rating company hold tinci - jrj.com.cnpg.jrj.com.cn/acc/res/cn_res/stock/2017/6/6/3af32a... ·...

Deutsche Bank Markets Research

Rating

Hold Asia

China

Resources

Metals & Mining

Company

Tinci

Date

6 June 2017

Initiation of Coverage

Restart in 2018 after readjustment in 2017; initiating coverage with a Hold

Reuters Bloomberg Exchange Ticker 002709.SZ 002709 CH SHZ 002709

Forecasts And Ratios

Year End Dec 31 2015A 2016A 2017E 2018E 2019E

Sales (CNYm) 945.8 1,837.2 2,019.5 2,281.6 2,936.2

Reported EPS FD(CNY) 0.77 1.22 1.15 1.44 1.87

Reported NPAT (CNYm) 99.6 396.3 373.1 467.0 607.7

DB EPS growth (%) 49.9 59.2 -5.9 25.2 30.1

PER (x) 23.8 39.4 31.0 24.8 19.1

Source: Deutsche Bank estimates, company data

Restart in 2018 after readjustment in 2017; initiating coverage with a Hold

________________________________________________________________________________________________________________ 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) 35.63

Price target - 12mth (CNY) 36.00

52-week range (CNY) 76.55 - 35.45

HANG SENG INDEX 25,924

James Kan

Research Analyst

(+852 ) 2203 6146

[email protected]

Price/price relative

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Tinci

HANG SENG INDEX (Rebased)

Performance (%) 1m 3m 12m

Absolute -5.4 -32.0 -37.8

HANG SENG INDEX 5.9 10.1 23.8

Source: Deutsche Bank

Tinci is the largest electrolyte producer in the world, and we expect it to continue to post a revenue CAGR of c.30% in 2018-20. Although electrolyte profitability faced headwinds in 2017, it should be stable again in 2018-19. After a readjustment year in 2017, Tinci is likely to grow its bottom line again in 2018-19 via volume expansion, with an average growth rate of c.20%. We like Tinci's steady development of its personal care chemicals business and has developed major FMCG, (fast-moving consumer goods) names as its major clients. Our target price of c.RMB36 implies 25x 2018 DBe EPS. With the stock trading at close to our target price, we initiate coverage with a Hold.

Strong demand outlook with revenue CAGR of 30% in next 5 years Tinci has quickly emerged as the largest electrolyte maker in the world, holding c.20% global market share in 2016, through strong downstream demand growth and market share acquisition from competitors. Given its strong industry knowledge/patents accumulated and strong client relationships, we forecast Tinci to post revenue CAGR of c.30% in the next five years.

Electrolyte profit may face headwinds in 2017, but will restart growth in 2018 Electrolyte profitability is facing headwinds but should be stable again in 2018-19. The abnormally high margin in 2016 was caused by a significant shortage of LiPF6; this also caused Tinci’s 2017 earnings growth to slow down materially. We expect Tinci to grow its bottom line again in 2018-19 via volume expansion, with an average growth rate of c.20%.

Steadily developed personal care chemicals business Tinci’s personal care business has posted a stable CAGR of 20% in the past 3 years with a lucrative gross profit margin exceeding 30%. Tinci has been certified by major FMCG brands including P&G, L’OREAL, Unilever and Colgate. We believe this proves Tinci’s long-term commitment toward quality while complying with top global brands’ compliance requirements. We forecast this division’s revenue to grow at CAGR of 20% in 2017-2019

Initiating coverage with a Hold; target price set at 25x 2018E P/E; risks Tinci has grown rapidly in the past three years. Although it might face headwinds this year, its bottom line should start to grow again, at c.20% in 2018-19E via volume expansion. ROEs should remain above c.18% on our estimates. We set our TP at RMB36, based on 25x (the industry average) FY18E EPS. With 1% upside potential to our estimates, we initiate Tinci with a Hold. Major upside/downside risk: significant China EV subsidy policy changes.

Distributed on: 05/06/2017 22:52:02 GMT

0bed7b6cf11c

6 June 2017

Metals & Mining

Tinci

Deutsche Bank AG/Hong Kong

Model updated:05 June 2017

Running the numbers

Asia

China

Metals & Mining

Tinci Reuters: 002709.SZ Bloomberg: 002709 CH

Hold Price (2 Jun 17) CNY 35.63

Target Price CNY 36.00

52 Week range CNY 35.45 - 76.55

Market Cap (m) CNYm 11,581

USDm 1,699

Company Profile

Established in 2000, Tinci mainly manufactures fine-chemical products. Its major products are electrolytes for lithium batteries and chemical ingredients for personal care products. Tinci is the largest electrolyte maker in the world, holding c.20% global market share in 2016 and Tinci's personal care chemical products have been certified by major FMCG brands including P&G, L'OREAL, Unilever and Colgate.

Price Performance

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Tinci HANG SENG INDEX (Rebased)

Margin Trends

8121620242832

14 15 16 17E 18E 19E

EBITDA Margin EBIT Margin

Growth & Profitability

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James Kan

+852 2203 6146 [email protected]

Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E

Financial Summary

DB EPS (CNY) 0.51 0.77 1.22 1.15 1.44 1.87

Reported EPS (CNY) 0.51 0.77 1.22 1.15 1.44 1.87

DPS (CNY) 0.15 0.11 0.20 0.23 0.29 0.37

BVPS (CNY) 7.0 9.1 5.0 5.9 7.1 8.6

Weighted average shares (m) 120 130 325 325 325 325

Average market cap (CNYm) 1,529 2,373 15,621 11,581 11,581 11,581

Enterprise value (CNYm) 1,387 2,126 15,290 11,154 10,920 10,659

Valuation Metrics P/E (DB) (x) 24.8 23.8 39.4 31.0 24.8 19.1

P/E (Reported) (x) 24.8 23.8 39.4 31.0 24.8 19.1

P/BV (x) 1.80 3.64 8.42 6.01 5.04 4.16

FCF Yield (%) nm nm 0.4 1.5 2.8 3.3

Dividend Yield (%) 1.2 0.6 0.4 0.6 0.8 1.0

EV/Sales (x) 2.0 2.2 8.3 5.5 4.8 3.6

EV/EBITDA (x) 12.1 12.1 28.6 20.5 16.3 12.6

EV/EBIT (x) 19.1 17.9 32.7 25.5 19.7 14.9

Income Statement (CNYm)

Sales revenue 706 946 1,837 2,020 2,282 2,936

Gross profit 247 345 782 766 907 1,152

EBITDA 115 175 534 543 669 845

Depreciation 41 54 67 106 116 128

Amortisation 1 3 0 0 0 0

EBIT 73 118 467 437 553 718

Net interest income(expense) 0 -3 -3 1 -5 -4

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 73 115 464 438 549 714

Income tax expense 9 16 69 65 82 106

Minorities 2 0 -1 0 0 0

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 62 100 396 373 467 608

DB adjustments (including dilution) 0 0 0 0 0 0

DB Net profit 62 100 396 373 467 608

Cash Flow (CNYm)

Cash flow from operations 69 90 234 364 536 537

Net Capex -119 -123 -164 -192 -209 -155

Free cash flow -50 -33 70 172 327 382

Equity raised/(bought back) 274 288 4 0 0 0

Dividends paid -19 -21 -25 -75 -93 -122

Net inc/(dec) in borrowings 18 133 58 0 0 0

Other investing/financing cash flows -390 -545 -456 -150 -150 -150

Net cash flow -168 -178 -348 -53 84 110

Change in working capital -41 -78 -223 13 -47 -199

Balance Sheet (CNYm)

Cash and other liquid assets 148 222 198 146 230 340

Tangible fixed assets 461 540 676 762 855 883

Goodwill/intangible assets 26 226 222 222 222 222

Associates/investments 0 60 241 391 541 691

Other assets 392 578 999 970 1,019 1,292

Total assets 1,026 1,626 2,335 2,491 2,867 3,427

Interest bearing debt 6 27 102 102 102 102

Other liabilities 173 408 599 456 458 533

Total liabilities 179 435 701 558 560 635

Shareholders' equity 847 1,183 1,628 1,926 2,300 2,786

Minorities 0 9 7 7 7 7

Total shareholders' equity 847 1,192 1,634 1,933 2,306 2,792

Net debt -142 -195 -96 -43 -127 -237

Key Company Metrics

Sales growth (%) 18.4 34.0 94.3 9.9 13.0 28.7

DB EPS growth (%) -37.9 49.9 59.2 -5.9 25.2 30.1

EBITDA Margin (%) 16.3 18.5 29.1 26.9 29.3 28.8

EBIT Margin (%) 10.3 12.5 25.4 21.7 24.2 24.4

Payout ratio (%) 29.4 14.5 16.4 20.0 20.0 20.0

ROE (%) 8.8 9.8 28.2 21.0 22.1 23.9

Capex/sales (%) 16.9 13.1 8.9 9.5 9.2 5.3

Capex/depreciation (x) 2.8 2.2 2.4 1.8 1.8 1.2

Net debt/equity (%) -16.7 -16.4 -5.9 -2.2 -5.5 -8.5

Net interest cover (x) nm 34.4 180.4 nm 117.9 186.4

Source: Company data, Deutsche Bank estimates

6 June 2017

Metals & Mining

Tinci


Investment thesis

Outlook

Established in 2000, Tinci mainly manufactures fine-chemical products. Its

major products are electrolytes for lithium batteries and chemical ingredients

for personal care products.

Tinci is the largest electrolyte maker in the world, holding c.20% global market

share in 2016. Given its strong industry knowledge/patents accumulated and

strong client relationships, we forecast Tinci to grow further, with a revenue

CAGR of c.30% in the next five years. Electrolyte profitability is facing

headwinds in 2017 but should be stable again in 2018-19. We expect Tinci to

grow its bottom line again in 2018-19E via volume expansion with an average

growth rate of 20%.

Tinci’s personal care chemical products have been certified by major FMCG

brands including P&G, L’OREAL, Unilever and Colgate. We believe this proves

Tinci’s long-term commitment toward quality while complying with top global

brands’ compliance requirements. Tinci aims to register a revenue CAGR of

20% for this division in the next three years.

Valuation

Our target price of RMB36 is based on 25x FY18 DBe EPS, which is the

average of lithium battery components industry. We believe Tinci’s ROEs

should remain above c.20% as both personal care and electrolytes are high-

profit businesses. With growth in 2018-19E at 25+YoY, we believe 25x P/E

valuation is undemanding.

Risks

Industry risks: 1) significant changes in China EV subsidy policy to boost China

EV sales; and 2) quicker/slower-than-expected profitability erosion.

Company upside risks: 1) quicker-than-expected ramp-up of LiPF6 production

line; 2) expand larger the market share and 3) grow personal care business

quicker than expected.

Company downside risks: 1) slower-than-expected ramp-up of LiPF6

production line; 2) inability to further expand market share; and 3) inability to

further grow personal care business quickly.

6 June 2017

Metals & Mining

Tinci


Valuation and risks

Target price of RMB36, based on 25x FY18E P/E

Our target price of RMB36 is based on 25x FY18 DBe EPS, the industry

average for the lithium battery components. We believe Tinci’s ROEs should

remain above c.20% as both personal care and electrolytes are high-profit

businesses. As we expect 2018-19 growth of 25+YoY, we believe 25x P/E

valuation is undemanding.

Figure 1: Tinci’s 12-month forward P/B vs. ROE Figure 2: Tinci’s 12-month P/E

0%

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12m Forward P/B (LHS) Average= 5.6 + 1 SD= 8.0

-1 SD= 3.1 ROE (RHS)

P/B

(x)

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12m Forward P/E Average= 39.3 +1std= 53.5 -1std= 25.1

P/E

(x)

Source: Deutsche Bank, Bloomberg Finance LP

Source: Deutsche Bank, Bloomberg Finance LP

Figure 3: 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

6 June 2017

Metals & Mining

Tinci


Major upside and downside risks

Industry risks:

Significant changes in China’s EV subsidy policy to

accelerate/decelerate China EV sales.

Slower/quicker-than-expected capacity expansion to catch up with the

strong downstream demand.

Quicker/slower-than-expected profitability erosion.

Company risks:

Tinci’s capacity expansion is quicker/slower than expected.

Tinci’s personal care business grows faster/slower than expected.

6 June 2017

Metals & Mining

Tinci


Business overview

Facing short-term headwinds; turnaround in 2018-19E

Established in 2000, Tinci mainly manufactures fine-chemical products. Its

major products are electrolytes for lithium batteries and chemical ingredients

for personal care products.

The electrolyte business has grown rapidly in the past several years, with a

CAGR of c.50%, leapfrogging the chemical ingredients for personal care

business in 2015. After acquiring Dongguan Kaixin in 2016, Tinci became the

largest electrolyte producer in the world, with c.20% market share in 2016.

Although downstream demand should post a CAGR of 30% in the next three

years, we expect a short-term profitability adjustment in 2017 due to lower raw

material costs, (which could drive down the per-tonne profit, as electrolyte

producers mainly price in margins). However, given its strong client

relationships and leading manufacturing knowhow and experience, we believe

sales volume expansion will continue to grow the gross profit of Tinci’s

electrolyte business in 2018-19E.

Figure 5: Summary of Guangzhou Tinci’s historical operations

2011 2012 2013 2014 2015 2016

Revenue – Electrolyte RMBm 124 188 154 198 453 1,225

Revenue – Personal care ingredients RMBm 237 249 354 420 421 525

GPM - Electrolyte 43 92 62 67 137 534

GPM - Personal care ingredients 70 72 113 113 131 170

NPAT RMBm 46 63 81 62 100 396

Source: Deutsche Bank, company data

The chemical ingredients for personal care products business has been

growing steadily by volume with stable profitability at c.30%. Tinci has been

certified by major FMCG brands including P&G, L’OREAL, Unilever and

Colgate. Tinci targets personal care business gross profit CAGR of 20%

through: 1) development of more applications; 2) tailored services; and

3) increasing the market share at each of its major clients.

Figure 6: Revenue breakdown in 2011-19E Figure 7: Gross profit breakdown in 2011-19E

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RMB mnPersonal care functional ingredients LiB electrolyte Silicone rubber

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Source: Deutsche Bank estimates, Industry data


Figure 4: Major electrolyte makers

and their market shares in 2015

12%

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7%6%6%

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27%

Capchem

Mitsubishi, Japan

Tinci Materials

Guotai Huarong

Tianjin Jinniu

Dongguan Shanshan

Dongguan Kaixin

BYD

UBE, Japan

Smooth Way

Others

Source: Deutsche Bank estimates, CIAPS

6 June 2017

Metals & Mining

Tinci


Electrolytes

Largest global player with 20% market share

Tinci started its electrolyte business for lithium batteries in 2007. Within eight

years, it grew quickly to become the second-largest electrolyte maker in China

in 2015, taking market shares from Japanese companies like UBE, Panax and

Soulbrain. After acquiring Dongguan Kaixin in 2015, the sixth-largest Chinese

electrolyte producer, Tinci emerged as the largest electrolyte producer not only

in China but also the world, with total annual shipment of c.22kt in 2016. This

represents c.18-20% global market share, we estimate.

Figure 8: Tinci’s LiB shipment forecast Figure 9: Tinci’s LiB market share in 2011-15

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Others

LG chem

soulbrain

Panax

UBE

Mitsubishi

BYD

SS

JN

CAP

Tinci



Tinci has built three major manufacturing bases with total capacity of 40-

45ktpa, in Dongguan/Guangzhou, Jiujiang/Ningde, and HuHeHaoTe/Tianjin,

hoping to cover major industry clusters within a transportation radius of

500km. We expect Tinci to continue to grow its electrolyte business

aggressively in the next five years, to match strong downstream demand, and

to expand market share further.

In a market where the strong are becoming stronger, we are confident of

Tinci’s ability to grow. Driven by: 1) strong downstream demand; 2) close

client relationships; and 3) imminent removal of the raw material bottleneck,

Tinci’s electrolyte business will likely post a CAGR of c.30%, according to our

estimate. As a result, sales volume could further climb to c.40kt in 2018E,

which implies increased global market share of c.23-25%.

6 June 2017

Metals & Mining

Tinci


Booming industry with CAGR of c.30% till 2020E

High growth of lithium-ion battery industry will continue

A strong global commitment to reducing carbon emissions should continue to

underpin the high growth of electric vehicles (EV) and energy storage systems

(ESS). As such, accelerated investments to cater to the demand growth of

EV/ESS will help to reduce lithium-ion batteries’ cost/price. 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 4x larger than that of

lithium batteries. Combined with traditional demand, 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 has added up to

c.400Gwh of capacity completed by 2020E. As such, upstream lithium-ion

battery components will see similar rapid growth.

Figure 10: Driven by strong global EV sales, global lithium battery demand

may register CAGR of 30%

0

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2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Portable LIB Power Lead acid replacement ESSGwh

Source: Deutsche Bank estimates, MIIT, EVtank, GIIB, CIAPS

Driven by LiB demand, electrolyte consumption will grow accordingly

Figure 11 provides a summary of key component material demand in

conjunction with Deutsche Bank’s estimates for global lithium battery demand,

based on our battery component demand model. Due to the mixture of power

and energy lithium battery demand, components are likely to grow at different

speeds. However, all these components will likely post a CAGR of more than

20% in the next five years.

We expect electrolyte demand CAGR at c.30% for the next five years, in line

with the industry average. We estimate that every 1kwh of lithium battery

production may consume 1kg of electrolytes, based on various designs and

the final function of the battery. Overall, we expect the market volume of

electrolytes to grow from the current 80kt in 2015 to c.250kt in 2020E, with a

CAGR of c.30%. Accordingly, demand for electrolyte salt, LiPF6, might climb

from the current c.10kt to 32kt in 2020E.

6 June 2017

Metals & Mining

Tinci


Figure 11: Estimated material content (weight) of an ideal LiB 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, industry data

Figure 12: Global electrolyte demand Figure 13: Global LiFP6 demand

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Electrolytektkt

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Global hexafluorophosphate demandkt



Strong will become stronger

Electrolytes is a business for specialists with diversified specific products

provided with economies of scale, in terms of product formulation and

manufacturing knowhow. It is a challenging environment for mid-size, under-

capitalized, or unfocused players. We believe that strong players should

become stronger in this market.

Capacity not a bottleneck for electrolyte solution providers

We have no concerns about a shortage of capacity for electrolyte providers. It

is quite easy for electrolyte solution providers to expand capacity within 6-12

months. Further, there is almost no need for further ramping-up. The

manufacturing process of electrolyte mainly concerns mixing and canning. In

the past two years when downstream demand was strong, raw material

shortages were key bottlenecks for the electrolyte industry.

Self-supplied raw materials ensure stable operations in long term

Tinci has managed to develop self-sufficiency in LiPF6, the core raw material

for electrolytes. By the end of 2018, the total LiPF6 capacity of Tinci should

reach 6ktpa, including 4ktpa solid LiPF6 and 6ktpa liquid LiPF6 (equivalent to

2ktpa solid LiPF6), which should be enough to support 48ktpa electrolyte

capacity. Although the manufacturing knowhow for LiPF6 is critical, we

believe the likelihood of failure for the project ramp-up for Tinci is low, as it has

Figure 14: Electrolyte production

process

Purity >99%Water < 10 ppm


So

lve

nts

MPC

LiPF6

EC

Mix Canning Stock

DMC

PC

VC TF PS DVB

EMC

CalculationDEC

Source: Deutsche Bank, Company data

6 June 2017

Metals & Mining

Tinci


accumulated experience in the past several years and has ramped up

production lines twice in the past five years.

Although we do not expect a shortage of LiPF6 in the next 3-5 years, after the

major investment and capacity expansion since 2016 (see Figure 15, which

shows the aggressive capacity expansion plans for LiPF6 in China; we expect a

significant glut market going forward), a higher self-supplied raw material level

should benefit Tinci through stable supply and better quality control in the long

term.

Figure 15: Major LiPF6 capacity expansion plans

Company Capacity expansion

Capex (RMB m)

Expected completion time

Xintai Materials 6kt/a 250 3kt/a in 2017 and 3kt/a in 2019

Tianjin Jingniu 2.5kt/a n.a. n.a.

Do-Fluoride 3kt/a 200 FY16 year end

Bicon Pharmaceutical 3kt/a n.a. FY16 year end

Shida Shenghua 2kt/a 90 FY17

Tinci Materials 2kt/a 126 FY17


Zhejiang Yongtai 6kt/a 388 FY17 year end

Total new expansion 26kt+

Global demand in 2015 8.9kt


Client relationships matter in a semi-winner-takes-all market

Tinci has cultivated most leading domestic battery makers, such as CATL/ATL,

BYD, Lishen and Guoxuan, as its key clients. The electrolyte industry is a semi-

winner-takes-all market. Client networks play a more important role in the

electrolyte industry than for other lithium components. Although lithium

battery makers choose more than one electrolyte maker, they usually select

only one electrolyte maker for each type of battery, as the amount of

electrolyte ordered is relatively small. It is not economical to choose several

makers. In addition, electrolyte manufacturing is usually tailored and designed

for specific downstream clients or sometimes even done with the collaboration

of downstream clients. As a result of the collaboration, the formulation is

usually exclusive. This exclusivity helps winning electrolyte players to supply

all the pieces for each type of lithium battery.

Figure 16: Tinci almost covered most leading battery makers such as BYD, BAK, Lishen, CATL and Guoxuan, etc.

Supplier

SDI Panasonic LG Sony CATL/ATL Lishen BAK BYD Maxwell Coslight OptimumNano

Tinci Materials √ √ √ √ √ √

Capchem √ √ √ √ √ √ √ √ √

Guotai Huarong √ √ √ √ √ √

Tianjin Jinniu √ √ √ √ √

Kaixin √ √

Shanshan √ √ √

BASF √ √

Mitsubishi √ √ √ √ √

UBE √ √

Chuo Group √

Mitsui Chemicals √

Soulbrain √

LG Chem √

Customers

Source: Deutsche Bank, Based on public information during 2014-16, non-exhaustive relationship map

6 June 2017

Metals & Mining

Tinci


A benign cycle between profit, R&D and client relationships

We see a benign circle of cooperation with downstream clients, revenue &

profit, and technology. The more cooperation there is with downstream battery

makers, the more opportunities there are for an electrolyte solution maker to

invest in R&D and accumulate technology. The stronger revenue and net profit

further support the R&D and patent applications, which in turn help to obtain

more orders and forge stronger cooperation with downstream clients. Figure

17 and Figure 18 demonstrate the strong and clear relationships between the

number of patent applications, R&D expenditure and market share. As such, in

our view, the strong will become stronger in this market and entry barriers for

electrolyte producers are high, although total capex for the electrolyte factory

is not high.

Figure 17: Number of patents directly proportional to

market share

Figure 18: R&D expenditure also has positive correlation

with electrolyte makers’ market share

5%

4%

4%

3%

2%

2%

9%

9%

9%

11%

13%

20%

2011

2012

2013

2014

2015

2016

Tinci's market share

JSGT market share

Tinci's R&D expenditure

JSGT's R&D expenditure

5%

4%

4%

3%

2%

2%

9%

9%

9%

11%

13%

20%

2011

2012

2013

2014

2015

2016


JSGT market share

Tinci's patent number

JSGT's patent number

Source: Deutsche Bank estimates, Company data


Volume expansion should grow bottom line again, in 2018-19

We expect profitability deterioration in 2017 (gross profit per tonne), as: 1) raw

material cost for LiPF6 is declining; and 2) electrolyte players aim to price on

gross profit margin. As the oversupply of LiPF6 is significant, we believe the

price of LiPF6 will likely fall to the trough of the industry cycle in 2017 and be

stable in 2018-19. Consequently, the volume expansion of electrolytes should

grow Tinci’s bottom line again in 2018-19 at c.20% YoY.

Figure 19: Profitability fluctuates with raw material cost

Figure 20: Volume expansion should grow bottom line

again, in 2018-19E

-

10

20

30

40

50

60

70

80

2007

2008

2009

2010

2011

2012

2013

2014

2015

201

6E

2017

E

2018

E

2019

E

Electrolyte - LiPF6 spread Cost of solvent Cost of LiPF6RMB k/t

-

10

20

30

40

50

60

70

80

0

100

200

300

400

500

600

20

11

20

12

20

13

20

14

20

15

20

16

20

17E

20

18E

20

19E

NPAT Electrolyte sales volumeRMBm kt

Source: Deutsche Bank estimates, Company data, CIAPS


6 June 2017

Metals & Mining

Tinci


Personal care

Steady growth at 20%

The emergence of electrolytes as the major revenue/gross profit earner has

relegated chemical ingredients for personal care products to second place. The

excellent performance was neglected by the market in 2016. As a matter of

fact, Tinci’s personal care ingredients business contributed 45%/29% to its

total revenue with gross margin at 31%/23% in 2015/2016 respectively. The

personal care business has posted a CAGR of 20% with lucrative stable gross

profit margin of 30% in the past five years.

Tinci has established full product lines by offering ingredients including

surfactant, silicone oil, cationic conditioner, and water soluble polymer, which

are widely used in personal care products such as shampoo, shower gel,

conditioning and skin care products. Surfactant (表面活性剂) and carbomer

(卡波姆树脂 ) are the main personal care functional ingredient products,

bringing gross margin of c.25% and c.60% respectively. Currently, the

company has sufficient capacity of 50kt and 5kt for surfactant and carbomer,

respectively, which are mainly provided by Guangzhou Tianci and Jiujiang

Tianci.

Figure 21: Major products of Tinci and their capacity in detail

Personal care ingredients

Typical products Application Capacity (kt)

Gross Margin

Surfactant Betaine, Imidazoline Surfactant can lower the surface tension between two liquids or between a liquid and a solid. It is widely used in shampoo, shower gel, liquid soap, and facial cleaner.

50 25%

Silicone oil Transparent silicone oil, silicone emulsion

Silicone oil is widely used in shampoo, hair care products and forming agent to soften the hair.

Cationic conditioner Guar gum, cellulose

Cationic conditioner is used as conditioning agent in personal care products including shampoo, conditioner, liquid soap, shower gel and baked ointment. It is also applied as an enhancer in papermaking, mining, water treatment and textile dyeing.

Water-soluble polymer Carbomer Carbomer is frequently used as a gel in hair care products and skin care products. It is also used as thickener in textile dyeing, medical, papermaking and coating industries.

5 60%

Source: Company, Deutsche Bank

Despite fierce competition in the personal care ingredients industry, Tinci has

maintained steady and strong corporate relationships with large personal care

product manufacturers, with key clients including P&G, Ashland, and Blue

Moon. This involves a strict and prolonged process, usually taking 3-4 years,

for large downstream companies, especially multinational companies, to select

and examine a qualified supplier; given this scenario, we believe Tinci will

continue to witness stable demand in the future. Moreover, we see strong

demand guarantee from one of its biggest clients, P&G, given that Tinci is

based in Guangzhou, which would help accomplish P&G’s zero-inventory

strategy.

6 June 2017

Metals & Mining

Tinci


Figure 22: Major operation of Tinci’s personal care business

Capacity of 9.8ktpa, the largest factory in Asia Total capacity of 5ktpa

Self-supplied raw material, propane diamine Second largest player in the world

The industry leader, which set up industry standards

Major clients: P&G, Colgate, Blue-Moon Surfactant Carbomer Major clients: BDF, Beiersdorf

Major clients: Colgate, Reckitt Benckiser Cationic Conditioner Silicone oil Major clients: L'OREAL, Unilever, BDF Beiersdorf

Capacity of 600mtpa

Capacity of 600mtpa Capacity of 9ktpa, largest factory in Asia

Self-supplied raw material One of the classic products of Tinci

Source: Deutsche Bank, company data

We expect the global market for personal care products to increase by 3% to

5% every year over the next five years. We expect the company’s personal

care functional ingredient business to post c.15-20% CAGR and with stable

margin.

Tinci aims to register a CAGR of 20% in the next three years with stable

margins through: 1) developing more applications for current major products;

2) tailored services for specific clients; and 3) market share expanding within

existing clients. Key targeted clients for an increase in the penetration rate are

P&G, Unilever, and Avon.

Figure 23: Personal care business targets 20% CAGR over 2018-20E

Market s hare expanding with in incumbent cl ients

Tai lored s ervice for s peci f ic cl ients

Developing more appl ications for major ingredients

Key targeted clients to increase penetration rate are

P&G, Unilever and Avon

Cooperate with Ashland, GE, Blue Moon and Zhimeicun

Looking for more applications in oil exploration, paper making,

construction, pesticide and cosmetics.


6 June 2017

Metals & Mining

Tinci


Financial analysis

Financial snapshots

Overall, we expect Tinci’s revenue to post 11% CAGR in the next three years,

mainly driven by the sales volume expansion of electrolytes, from 22ktpa in

2016 to c. 54ktpa in 2019E (Figure 24). Accordingly, NPAT may be c.-10% YoY

in FY17, but c.20%+ YoY is expected for FY18/19E. Overall, we expect a 12%

CAGR in the next three years (Figure 25).

Figure 24: Tinci’s revenue outlook Figure 25: Tinci’s NPAT outlook.

0%

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20%

30%

40%

50%

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NPAT YoYmn RMB



Tinci continued to remain net cash (Figure 26). We believe the strong cash

flow from operations should support strong capex, going forward (Figure 27).

Most of the capex for LiPF6 has been almost invested and further capex for

electrolyte expansion is limited.

Figure 26: Tinci’s net debt/net gearing Figure 27: Tinci. cash flow from operations/capex

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

-550

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-250

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2011

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Net debt Net gearingmn RMB

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Cash flow from operations CAPEXmn RMB



6 June 2017

Metals & Mining

Tinci


Figure 28: Deutsche Bank estimates vs. Bloomberg Finance LP consensus for Tinci

RMB m 2017E 2018E 2019E

DB estimates Consensus DBe/Cons. DB estimates Consensus DBe/Cons. DB estimates Consensus DBe/Cons.

Revenue 2,020 2,586 78% 2,282 3,309 69% 2,936 3,629 81%

Gross profit 660 1,064 62% 791 1,307 61% 1,024 1,473 70%

Operating income 387 669 58% 483 812 60% 628 922 68%

NP 373 583 64% 467 704 66% 608 795 76% Source: Deutsche Bank estimates, Bloomberg Finance LP

Figure 29: Tinci’s income statement summary

RMB m 2013 2014 2015 2016 2017E 2018E 2019E

Revenue 596 706 946 1,837 2,020 2,282 2,936

COGS 403 501 658 1,123 1,360 1,490 1,912

Gross profit 193 205 288 714 660 791 1,024

SGA 110 137 182 273 273 308 396

Operating income 82 68 106 441 387 483 628

Operating profit margin 14% 10% 11% 24% 19% 21% 21%

EBIT 104 73 118 467 437 553 718

Financial cost 5 0 3 3 -1 5 4

EBITDA 135 115 175 534 543 669 845

PBT 99 73 115 464 438 549 714

Tax 15 9 16 69 65 82 106

PAT 85 64 99 395 373 467 608

NPAT 81 62 100 396 373 467 608

YoY -24% 62% 298% -6% 25% 30% Source: Deutsche Bank estimates, Company data

Figure 30: Tinci’s cash flow summary

RMB m 2013 2014 2015 2016E 2017E 2018E 2019E

Net profit 85 64 99 395 373 467 608

Depreciation 29 41 54 67 106 116 128

Amortization 1 1 3 5 0 0 0

Decrease in inventory -1 -15 -25 -62 0 -18 -58

Decrease in AR -15 -58 -182 -376 -28 -31 -215

Increase in AP -23 33 129 215 41 2 75

Cash flow from operation 82 69 90 234 364 536 537

Capex -97 -119 -123 -164 -192 -209 -155

Cash flow from Investment -92 -171 -296 -252 -342 -359 -305

Borrowing 133 18 133 58 0 0 0

Payback debt 0 274 288 4 0 0 0

Payback long-term payable -68 -91 -125 -38 0 0 0

Dividend payment -18 -19 -21 -25 -75 -93 -122

Cash flow from financing 26 173 274 -3 -75 -93 -122 Source: Deutsche Bank estimates, Company data

6 June 2017

Metals & Mining

Tinci


Figure 31: Tinci’s balance sheet summary

RMB m 2013 2014 2015 2016E 2017E 2018E 2019E

Non-current assets 434 503 845 1,180 1,416 1,659 1,837

Fixed assets 398 461 540 676 762 855 883

Prepaid lease payments 27 26 71 85 85 85 85

Others 9 16 233 419 569 719 869

Current assets 362 523 782 1,156 1,075 1,207 1,591

Cash and cash equivalents 77 148 222 198 146 230 340

Restricted cash 175 230 388 692 719 750 965

Inventories 11 6 25 23 23 23 23

AR & NR 85 100 125 187 187 205 263

Others 13 40 22 56 0 0 0

Total assets 796 1,026 1,626 2,335 2,491 2,867 3,427

Current liabilities 224 173 424 693 549 552 626

Accounts payable 75 6 27 102 102 102 102

Other payables and 111 129 234 406 447 449 524

accruals 9 8 10 19 0 0 0

Short term borrowings 29 30 152 165 0 0 0

Non-current liabilities 6 6 11 9 9 9 9

Medium-term debentures 0 5 7 5 5 5 5

Convertible bonds – 6 1 4 4 4 4 4

Total liabilities 230 179 435 701 558 560 635

Shareholders’ equity 548 847 1,183 1,628 1,926 2,300 2,786

Issued share capital 17 0 9 7 7 7 7

Total equity 565 847 1,192 1,634 1,933 2,306 2,792 Source: Deutsche Bank estimates, Company data

6 June 2017

Metals & Mining

Tinci


Appendix B

Fine chemicals

Given the diverse variety, wide profession span and high function specialty of

electronic chemicals, it is hard for an individual company to acquire knowledge

and processing technology across various fields, such that multi sub-sector

have developed under the broad sector of electronic chemicals. Unlike basic

chemical raw material industry, electronic chemicals in the fine chemicals

sector are marked by their high degree of market segmentation and high

technical barriers. Moreover, the sub-sectors usually have high concentration,

with leading companies taking large market shares.

The diversity of demand from end-consumer market enhances the diversity in

variety, function, combination, and craft route of electronic components,

which leads to end-to-end product research and production in electronic

chemicals to meet the personalized demand. More and more downstream

clients are proposing joint development of new products and technologies with

electronic chemical manufacturers, to optimize the component function. It is of

growing importance to have strong capabilities in research and technology

integrated services for electronic chemical enterprises.

Acquisition of Dongguan Kaixin

In 2014, Tinci proposed to acquire a 100% stake in Dongguan Kaixin Battery

Materials for RMB19.6m, and it completed the share transfer in March 2015.

Gongguan Kaixin, set up in 2012, focuses on the development and production

of electrolytes. It had a product line with annual electrolyte capacity of 7.5kt

when acquired. The company expects to enhance its operating scale and

strengthen its market position in the electrolyte sector through the acquisition.

Cooperation with General Lithium (Palith)

In order to secure the lithium resource, Tinci has invested General Lithium

(Palith) in 2015. General Lithium is one of the major lithium compounds

processors in China, focusing on producing lithium carbonates and lithium

hydroxide. Currently, Tinci holds 19.59% shares of General Lithium.

LiFSI introduction

LiPF6 has been widely used in LiB as an electrolyte salt, given its superior

electrical conductivity and stable electrochemical performance. LiFSI, as a new

type of LiB electrolyte salt, not only has the traditional advantages of high

electrochemical stability, excellent electrical conductivity, good cycling

performance, high temperature performance and nice storage performance,

but also has advantages in terms of improving the SEI membrane, stabilizing

positive and negative electrode interphase, and avoiding battery swelling. LiFSI

is the future development direction of the LiB battery electrolyte salt. However,

the consumption of LiFSI should not be soaring in the recent one or two years,

as the price of LiFSI remains high. LiFSI will probably be mixed with LiPF6 as

the final solution for electrolyte salt. See more details in Appendix D.

6 June 2017

Metals & Mining

Tinci


Appendix C

Company background and management

Figure 32: Shareholder structure of Tinci Material


Figure 33: Major development/event of Guangzhou Tinci since 2000

Guangzhou TinciMaterials Technology was established and

was mainly engaged in personal care functional ingredients production.

Guangzhou Tinci Silicon Technology was

established, business

scope of which included Silicone rubbers.

Guangzhou Fine Chemicals technologyresearch center was founded and started

research on lithium ion battery materials.

Jiujiang Tinci was established and started to production and sale of lithium ion battery

electrolyte.

The company started production of carbomer

and formed strategic partnership with Wanxiang Group.

Jiujiang Tinci succeeded in trail production of

electrolyte and

carbomer production line with annualcapacity of 2kt .

Jiujiang Tinci's electrolytic project was officially put

into operation withbattery materials

expanding to lithium electric power market. It started to supply P&G .

Tianjin Tinci wasfounded and the group

produced crystal lithium

hexafluorophosphate and diaminopropane,important ingredients

Tinci Material got listed on Shenzhen Exchange in Jan 2014, raising RMB411mn through IPO.

Tinci acquired 70% stake of Guangzhou

Zhongkelixin Materials at RMB17.5bn.

Tinci completed private share placement of

RMB247mn and used RMB196mn to acquire

100% stake in Dongguan Kaixin

Tinci proposed private share placement plan

with expected size up to RMB621mn.

20022000 2005 2007 2009 2010 2011 2013 2014 Aug 15 Dec15 Aug 16


Figure 34: Senior Management of Tinci Material

Jinfu Xu, 徐金富 Mr. Jinfu Xu is the CEO and real controller of Guangzhou Tinci Material. He is the ex-CEO of Guangzhou Daoming Chemistry. Mr. Xu holds a master’s degree from the Chinese Academy of Science, majoring in chemistry, and an EMBA degree from CEIBS.

XunWu Chen, 陈汛武

Mr. Jinfu Xu is the director and general manager of Tinci. He graduated from Northwest Institute of Light Industry and also holds an EMBA degree from CEIBS. He was earlier a lecturer of Zhejiang Paper Industry School, the planning and warehouse logistics manager of Guangzhou P & G Co., Ltd, the operations manager, project manager, director, general manager and director of Suzhou P&G Co., Ltd., and the director and general manager of Ningbo Fangtai Kitchenware.

Liping Zhang, 张利萍 Mrs. Liping Zhang is the director and vice general manager of Tinci. She graduated from Zhejiang University, majoring in chemistry. She was the research leader of Jiangxi Xinghuo Chemical Research Institution, mainly focused on researching organic silicon materials.

Bing Gu, 顾斌 Mr. Bing Gu is the director, vice general manager and CFO of Guangzhou Tinci. He graduated from Zhongnan University of Finance, majoring in accounting. He previously served as deputy director and CFO of Hubei Jinlongquan Brewery Group and Guangzhou Blue Moon Industrial. He has been the CFO of the company since 2007 and a director since 2010.


6 June 2017

Metals & Mining

Tinci


Appendix D

Electrolyte introduction - Fine chemical products

The role in the battery cell: The electrolyte helps ions to move from the cathode to anode on the

charge and in reserve on discharge. The electrolyte is highly volatile

and flammable.

Global demand/supply: We expect global demand will post a CAGR of 29% in the next five

years.

We do not see a significant shortage, as electrolyte solution capacity

can increase quickly and easily. A production line can be added and

ramped up within a year.

Capex/t: RMB3-6k/t.

A shortage of electrolyte salt should be resolved in 2017.

The aggressive capacity expansion announced by major players

will result in oversupply in the next five years.

However, considering the manufacturing difficulty at ramp-up,

even for incumbent players, we expect a long ramp-up period and

capacity release progress may be lengthened.

Competitiveness and profitability: Tailored products – high entry barriers with:

Complicated formulation/tailored solution development skill

Close client relationship maintenance

Pricing: targeting gross profit margin, ASP will be affected by volatile

raw material prices, especially LiPF6.

High gross profit margin at. c.20~30% in the long term.

Figure 35: LiPF6 D/S vs. ASP Figure 36: Electrolyte D/S vs. ASP

0

50

100

150

200

250

300

350

400

0

5

10

15

20

25

30

35

40

2015 2016E 2017E 2018E 2019E 2020E

Supply Demand LiPF6 ASP (RHS)kt k RMB/t

0

10

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90

0

50

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200

250

2015 2016 2017E 2018E 2019E 2020E

Supply Demand

Electrolyte ASP (RHS) Electrolyte margin/tktk RMB/t

Source: Deutsche Bank estimates, Industry data, CIAPS

Source: Deutsche Bank estimates ,industry data, CIAPS

6 June 2017

Metals & Mining

Tinci


Electrolytes

Key component with a way to find breakthrough

The electrolyte, an electrically conductive solution in batteries, helps ions to

move from the cathode to anode on the charge and in reserve on discharge.

As a key intrinsic component of lithium batteries, the electrolyte accounts for

c.15% of the lithium battery raw material cost.

The electrolyte proved to be one of the major elements accountable for lithium

battery accidents in the past for its highly volatile and flammable

characteristics. A high-quality electrolyte is critical for lithium battery

performance not only in relation to safety, but also to charging rate, voltage,

life span and temperature tolerance, etc. We believe electrolyte development is

considered one of the key promising routes to a breakthrough in current

lithium battery performance.

Fixed main ingredients + varying formulations & additives

The typical commercialized electrolyte in a lithium battery is the combination

of electrolyte salt (LiPF6, lithium hexafluorophosphate, the most commonly

used lithium salt) dissolved in a complex mixed organic solvent, for instance, a

mixture of EC (ethylene carbonate) / PC (propylene carbonate) / DEC (diethyl

carbonate) / DMC (dimethyl carbonate), etc., with specific additives. See Figure

38 and Figure 39, which demonstrate the electrolyte’s major composition and

producing process.

Figure 38: Composition of the electrolyte Figure 39: Electrolyte production process

Electrolyte

Additives

Others

Cyclic Carbonate

Electrolyte salt

Conventional Solvents

Solvents

Chain Carbonate

ECPC

DMCDECEMC

Conventional electrolyte

saltsOthers

LiPF6



Solv

en

ts

MPC

LiPF6

EC

Mix Canning Stock

DMC

PC

VC TF PS DVB

EMC

CalculationDEC

Source: Deutsche Bank, industry data

Source: Deutsche Bank, Tinci Materials

Though the basic components are the same for all electrolytes, the selection of

electrolyte salt, solvent type, solvent ratio, and additives significantly

differentiates the performance of a lithium battery. Optimization of the

electrolyte formulation must consider not only the type of cathode, anode, and

separator but also the final function of the lithium battery. The formulation of

electrolytes has been continually developed to catch up with

Figure 37: Cost of electrolyte as % of

lithium battery raw material

Cathode active

material32%

Anode active

material11%

Separator18%

Electrolyte15%

Others24%

Source: Deutsche Bank estimates, industry data

6 June 2017

Metals & Mining

Tinci


improvements/changes in other components like cathodes, anodes, separators,

or others, by trying out new lithium salts and additives.

Of the three main electrolyte ingredients, electrolyte salt is the most expensive

in terms of value/weight, while solvent is the least. Lithium salt takes c.13% of

the weight of the electrolyte but accounts for 55% of the total cost. See

Figure 40 and Figure 41.

Figure 40: Electrolyte breakdown by weight Figure 41: Electrolyte breakdown by cost

Electrolyte salt13%

Organic solvent

80%

Additives and

others8%

Electrolyte salt55%

Organic solvent

30%

Additives and

others15%

Source: Deutsche Bank estimates, Industry data Source: Deutsche Bank, estimates, Industry data

Salt decides key specifications, but additives should provide a breakthrough

Key specifications decide how good electrolytes are: 1) conductivity;

2) temperature tolerance range (both high and low); 3) voltage range; 4) cycle

life; 5) discharge rate; and 6) safety, including thermal/hydrolytic stability, and

abuse tolerance. Lithium salt plays an important role in deciding the electrolyte

performance. Again, it is unlikely to satisfy all specifications simultaneously,

but is a compromised result after the trade-offs.

So far, LiPF6 has been the most successful lithium salt applied in lithium

batteries, due to its relatively balanced specification. However, strong demand

for batteries for EVs has increased the potential need for high-voltage

electrolytes. LiFSI seems to be a potential candidate to replace a small part of

the LiPF6 in the high-end market for power lithium batteries. In the past few

months, several Chinese companies, including Capchem, Tianci and Jiangsu

Huashen, have announced that they will build new LiFSI capacity of 1.5ktpa in

total by 1H17. For downstream clients, acceptance of LiFSI remains to be

seen. After all, ASP of LiFSI at c.RMB1.5~2m/t is more than three times that of

LiPF6. Capchem expects total annual consumption of LiFSI in the next several

years to be only several hundred tonnes.

Believing that additives are key to a breakthrough in electrolyte performance,

the whole industry put more than 80% of research efforts into additives, said

Capchem. The formulation of additives is the most important competitive

factor for electrolyte solution providers. Many additives are already on the

table, including FE, PFPE and PEO. In short, they are being used to improve

performance such as: 1) SEI structure (see Appendix); 2) conductivity; and

3) flame retardation. However, once again, these materials may improve some

specifications but hinder other aspects of performance. A mixed

(compromised) solution is normal. So far, the amount of additives has usually

been less than 10% of the total electrolyte volume, restricted by the need to

maintain a balance between performance and abuse tolerance.

6 June 2017

Metals & Mining

Tinci


Global demand – robust growth expected

We believe global electrolyte demand will grow quickly, driven by a boom in

the lithium battery industry. Every 1Kwh of lithium battery production

consumes electrolytes from 0.85-1kg, depending on various designs and the

final function of the battery as we estimated. Overall, we expect the market

volume of electrolytes will grow from c.70kt in 2015 to c.250kt in 2020E, a

CAGR of c.30%. Accordingly, demand for key electrolyte salt, LiPF6, could

climb from the current c.8.8kt to c.32kt in 2020E.

Global major players and their market shares

There are three main types of players in the electrolyte industry: 1) providers of

organic solvent, such as Shida Shenhua; 2) providers of lithium salt, such as

Stella Chemifa, Kanto Denka Kogyo, and Do-fluoride; and 3) providers of

electrolyte solutions, such as Ube, Tianci, and Capchem. In order to stabilize

raw material purchases, some manufactures like Tinci also produce lithium salt

for its own final electrolyte solutions.

Organic solvent makers – plentiful supply with a low utilization rate For organic solvents, technical producing knowhow is low, and China has serious overcapacity. The utilization rate of DMC (dimethyl carbonate), the most common organic solvent, was only 55% in 2015, as estimated by industry leader Shida Shenhua, and we do not see any significant changes in demand/supply yet. The final ASP price of DMC should be volatile, based on its raw material costs.

Lithium salt providers facing headwinds; significant oversupply lies ahead

This is a subsector with high technology knowhow, previously dominated by

Japanese makers. Kanto Denka Kogyo, Stella Chemifa, and Morita Chemical

controlled more than 90% of global market share (LiPF6) in 2011, and hence

decided the price of LiPF6, too. Chinese producers Jiangsu Guotai and Do-

fluoride were able to attain the technology in 2006. With Chinese capacity

increasing and quality improving, ASP of LiPF6 declined from a high at

RMB800k/t in 2004 to only RMB74k/t in 2014.

Figure 43: Major LiPF6 capacity expansion plans

Company Capacity expansion

Capex (RMBm)

Expected completion time

Xintai Materials 6kt/a 250 3kt/a in 2017 and 3kt/a in 2019

Tianjin Jingniu 2.5kt/a n.a. n.a.

Do-Fluoride 3kt/a 200 FY16 year end

Bicon Pharmaceutical 3kt/a n.a. FY16 year end

Shida Shenghua 2kt/a 90 FY17



Zhejiang Yongtai 6kt/a 388 FY17 year end

Total new expansion 26kt+

Global demand in 2015 8.9kt


Figure 42: Global electrolyte grows

at a CAGR of 30%

0

50

100

150

200

250

300

2015 2016E 2017E 2018E 2019E 2020E

Electrolytekkt


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The remarkable growth in EV batteries since 2H15 caused a temporary

shortage of lithium salt supply, and ASP of LiPF6 soared to RMB480k/t and

peaked in March 2016. The price of LiPF6 now has quickly declined

RMB300k/t recently as more supply is coming on soon. Figure 44

demonstrates the major capacity expansion schedule in China.

Electrolyte solution providers: capability to create formulations

Electrolyte solution providers purchase organic solvent, lithium salt, and

sometimes additives externally. Electrolyte solution providers blend and

produce the final product to be ready for use by lithium battery makers.

Chinese companies have grown their market share, with volume rising from

18ktpa in 2010 to 65ktpa in 2015. Major Chinese players are Capchem,

Guangzhou Tinci, Jiangsu Guotai, and Tianjing Jinniu. Major international

competitors are Mitsubishi, UBE, Tomypure, and Mitsui Chemical. We believe

Chinese companies will grow market share as domestic demand lifts for

lithium batteries. Japanese players could retain their leading position in the

high-end market, notably the high-voltage and quick charge/discharging

markets.

Our summary of global supply/demand for electrolytes demonstrates a deficit

in electrolytes, but we believe more supply will come on in response to global

demand. It is easy for electrolyte players to expand capacity, which can be

done within 8-12 months with low capex/t.

Figure 44: Chinese players have large market shares

Figure 45: Short product ramp-up time makes shortage

of electrolytes unlikely

12%

10%

9%

8%

7%6%6%

6%

5%

4%

27%

Capchem

Mitsubishi, Japan

Tinci Materials

Guotai Huarong

Tianjin Jinniu

Dongguan Shanshan

Dongguan Kaixin

BYD

UBE, Japan

Smooth Way

Others

-

50

100

150

200

250

300

Sup

ply

De

ma

nd

Sup

ply

De

ma

nd

Sup

ply

De

ma

nd

Sup

ply

De

ma

nd

Sup

ply

De

ma

nd

Sup

ply

De

ma

nd

2015 2016E 2017E 2018E 2019E 2020E

mn sqmSupply announcedCapacity expansion may react to short supplyTotal traditional demandDemand of lead-acid replacement

Source: Deutsche Bank estimates, Capchem, CIAPS, Industry data

Source: Deutsche Bank estimates, Capchem, CIAPS, Industry data

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Competitiveness and profitability

Industry pricing based on cost-plus

Electrolytes are heavy raw material-intensive business. Raw materials account

for as much as c.85%+ of total production cost, while manufacturing, labor,

and energy represent the remaining 9%, 4%, and 2%, respectively. The current

industry pricing rule is that electrolyte producers set ASP of electrolytes by

targeting a certain gross profit margin. Therefore, the electrolyte price has

been heavily tied historically to raw material cost, especially the electrolyte salt

price, especially the price of LiPF6. See Figure 47. Thus, it is not difficult to

understand that electrolyte producers are receptive to cost hikes of raw

materials to some extent, as long as they are able to pass on the cost to

downstream clients and even benefit from higher gross profit per tonne. In the

past several years, we see electrolyte solution providers continue to earn

c.20% above gross profit margin through the business cycle. We forecast

electrolyte solution providers will continue to keep their gross profit margin at

c.20% in the next few years thanks to its high-entry barrier.

Figure 47: ASPs of lithium salt and electrolytes have high

positive correlation

Figure 48: Electrolyte demand/supply vs. ASP

0

10

20

30

40

50

60

70

80

90

100

0

50

100

150

200

250

300

350

400

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E

LiPF6 (LHS) Electrolyte (RHS)RMB k/t RMB k/t

0

10

20

30

40

50

60

70

80

90

0

50

100

150

200

250

2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E

Supply Demand

Electrolyte ASP (RHS) Electrolyte margin/tkt k RMB/t

Source: Deutsche Bank estimates, industry data, Capchem Source: Deutsche Bank estimates, CIAPS, industry data

Client networks play more important role in electrolytes than other components

Client networks play a more important role in the electrolyte industry than in

other lithium battery components. Although lithium battery makers usually use

more than one electrolyte maker, they usually select only one electrolyte maker

for each type of battery, considering that the amount of electrolytes ordered is

small. It is not economic to choose many. In addition, electrolyte manufacturing

is usually tailored and designed for specific downstream clients or sometimes

even done with the collaboration of downstream clients. As a result of

collaboration, the formulation is usually exclusive. This exclusivity helps winning

electrolyte players to take all the pieces in each type of lithium battery.

Thus, other than an ability to respond quickly and develop various formulations

to satisfy clients, electrolyte players must focus on their close customer

relationships and long-term sustainability. We believe the stronger competitive

edge of major players will ultimately be reflected in a higher spread, although it

would generally follow the trajectory of general industry spreads.

Figure 46: Cost breakdown for

electrolyte solution provider

Raw material,

86%

Labour, 4%

Energy, 2%

Manufacture cost,

9%


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Figure 49: Electrolyte supply chain relationship map (non-exhaustive)

Supplier

SDI Panasonic LG Sony CATL/ATL Lishen BAK BYD Maxwell Coslight OptimumNano

Tinci Materials √ √ √ √ √ √

Capchem √ √ √ √ √ √ √ √ √

Guotai Huarong √ √ √ √ √ √

Tianjin Jinniu √ √ √ √ √

Kaixin √ √

Shanshan √ √ √

BASF √ √

Mitsubishi √ √ √ √ √

UBE √ √

Chuo Group √

Mitsui Chemicals √

Soulbrain √

LG Chem √

Customers

Source: Deutsche Bank estimates, industry data, Based on public information during 2014-2016

A virtuous circle of profit, R&D, and client relationships

We see a virtuous circle of cooperation with downstream clients, revenue &

profit, and technology. The more an electrolyte solution maker cooperates with

downstream battery makers, the more opportunities it has to invest in R&D

and accumulate technology. Stronger revenue and net profit further support

R&D and patents application, which helps it to obtain more orders from and

strengthen cooperation with downstream clients. Figure 51 and Figure 52

demonstrate the strong and clear relationships between the number of patent

applications, R&D expenditure and market share. Hence, the entry barriers to

become an electrolyte producer are high, although total capex for an

electrolyte factory, especially electrolyte solution is not high.

Figure 50: The number of patents has a direct

relationship with market share

Figure 51: R&D expenditure also has a positive

correlation with electrolyte makers’ market share

5%

4%

4%

3%

2%

2%

9%

9%

9%

11%

13%

20%

2011

2012

2013

2014

2015

2016


JSGT market share

Tinci's R&D expenditure

JSGT's R&D expenditure

5%

4%

4%

3%

2%

2%

9%

9%

9%

11%

13%

20%

2011

2012

2013

2014

2015

2016


JSGT market share

Tinci's patent number

JSGT's patent number



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Appendix C

Company background and management

Figure 52: Shareholder structure of Tinci Material


Figure 53: Major development/event of Guangzhou Tinci since 2000

Guangzhou TinciMaterials Technology was established and

was mainly engaged in personal care functional ingredients production.

Guangzhou Tinci Silicon Technology was

established, business

scope of which included Silicone rubbers.

Guangzhou Fine Chemicals technologyresearch center was founded and started

research on lithium ion battery materials.

Jiujiang Tinci was established and started to production and sale of lithium ion battery

electrolyte.

The company started production of carbomer

and formed strategic partnership with Wanxiang Group.

Jiujiang Tinci succeeded in trail production of

electrolyte and

carbomer production line with annualcapacity of 2kt .

Jiujiang Tinci's electrolytic project was officially put

into operation withbattery materials

expanding to lithium electric power market. It started to supply P&G .

Tianjin Tinci wasfounded and the group

produced crystal lithium

hexafluorophosphate and diaminopropane,important ingredients

Tinci Material got listed on Shenzhen Exchange in Jan 2014, raising RMB411mn through IPO.

Tinci acquired 70% stake of Guangzhou

Zhongkelixin Materials at RMB17.5bn.

Tinci completed private share placement of

RMB247mn and used RMB196mn to acquire

100% stake in Dongguan Kaixin

Tinci proposed private share placement plan

with expected size up to RMB621mn.

20022000 2005 2007 2009 2010 2011 2013 2014 Aug 15 Dec15 Aug 16


Figure 54: Senior Management of Tinci Material

Jinfu Xu, 徐金富 Mr. Jinfu Xu is the CEO and real controller of Guangzhou Tinci Material. He is the ex-CEO of Guangzhou Daoming Chemistry. Mr. Xu holds a master’s degree from the Chinese Academy of Science, majoring in chemistry, and an EMBA degree from CEIBS.

XunWu Chen, 陈汛武

Mr. Jinfu Xu is the director and general manager of Tinci. He graduated from Northwest Institute of Light Industry and also holds an EMBA degree from CEIBS. He was earlier a lecturer of Zhejiang Paper Industry School, the planning and warehouse logistics manager of Guangzhou P & G Co., Ltd, the operations manager, project manager, director, general manager and director of Suzhou P&G Co., Ltd., and the director and general manager of Ningbo Fangtai Kitchenware.

Liping Zhang, 张利萍 Mrs. Liping Zhang is the director and vice general manager of Tinci. She graduated from Zhejiang University, majoring in chemistry. She was the research leader of Jiangxi Xinghuo Chemical Research Institution, mainly focused on researching organic silicon materials.

Bing Gu, 顾斌 Mr. Bing Gu is the director, vice general manager and CFO of Guangzhou Tinci. He graduated from Zhongnan University of Finance, majoring in accounting. He previously served as deputy director and CFO of Hubei Jinlongquan Brewery Group and Guangzhou Blue Moon Industrial. He has been the CFO of the company since 2007 and a director since 2010.


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Acknowledgement

The author of this report would like to acknowledge Jason Zhu for his

contribution.

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Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

Tinci 002709.SZ 36.68 (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=002709.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: Tinci (002709.SZ) (as of 6/5/2017)

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

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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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

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United States of America

Tel: (1) 212 250 2500

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