand and supply vs. spread
60
65
70
75
80
85
90
95
0
20
40
60
80
100
120
140
2015 2016E 2017E 2018E 2019E 2020E
LFP total supply LFP total demand LFP Spread
kt k RMB/t
0
5
10
15
20
25
30
0
50
100
150
200
250
300
2015 2016E 2017E 2018E 2019E 2020E
Ternary total supply Ternary total demand NMC spread 532kt k RMB/t
Source: Deutsche Bank estimates, CIAPS, industry data
Source: Deutsche Bank estimates, CIAPS, industry data
Figure 36: Lithium battery cathode
Source: Deutsche Bank, 3M
Figure 37: Capex and capacity of
some sampled cathode projects
-
250
500
750
1,000
1,250
1,500
1,750
- 10 20 30 40
RMBmn
kt
Source: Deutsche Bank, industry data
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 19
Cathode materials
Key differentiator for lithium batteries
A cathode provides lithium-ion in a lithium battery. It can be considered the
most important component in the battery. Almost all battery makers need to
start their battery planning by first choosing suitable cathode materials, then
the type of anode, separator, and electrolyte to match the cathode. This is not
only because the cost of the cathode is the largest portion of the total cost of a
battery cell at c.30%, but also because the selection of the cathode decides the
key characteristics/performance of a lithium battery, like energy density, cycle
performance, and charging/discharging rate. Other components – like the
anode, separator, and electrolyte – also help improve battery performance, but
to a limited extent. It is not hard to understand that the characteristics and
performance of a lithium battery decide its final applications.
Different options developed for different applications
There are various options in cathodes. The most common include NMC
(lithium nickel manganese cobalt oxide, LiNiMnCoO2), NCA (lithium nickel
cobalt aluminum oxide, LiNiCoAlO2), LFP (lithium iron phosphate LiFePO4),
LCO (lithium cobalt oxide, LiCoO2), and LMO (lithium manganese oxide,
LiMn2O4).
Figure 41: Key specifications of different cathode types:
a balanced solution is not available (I)
Figure 42: Key specifications of different cathode types:
a balanced solution is not available (II) Energy
capacity**
Cost
Power ***
Safety
Life span
Performance *
NMC
NCA
LFP
Energy capacity
**
Cost
Power ***
Safety
Life span
Performance *
LCO
LMO
Source: Deutsche Bank, Battery university.com *Performance at hot and cold temperatures; **the capacity that relates to runtime; *** capability of delivering a high current
Source: Deutsche Bank, Battery university.com *Performance at hot and cold temperatures; **the capacity that relates to runtime; ***capability of delivering a high current
Different cathodes have different specifications (see Figure 41 and Figure 42).
The specification trade-off is one of the key characteristics of a lithium battery
that impacts overall performance improvement. It is difficult to improve one
specification of a lithium battery without having a negative impact on another
or others. Typical examples: 1) increasing the discharge rate has an inverse
impact on lithium battery capacity; and 2) the battery lifespan (the cycle
number) is adversely affected by charging/discharging depth. The trade-offs
among specifications and the natural characteristics of lithium battery
represent the major bottleneck in battery technology development. A balanced
battery solution universally applicable to various users is not yet available.
Figure 40: Cathode cost is c. 30% of
total raw material cost of LiB cell
currently.
Cathode active
material32%
Anode active
material11%
Separator18%
Electrolyte15%
Others24%
Source: Deutsche Bank estimates, Industry data
6 June 2017
Metals & Mining
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Page 20 Deutsche Bank AG/Hong Kong
There are mainly two large groups of users: those that prioritize energy and
those that prioritize power. Portable devices typically prioritize energy, caring
more about the energy capacity of a lithium battery, while electrical vehicles
typically prioritize power, requiring the capability of a high electric current. In
order to meet user requirements, several solutions, a result of compromises
among different specifications, have been developed. Current prevailing
solutions are LCO, NMC/NCA and LFP. Figure 43 is a summary of the
characteristics of major cathode options.
LCO: this highly mature solution for energy-preferred users since 1995
remains the most popular applicable solution.
Ternary material series (NMC/NCA) came on the market in c.2005,
were first applied in portable devices, then in the automotive area
since c.2010. Ternary has higher energy density, but concerns about
safety remain, as the risk of fire hazards may be higher.
LFP: a safer solution, but with lower energy density. China is the major
country that has applied and researched this solution. Progress in
technology improvement has been slow so far. In China, some
passenger EVs and most commercial EVs, especially e-buses, prioritize
safety and thus prefer LFP.
Figure 43: Different cathode solutions are developed for different applications
Acronym Material components Chemical formula Uses Characteristics
LCO Lithium Cobalt Oxide Li1-xCoO2 Mobile phones, laptops Incumbent technology first introduced in 1991, high energy density but incurs longer charge times and shelf life of only one to three years, can be dangerous if damaged.
LMO Lithium Manganese Oxide
Li1-xMnO4 Power tools, medical instruments
Low internal cell resistance allows fast recharging and high current discharging but one-third of LCO's energy capacity.
NCA Nickel Cobalt Aluminium Li1-xNiCoAlO2 Electric powertrains for vehicles, energy storage
High energy power and long life span; safety and cost were historical concerns but these have been resolved; Tesla uses NCA.
NMC Nickel Manganese Cobalt
Li1-x(NiMnCo)O2 Electric powertrains for vehicles, power tools
Can be tailored to high specific energy or high specific power; most Japanese and Korean producers sell NMC to EV market.
LFP Lithium Iron Phosphate Li1-xFePO4 Electric powertrains for vehicles , eBikes, garden lights etc.
LFP batteries offer a safe alternative due to thermal and chemical stability of the Fe-P-O bond compared to Co-O bond; the Chinese government is promoting LFP use in China over NCA/NMC for safety reasons.
Source: Deutsche Bank, industry data
Global demand: ternary is the trend
The strong growth of lithium batteries, mainly driven by EV development, will
convert to strong growth of lithium battery cathodes. Assuming that each 1kwh
LFP/LFP/NMC/NCA will consume 2.3kg/2.9kg/2.6kg/1.5kg cathode active
material, our forecast of global lithium demand of 290Gwh in 2020E, a CAGR of
30%, converts to c.490kt cathode demand in 2020E at a CAGR of 23%. See
Figure 9 for our assumptions of per kwh cathode consumption in detail.Figure 44
and Figure 45 shows demand for global lithium batteries and cathodes,
respectively. We believe global cathode supply will be able to expand quickly to
catch up with demand, due to lower entry barriers in both capital and technology.
Structurally, NMC/NCA should grow the fastest, LFP mildly, and LCO the
lowest. LCO demand should continue to have a CAGR of 5% due to slower
demand growth in portable electronics. LFP demand could be significantly
affected by the new China EV battery policy launched at year-end 2016, which
favors high energy density, and could thus lead a structural shift from LFP-
domination to an NMC/LFP mix in the Chinese EV market. We forecast a CAGR
of 14% for LFP demand in the next five years. In terms of NMC/NCA, ternary
series, we forecast CAGRs of 47%/92%, respectively, in the next five years. It is
being pulled up to satisfy global EV demand and also LFP replacement in the
Chinese EV market.
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 21
Figure 44: Global LiB demand breakdown by type Figure 45: Global cathode demand breakdown by type
0
50
100
150
200
250
300
350
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
LCO NMC NCA LFP LMO Lead acid replacementGwh
0
100
200
300
400
500
600
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
LCO NMC LFP NCA LMOkt
Source: Deutsche Bank estimates, GBII, CIAPS, Avicenne, industry data
Source: Deutsche Bank estimates, GBII, CIAPS, Avicenne, industry data
China is shifting from an LFP-dominated market to an NMC/LFP mixed market
LFP has been widely adopted in China because of: 1) access to production
knowhow being easier without patent constraints; 2) cheaper raw materials, as
the major components are iron (Fe) and phosphate (P), which are much
cheaper and more abundant than cobalt (Co) and nickel (Ni); and 3) LFP is
more stable and results in fewer safety issues.
The Chinese government announced a high-energy favorable subsidy policy at
year-end 2016, which offers subsidies based on the energy density of battery
packs. In practice, there is material loss in energy density from the cell level to
the pack level. Figure 46 and Figure 47 demonstrate energy density losses in a
sample of EV models from cell to pack.
Figure 46: Energy density continues to decline through the pack level Figure 47: Energy density deterioration
0
50
100
150
200
250
300
Imie
EV-G
ImIE
V-M
Leaf
(ZE
O)
Leaf
(AZE
O)
ZOE ie
Mod
el S
Spar
k
E-U
P!
Vol
t
Priu
s PH
EV
Out
land
er
Vol
t G
en2
Piru
s A
lpha
Civi
c H
V
Sona
ta
Aco
rd Fit
cell module packwh/kg
0%
20%
40%
60%
80%
100%
120%
Cell Module Pack
Source: Deutsche Bank, Company data
Source: Deutsche Bank estimates, industry data
It is difficult for LFP makers to meet the energy density requirement at the
highest subsidy level by only improving battery technology in the cell.
Lightening the pack or BMS is always involved but this may increase the safety
risk. Consequently, NMC has been preferred by many battery makers since
then and the development of NMC in China has accelerated. Given that the ex-
China EV market has chosen ternary as the mainstream option, ternary
batteries (NMC/NCA) should have a clear leading position, going forward.
6 June 2017
Metals & Mining
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Page 22 Deutsche Bank AG/Hong Kong
NCA, Tesla’s choice, is more likely to be applied in the high-end market. The
manufacturing cost of NCA is higher, given a more restricted manufacturing
environment, especially in relation to moisture, than NMC. We believe most
Chinese companies are likely to apply NMC first, in favor of its better cost
performance and lower manufacturing complexity. Even though we see that
some Chinese companies like Easpring have already started R&D for NCA, we
believe they are unlikely to launch products in large volume in the near term.
High-nickel NMC is highly preferred and quickly developed
Unlike other single structure cathode materials, the ternary battery uses a
combination of LiNiO2, LiMnO2, and Li2CoO2, and was first developed by 3M.
The initial proportion of the three is 1:1:1, patented by 3M. In order to avoid
patent issues, a new mixture proportion of 5:3:2 (50% LNO, 30% LMO, and
20% LCO) has been adopted by Korean companies. The result is more than
encouraging: the larger proportion of LNO helps to increase energy density,
while the smaller proportion of LCO helps to reduce cost, as cobalt is
expensive.
Figure 48: Multiple choices available in NMC Figure 49: High Ni and low cobalt is the major trend
LCO
NMC 1:1:1
LMO LNO
Source: Deutsche Bank, BSAF
Source: Deutsche Bank estimates
Adopting a high proportion of nickel is a clear R&D trend for NMC as the
industry consensus. Multiple choices in mixture proportion have been tried in
the laboratory (see Figure 48). 111, 433, 424, and 532 are classic high-stability
choices, while 622 and 811 are high energy density but low safety options.
In our view, although it will take time, the whole industry will eventually shift
to adopting more of 622 and 811 to pursue higher energy density. In the short
term, China has just shifted from LFP to low nickel NMC. 532 and 111 are
mainstream choices. Our channel checks demonstrate that several lithium
battery companies have taken 622 from cathode makers for sample tests. We
believe high penetration for 622 will continue until 2018 at least.
6 June 2017
Metals & Mining
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Deutsche Bank AG/Hong Kong Page 23
Global supply – a structural change to cope with demand
We do not expect a significant shortage in supply going forward, although
demand is growing quickly. In the short term, we may see 1) dynamic
oversupply as the years go by, 2) a market that is highly fragmented, and 3) a
thin gross profit margin. In the long run, we take a cautious and bearish view,
seeing the risk of a glut market. Based on currently announced capacity
expansion plans from both incumbents and new players, we expect total
cathode capacity to post a CAGR of 24% till 2020.
The market may stay highly fragmented
This is a relatively fragmented market, in which most cathode producers are
independent manufacturers, such as Umicore, Shanshan, Easpring, and Nichia.
However, we also find that in-house capacity at battery makers is growing,
such as at LG, BYD, and Guoxuan. In our view, in-house capacity helps battery
makers control product quality, which is highly dependent on the quality of the
cathode (especially its purity), and to increase negotiation power in third-party
cathode purchase deals.
Although the profitability of cathode players is not attractive at a gross profit
margin of c.5-15%, incumbent players are not only expanding, but many new
players are also entering the industry, due to lower entry barriers in capital or
technology. According to our channel checks, most players understand that
profitability is thin and do not forecast significant profitability improvement in
the future, but are optimistic about the outlook for this industry, especially its
growth. Most players are confident of their ability to make a profit from the
economies of scale and grab a volume share of this large growing market,
believing this to be a business that can generate at least positive operating
cash flow. Thus, in the short term, we may see 1) a market that remains highly
fragmented, 2) dynamic oversupply as the years go by, and 3) a thin gross
profit margin. In the long run, we take a cautious and bearish view,
considering the risk of a glut market.
A market that can quickly achieve balance to cope with demand
We believe the cathode market can be quickly balanced to cope with demand
in terms of total volume growth and structural changes. Based on currently
announced capacity expansion plans from both incumbents and new players,
we see total cathodes posting a CAGR of 24% till 2020E.
Although short-term (6-12 months) supply tightness is possible for specific
types, a long-term structural supply shortage in any specific type is unlikely, in
our view, due to a short lead time in the capacity ramp-up of new supply. The
possibility of a structural supply shortage for any type is low, in our view. We
believe demand and supply have an interactive relationship regionally. Demand
for a specific type of cathode will not suddenly emerge when supply is not
ready. For example, demand for NCA in China is limited as the technology is
not ready in the country, although it is mature in Japan and the US.
Bigger oversupply in LFP than in NMC
A shift in supply biased towards NMC is occurring to cope with structural
changes in demand. We have seen large investments announced that have
reacted quickly to upcoming demand and we do not see a significant supply
shortage until 2019. See Figure 51. By contrast, LFP may face an oversupply in
the middle- to high-end market in early 2017/2018 and then dump into the
Figure 50: Global market shares of
cathode players demonstrate a
highly fragmented market in 2015
11%
9%
9%
8%
5%
5%4%4%
2%
43%
Hunan Shanshan
Nichia, Japan
Umicore, Belgium
L&F, Korea
PU Lead
BYD
Sumitomo, Japan
Easping
Hunan Shenghua
Others
Source: Deutsche Bank, CIAPS, Aviance
6 June 2017
Metals & Mining
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Page 24 Deutsche Bank AG/Hong Kong
lead-acid replacement market (see Figure 52). The current lead-acid market
volume is almost 4x the lithium battery market volume. We expect that a 5%
replacement ratio could create huge demand for lithium battery at c.20Gwh in
2020. Despite that, a risk of oversupply may still appear in 2020, when demand
for commercial EV shifts towards ternary lithium batteries, based on our
expectation.
Figure 51: Ternary D/S forecast through 2020 Figure 52: LFP D/S forecast through 2020
-
50
100
150
200
250
300
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
2015 2016E 2017E 2018E 2019E 2020E
kt
Supply announcedCapacity expansion may react to short supplyTotal traditional demand
-
20
40
60
80
100
120
140
160
180
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
Sup
ply
Dem
and
2015 2016E 2017E 2018E 2019E 2020E
kt Supply announcedCapacity expansion may react to short supplyTotal traditional demandDemand of lead-acid replacement
Source: Deutsche Bank estimates, industry Data, CIAPS
Source: Deutsche Bank estimates, industry Data, CIAPS
Competitiveness and profitability
The price of a cathode can be volatile and is highly dependent on raw material
cost. And the margin is decided by a company’s competitiveness, influenced
by product type (subsector demand and supply), product quality and the
company’s networks etc. The value creation of cathodes is similar to that of
the steel industry, where per-tonne spread is an important profitability indicator,
in our view. The normal margin for cathodes varies within c.5-15% (2012-2016)
for specific types of cathode, which are in short supply in the short term, and
thus the gross profit margin could rise to c. 25%.
Pricing: an industry earning spread
Important raw materials for cathodes include lithium, cobalt and nickel. Raw
material cost accounts for c.75-85% of total manufacturing cost for cathodes.
Thus, the ASP of a cathode is variable and depends on the raw material price
trajectory. Figure 53 demonstrates the cost breakdown of NMC 532 and
spreads earned by cathode producers.
Figure 53: Raw materials account for c.80% of total cost
of cathodes
Figure 54: Profit spread of NMC /raw material cost
-
20
40
60
80
100
120
140
160
180
200
2011 2012 2013 2014 2015 2016 2017E
NMC 532 spread MnSO4*H2O CoSO4*7H2O
Li2Co3 NiSO4*6H2O Manufacture feek RMB/t
5
10
15
20
25
30
35
40
45
100
120
140
160
180
200
220
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
NMC 532 Spread NMC 532 spot pricek RMB/t k RMB/t
Source: Deutsche Bank estimates, Industry data, Asianmetal
Source: Deutsche Bank estimates, Asianmetal
6 June 2017
Metals & Mining
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Deutsche Bank AG/Hong Kong Page 25
Spread is an important indicator of the profitability of cathode players.
Although we see that spread has a correlation with spot price in the short term
(both are heavily influenced by the same downstream demand and some
metals like lithium and cobalt have high exposure to lithium battery), it is likely
to be more affected by its own industry supply in the long term. Figure 54
demonstrates that NMC 532 spread and spot price have a correlation with
each other in the short term but have their own dependent factors in the long
term.
NMC spread should be maintained while LFP spread is under pressure
Based on our review of demand/supply in the LFP and ternary markets in the
next four years, we believe LFP spread could be under pressure while ternary
spread could heighten. LFP demand from commercial EVs could decline
quickly as ternary technology matures. Ternary dynamics should be in slight
oversupply till 2019. We forecast that ternary spread will slightly decline till
2018, but will bounce back, based on regularly growing demand. Figure 55
and Figure 56 show subsector demand and supply of LFP and ternary.
Prefer specialists or players with large economies of scale
As a sector biased towards the characteristics of the commodity market, cost
leadership and product quality will likely be key for cathode players to survive.
Client relationships have been less important than for other components like
electrolytes and separators. But these may start to be important as Tier 1
automakers build up a supply chain data pool, and this may require lithium
battery makers to select only a few qualified suppliers from within the pool.
Figure 55: LFP demand/supply vs. spread Figure 56: Ternary demand and supply vs. spread
60
65
70
75
80
85
90
95
0
20
40
60
80
100
120
140
2015 2016E 2017E 2018E 2019E 2020E
LFP total supply LFP total demand LFP Spread
kt k RMB/t
0
5
10
15
20
25
30
0
50
100
150
200
250
300
2015 2016E 2017E 2018E 2019E 2020E
Ternary total supply Ternary total demand NMC spread 532kt k RMB/t
Source: Deutsche Bank estimates, Industry data
Source: Deutsche Bank estimates, Industry data
Figure 57: Supply chain relationship map (non-exhaustive)
SupplierPanasonic SDI LG CATL/ATL BYD Lishen SK Toshiba BAK Sony Sanyo Coslight
Easpring √ √ √ √ √ √ √ √ √ √ √ √
Reshine √ √ √ √ √ √ √
Shanshan √ √ √ √
Umicore √ √ √ √
BYD √ √
Xiamen Tungsten √
Hunan Shenghua √ √ √
Sumitomo √ √
Ningbo Jinhe √ √ √ √
PU Lead √ √ √
3M √
L&F √ √
Customers
Source: Deutsche Bank, Industry data; based on public information during 2014-2016
6 June 2017
Metals & Mining
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Page 26 Deutsche Bank AG/Hong Kong
Acknowledgement
The author of this report would like to acknowledge Jason Zhu for his
contribution.
6 June 2017
Metals & Mining
Easpring
Deutsche Bank AG/Hong Kong Page 27
Appendix I
Important Disclosures
*Other information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
Easpring 300073.SZ 18.45 (CNY) 5 Jun 17 NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=300073.SZ
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. James Kan
Historical recommendations and target price: Easpring (300073.SZ) (as of 6/5/2017)
0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17
Secu
rity
Pri
ce
Date
Previous Recommendations
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
**Analyst is no longer at Deutsche Bank
6 June 2017
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Page 28 Deutsche Bank AG/Hong Kong
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock
Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.
Newly issued research recommendations and target prices supersede previously published research.
53 %
36 %
11 %18 % 18 % 18 %
050
100150200250300350400450500
Buy Hold Sell
Asia-Pacific Universe
Companies Covered Cos. w/ Banking Relationship
6 June 2017
Metals & Mining
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Deutsche Bank AG/Hong Kong Page 29
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Research
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