rating company buy easpring - jrjpg.jrj.com.cn/acc/res/cn_res/stock/2017/6/6/a6e93e... · 6/6/2017...

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

[email protected]

Price/price relative

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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


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

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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

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14 15 16 17E 18E 19E

Sales growth (LHS) ROE (RHS)

Solvency

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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


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


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


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


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

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

RMB mn Automatic machinery Cathode

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RMB mn Cathode Automatic machinery



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


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

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

Portable Power Lead acid replacement ESSGwh

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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


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

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ktSupply announcedCapacity expansion may react to short supplyTotal traditional demand

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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


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

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

LCO NMC LFP NCA LMOkt

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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


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

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Yanjiao NMC 532 Yanjiao LCO

kt

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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%

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15%

20%

25%

30%

LCO NMC 532 NMC 622 NMC 811


6 June 2017

Metals & Mining

Easpring


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

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2015 2016 2017E 2018E 2019E 2020E

LCO NMC 532 NMC 622RMB k

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2015 2016 2017E 2018E 2019E 2020E

LCO NMC 532 NMC 622



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


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


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%

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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


Figure 27: Easpring’s net debt/net gearing Figure 28: Easpring’s cash flow from operations/capex

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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


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


6 June 2017

Metals & Mining

Easpring


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


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


6 June 2017

Metals & Mining

Easpring


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.


6 June 2017

Metals & Mining

Easpring


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

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kt k RMB/t

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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

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Source: Deutsche Bank, industry data

6 June 2017

Metals & Mining

Easpring


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

Easpring


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


Figure 44: Global LiB demand breakdown by type Figure 45: Global cathode demand breakdown by type

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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

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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

Easpring


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.

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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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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

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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



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

Easpring


Acknowledgement

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

contribution.

6 June 2017

Metals & Mining

Easpring


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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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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Tel: (81) 3 5156 6770

Deutsche Bank AG London

1 Great Winchester Street

London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc.

60 Wall Street

New York, NY 10005

United States of America

Tel: (1) 212 250 2500

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