rating company buy tianqi...

Deutsche Bank Markets Research

Rating

Buy Asia China

Resources Metals & Mining

Company

Tianqi Lithium

Date 1 February 2016

Initiation of Coverage

The power of lithium; initiating coverage with Buy

Reuters Bloomberg Exchange Ticker 002466.SZ 002466 CH SHZ 002466

Forecasts And Ratios

Year End Dec 31 2013A 2014A 2015E 2016E 2017E

Sales (CNYm) 1,068.2 1,422.4 1,805.2 4,902.5 5,991.2

Reported EPS FD(CNY) -1.30 0.54 0.86 7.30 8.33

Reported NPAT (CNYm) -191.0 130.5 223.7 1,888.2 2,156.4

DB EPS growth (%) – – 59.1 744.1 14.2

PER (x) – 86.5 125.3 14.8 13.0

Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

Tianqi -- major beneficiary of lithium boom; initiating coverage with a 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) 124/04/2015.

Price at 28 Jan 2016 (CNY) 108.30

Price target - 12mth (CNY) 149.90

52-week range (CNY) 173.03 - 37.80

HANG SENG INDEX 19,683

James Kan

Research Analyst (+852) 2203 6146 [email protected]

Yuki Lu

Research Associate(+852) 2203 [email protected]

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Tianqi Lithium

HANG SENG INDEX (Rebased)

Performance (%) 1m 3m 12m

Absolute -18.5 58.2 138.3

HANG SENG INDEX -10.5 -13.7 -20.0

Source: Deutsche Bank

DBe vs. Consensus (2016)

RMB mn DBe ConsensusDBe/Con.

Revenue 4,903 3,045 161%

EBIT 2,772 998 278%

NP 1,888 399 474%

Source: Deutsche Bank estimates, Bloomberg

Tianqi Lithium is the third-largest lithium producer globally, supplying a critical raw material for Electric Vehicle (EV) batteries. Demand trends are clear, especially in China where EV sales will rise 34% over the next three years. Supply is constrained and highly concentrated, with 86% controlled by four producers, supporting a very strong price outlook until 2018. With high quality, low cost reserves and well-timed processing capacity additions, earnings are set to surge eight-fold this year, taking RoE to 48.5%. We initiate coverage with a Buy and a TP of RMB149.9, implying 38% upside potential. High lithium price supported by demand and industry structure The average lithium price rose 44% last year and will gain a further 126% to RMB120,000/t in 2016, a level that will likely be maintained until at least 2018. Strong EV sales in China, a slow ramp-up of new supply and a concentrated industry structure are the key supporting factors. The EV battery industry is at the start of a rapid growth phase and generates a demand for lithium with a CAGR of 7~8% in the coming years. For Tianqi and other leading producers, we project an outlook very similar to the iron ore boom last decade. Global No. 3 lithium supplier with meaningful shipment increase Tianqi controls close to 18% of global lithium capacity. In 2015, through Talison (51%-owned), we estimate that Tianqi shipped c.34kt LCE (equity adjusted volume, vs. global production of 190kt LCE estimated). As well as owning the world-class Greenbushes mine, which has one of the largest and highest grade spodumene reserves in the world, Tianqi recently acquired a lithium carbonate processing plant in Zhangjiagang, which doubled its processing capacity. With further ramp-up of Greenbushes’ spodumene concentrate shipments and Zhangjiagang’s processing plant, we believe Tianqi’s shipments for spodumene concentrates and lithium compounds will increase 30%/20% and 93%/7% in 2016/2017 respectively. DCF-based TP suggests 38% upside; initiating coverage with a Buy With a resilient lithium price and strong shipment growth, we forecast earnings to rise eight-fold this year and a further 14% in 2017, generating an RoE of 48.5%. We derive our target price from a DCF model, with a WACC of 8.5%. We adopt 10.8% as the cost of equity to reflect a risk-free rate of 3.9%, a market risk premium of 5.6% and a beta of 1.24. Using a terminal growth rate of 3%, we set our target price at RMB149.9, implying 38% upside potential from current levels. Major risks: slower-than-expected demand pick-up from EV.

1 February 2016

Metals & Mining

Tianqi Lithium


Model updated:30 January 2016

Running the numbers

Asia

China

Metals & Mining

Tianqi Lithium Reuters: 002466.SZ Bloomberg: 002466 CH

Buy Price (28 Jan 16) CNY 108.30

Target Price CNY 149.90

52 Week range CNY 37.80 - 173.03

Market Cap (m) CNYm 28,024

USDm 4,261

Company Profile

Sichuan Tianqi Lithium Industries, Inc. develops, manufactures and sells lithium products. The Company's products include industrial lithium carbonate, battery lithium carbonate, lithium chloride, and lithium hydroxide.

Price Performance

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Tianqi Lithium HANG SENG INDEX (Rebased)

Margin Trends

-40-20

020406080

12 13 14 15E 16E 17E

EBITDA Margin EBIT Margin

Growth & Profitability

-20-100102030405060

-50

0

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200

12 13 14 15E 16E 17E

Sales growth (LHS) ROE (RHS)

Solvency

020406080100120

-40-30-20-10

01020

12 13 14 15E 16E 17E

Net debt/equity (LHS) Net interest cover (RHS)

James Kan +852 2203 6146 [email protected]

Fiscal year end 31-Dec 2012 2013 2014 2015E 2016E 2017E

Financial Summary

DB EPS (CNY) 0.28 -1.30 0.54 0.86 7.30 8.33Reported EPS (CNY) 0.28 -1.30 0.54 0.86 7.30 8.33DPS (CNY) 0.10 0.00 0.00 0.00 1.82 2.08BVPS (CNY) 6.9 21.0 11.4 12.3 17.8 24.0

Weighted average shares (m) 147 147 240 259 259 259Average market cap (CNYm) 4,342 5,194 11,295 28,024 28,024 28,024Enterprise value (CNYm) 3,932 6,896 12,742 29,255 28,394 26,900

Valuation MetricsP/E (DB) (x) 104.0 nm 86.5 125.3 14.8 13.0P/E (Reported) (x) 104.0 nm 86.5 125.3 14.8 13.0P/BV (x) 4.67 1.44 3.53 8.81 6.09 4.51

FCF Yield (%) nm 2.0 1.9 1.3 5.7 9.0Dividend Yield (%) 0.3 0.0 0.0 0.0 1.7 1.9

EV/Sales (x) 9.9 6.5 9.0 16.2 5.8 4.5EV/EBITDA (x) 63.1 nm 29.3 37.0 9.6 7.6EV/EBIT (x) 91.1 nm 40.8 48.1 10.2 8.0

Income Statement (CNYm)

Sales revenue 397 1,068 1,422 1,805 4,903 5,991Gross profit 103 274 578 1,009 3,404 4,219EBITDA 62 -175 434 790 2,961 3,562Depreciation 19 96 122 182 189 187Amortisation 0 0 0 0 0 0EBIT 43 -271 313 608 2,772 3,375Net interest income(expense) -1 -42 -25 -34 -24 0Associates/affiliates 0 0 0 0 0 0Exceptionals/extraordinaries -1 17 3 -7 -7 -7Other pre-tax income/(expense) 8 12 37 7 7 7Profit before tax 49 -283 328 574 2,747 3,375Income tax expense 7 11 46 190 604 743Minorities 0 -103 151 160 255 476Other post-tax income/(expense) 0 0 0 0 0 0Net profit 42 -191 131 224 1,888 2,156

DB adjustments (including dilution) 0 0 0 0 0 0DB Net profit 42 -191 131 224 1,888 2,156

Cash Flow (CNYm)

Cash flow from operations -44 223 302 607 1,758 2,669Net Capex -186 -121 -85 -230 -170 -160Free cash flow -230 101 217 377 1,588 2,509Equity raised/(bought back) 0 3,672 3,037 0 0 0Dividends paid -20 -87 -58 0 -472 -539Net inc/(dec) in borrowings 447 41 -108 -50 -50 -50Other investing/financing cash flows -23 -3,590 -3,324 2 0 0Net cash flow 174 138 -235 329 1,066 1,920Change in working capital -112 443 -249 41 -573 -150

Balance Sheet (CNYm)

Cash and other liquid assets 500 682 437 766 1,832 3,752Tangible fixed assets 202 1,075 1,026 1,072 1,061 1,052Goodwill/intangible assets 132 2,975 2,774 2,776 2,768 2,751Associates/investments 387 587 847 845 845 845Other assets 348 1,346 1,046 1,027 1,697 1,831Total assets 1,569 6,666 6,130 6,485 8,204 10,231Interest bearing debt 477 952 944 894 844 794Other liabilities 81 607 440 462 559 543Total liabilities 557 1,559 1,384 1,356 1,404 1,337Shareholders' equity 1,011 3,088 2,958 3,182 4,598 6,215Minorities 0 2,019 1,787 1,947 2,202 2,678Total shareholders' equity 1,011 5,107 4,745 5,129 6,800 8,893Net debt -23 269 507 128 -987 -2,957

Key Company Metrics

Sales growth (%) -1.5 169.2 33.2 26.9 171.6 22.2DB EPS growth (%) 3.7 na na 59.1 744.1 14.2EBITDA Margin (%) 15.7 -16.4 30.5 43.8 60.4 59.5EBIT Margin (%) 10.9 -25.4 22.0 33.7 56.5 56.3Payout ratio (%) 35.2 nm 0.0 0.0 25.0 25.0ROE (%) 4.2 -9.3 4.3 7.3 48.5 39.9Capex/sales (%) 46.8 11.6 6.0 12.7 3.5 2.7Capex/depreciation (x) 9.7 1.3 0.7 1.3 0.9 0.9Net debt/equity (%) -2.3 5.3 10.7 2.5 -14.5 -33.3Net interest cover (x) 46.5 nm 12.7 17.9 114.1 nm

Source: Company data, Deutsche Bank estimates

1 February 2016

Metals & Mining

Tianqi Lithium


Investment thesis

Outlook – strong earnings growth driven by high Li price

Founded in 1995 and after acquiring Talison in 2013, Sichuan Tianqi has become one of the largest lithium compound producers in the world, controlling c. 18% of the world market share. Tianqi’s primary operations are 1) mining spodumene concentrates in Australia and 2) processing spodumene concentrates to lithium chemical compounds in its China factories.

After a hike of 44% YoY in 2015, we believe that the average price of lithium carbonate in 2016 will have another 126% YoY increase and remain high at RMB120,000/t, until at least 2018. Strong EV sales in China and the slow ramp-up of new lithium supply should allow the tight supply of lithium to continue. Meanwhile, the top four suppliers of lithium control almost 86% of the supply. Lithium’s outlook in coming years looks very similar to iron ore’s boom story in the past decade.

For Tianqi, we believe the visibility of its organic earnings growth will be high in light of 1) high ASP of lithium compounds and expected increase in ASP of spodumene concentrates, and 2) flexibility to increasing volume of both spodumene concentrates in Talison, from current low utilization rate of only 60% only and lithium compounds in Zhangjiagang factory. The factory was acquired in 2015 and is now ready to ramp up.

Boosted by increases in both prices and the sales volume of spodumene and lithium compound, we forecast that Tianqi’s top line could reach RMB4,903mnand RMB5,991mn, up 172% YoY and 22% YoY, in 2016E and 2017E, respectively. Accordingly, we estimate that Tianqi’s bottom line could grow significantly, to RMB1,888mn and RMB2,156mn, up 744% and 14% YoY in 2016 and 2017, respectively.

Valuation – DCF-based TP at RMB149.9

We derive our target price from a DCF model, with WACC of 8.5%. We adopt 10.8% as the cost of equity to reflect a risk-free rate of 3.9%, a market risk premium of 5.6% and beta of 1.24. Using a terminal growth rate of 3%, we set our target price at RMB149.9 implying 38% upside potential from current levels. Our target price implies a 2016/17E PE of 21x/18x. The share price is currently trading at RMB108.3, implying 2016/2017 PE of 15x/13x. We expectthe ROE of Tianqi will reach 49%/40% in 2016/2017 and FCF yield will arrive at 5% and 8% in 2016/2017.

Risks

Major downstream risks: 1) Slower-than-expected demand from EV or other downstream industries. 2) Quicker-than-expected increase in lithium raw material supply, especially if there is a technology breakthrough in downstream salt lake brine extraction. And 3) Slower-than-expected utilization rate ramp-up in either the Greenbushes mine or the Zhangjiagang factory.

1 February 2016

Metals & Mining

Tianqi Lithium


Table Of Contents

Valuation ............................................................................. 5 DCF-based target price of RMB149.9 .................................................................. 5 Sensitivity analysis ............................................................................................... 6

Powering the EV growth ..................................................... 7 Strong EV sales will continue to drive growth of lithium batteries ..................... 7

A leading upstream player .................................................. 8 Spodumene operation: leading player controls a one-fifth of the global market share ..................................................................................................................... 8 Lithium compounds operation: driven by both price and volume improvements ............................................................................................................................ 12

Earnings forecasts ............................................................. 16 Profit centre shifts from spodumene to lithium compounds ............................. 16 Key assumptions and how we differ from consensus ....................................... 17

Financial Summary ............................................................ 18 Key financials of Tianqi ....................................................................................... 18

Appendix A ........................................................................ 21 Company profile and company history .............................................................. 21 Strategic M&A summary .................................................................................... 22 Talison (2012-14) ................................................................................................ 22 Galaxy Lithium Jiangsu factory, 2014 ................................................................ 23 20% equity in Tibet Shigatse salt lake brine, 2014 ............................................ 23

1 February 2016

Metals & Mining

Tianqi Lithium


Valuation

DCF-based target price of RMB149.9

We derive our target price from a DCF model, with a WACC of 8.5%. We adopt 10.8% as the cost of equity to reflect a risk-free rate of 3.9%, a market risk premium of 5.6%. We derive our target price from a DCF model, with WACC of 8.5%. We adopt 10.8% as the cost of equity to reflect a risk-free rate of 3.9%, a market risk premium of 5.6% and a beta of 1.24. Using a terminal growth rate of 3%, we set our target price at RMB149.9 implying 38% upside potential from current levels. Our target price implies a 2016/17E PE of 21x/18x. The share price is currently trading at RMB108.3, implying 2016/2017 PE of 15x/13x. We expect the ROE of Tianqi will reach 49%/40% in 2016/2017 and FCF yield will arrive at 5% and 8% in 2016/2017.

Figure 1: WACC for Tianqi’s DCF valuation Figure 2: 12M forward PB vs. ROE

Rf 3.9%

MRP 5.6%

Beta 1.24

Cost of equity 10.8%

Cost of debt 4.0%

Tax rate 22.0%

Post-tax cost of debt 3.1%

% capital in equity 70.0%

% capital in debt 30.0%

WACC 8.5%

Terminal growth rate 3.0%

Source: Deutsche Bank estimates Source: Deutsche Bank, Company data

Compared to Tianqi’s global lithium peers (Figure 3), we believe Tianqi’s relatively low PEx in 2016/2017 makes it very attractive. Most of Tianqi’s lithium peers have diversified businesses and thus the earnings growth might not be as strong as Tianqi’s. Tianqi’s high PBx at 6.1x 2016DBe BVPS can be justified by its 40%+ ROAE in the coming two years.

Figure 3: Global peer comparison table

Source: Deutsche Bank, Bloomberg Finance LP

1 February 2016

Metals & Mining

Tianqi Lithium


Sensitivity analysis

We outline our key sensitivities in the lithium operation in Figure 4, Figure 5 and Figure 6 based on FY2016 EPS.

Every RMB10,000/t price change in lithium carbonate will increase/decrease earnings by c.10% EPS. Relatively, EPS is less sensitive to price of spodumene than lithium carbonate. Every 10% change in ASP of spodumene only causes a 4% change in EPS. This is because although a higher price of spodumene may increase the profits of Talison in Australia (51% owned), it will also decrease the earnings of Tianqi’s processing factory in China (100% owned).

Figure 4: EPS sensitivity analysis against Lithium carbonate ASP Lithium carbonate ASP (k RMB/t)

100 110 120 130 140 150

2016E EPS 5.73 6.52 7.30 8.08 8.86 9.64

% Change -21% -11% 0% 11% 21% 32%Source: Deutsche Bank estimates

Figure 5: EPS sensitivity analysis against spodumene and lithium carbonate ASP ASP of Spodumene

AS

P o

f lit

hiu

m c

arb

on

ate

-30ppt -20ppt -10ppt 0ppt 10ppt 20ppt 3

-30ppt -49% -45% -41% -37% -34% -30% -

-20ppt -37% -33% -29% -25% -21% -17% -

-10ppt -24% -20% -16% -12% -9% -5%

0ppt -12% -8% -4% 0% 4% 8%

10ppt 1% 5% 9% 12% 16% 20%

20ppt 13% 17% 21% 25% 29% 33%

30ppt 26% 30% 34% 37% 41% 45% Source: Deutsche Bank

Figure 6: EPS sensitivity analysis against spodumene and lithium carbonate sales volume

Sal

es v

olu

me

of

lith

ium

ca

rbo

nat

e

Sales volume of Spodumene

-30ppt -20ppt -10ppt 0ppt 10ppt 20ppt 3

-30ppt -42% -35% -28% -21% -15% -8%

-20ppt -35% -28% -21% -14% -8% -1%

-10ppt -28% -21% -14% -7% 0% 6%

0ppt -20% -14% -7% 0% 7% 14%

10ppt -13% -6% 0% 7% 14% 21%

20ppt -6% 1% 8% 14% 21% 28%

30ppt 1% 8% 15% 21% 28% 35% Source: Deutsche Bank

1 February 2016

Metals & Mining

Tianqi Lithium


Powering the EV growth

Strong EV sales will continue to drive growth of lithium batteries

In our industry report “Powering the EV growth”, we forecast that total Chinese EV sales will grow at 42%/30%/31% in the next three years, and this will drive lithium demand to post an 7~8% CAGR in the coming years.

In 2015, China sold 207,169 units of commercial EV, implying c.500% YoY growth. We believe double-digit growth for commercial EV in China will likely continue as 1) subsidies remain meaningful in absolute terms, 2) subsidy policy now covers the whole country and more types of commercial EVs, and 3) the EV penetration for public buses should have reached critical mass, which will prolong the sales momentum. We also believe passenger EV growth will be strong due to the government’s ongoing policy support for EV, with sustainable policy restricting traditional vehicles in big cities.

Our analysis of the EV/battery supply chain suggests that lithium should be the sweet spot in the whole supply chain. Mid-stream producers might be facing technological uncertainty and aggressive capacity expansion, while downstream producers will need to continue to cut the cost of batteries and EVs to ensure greater end customer adoption. Only upstream lithium producers will under most scenarios enjoy the lithium growth in demand, regardless of downstream technology options.

Looking at the supply side, upstream players have very limited capability to expand production quickly in the short-middle term until at least 2018. We also see c. 86% of market supply controlled by the top four suppliers as a major positive for lithium producers.

Figure 7: Tianqi’s position in the industry supply chain, and revenue/gross profit in 2014 breakdown

Source: Deutsche Bank estimates, Company data

1 February 2016

Metals & Mining

Tianqi Lithium


A leading upstream player

Spodumene operation: leading player controls a one-fifth of the global market share

Sichuan Tianqi Lithium Industries, Inc is one of the top-four largest lithium chemical producers in the world, engaged mainly in mining spodumene and processing spodumene to lithium chemical compounds. Well positioned in the upstream and continuing to focus on this area, Tianqi’s top and bottom line should be boosted by increases in both prices and volume.

Figure 8: Tianqi’s position in the industry supply chain

Source: Deutsche Bank, Company data

Figure 9: Tianqi’s lithium compounds processing capacity in China as of 2016 Battery/Industry grade 27.5ktpa

Sheyang basement 10.5ktpa

Zhangjiagang basement (Original Galaxy lithium) 17ktpa

Lithium hydroxide 5ktpa

Lithium chloride 1.5ktpa

High purity lithium carbonate 0.6ktpa

Lithium Metal 0.2ktpa

Total Capacity in LCE (lithium carbonate equivalents) c.34.9ktpaSource: Deutsche Bank estimates, Company data

Figure 10: Summary of Tianqi’s mine assets Mine name Mine type Location Grade /

Mg:Li ratio Reserve (LCE) Output (LCE)

Greenbush Spodumene Perth, Australia 2.8% 4,300kt c.56ktpa

Jiajika Spodumene Sichuan, China 1.3% 550kt Lockout

Shigates Salt lake brine Tibet, China 0.02 1,830kt c.2-3ktpa Source: Deutsche Bank estimates, Company data

1 February 2016

Metals & Mining

Tianqi Lithium


Tianqi has two hard-rock mines in China and Australia, with total reserves of c.4.85mt LCE, and one salt-lake resource in Chile and China in each. Among its assets, the Australian Talison is no doubt the flagship and the only mine on which Tianqi is fully developing and operating. Talison is a joint-venture − the two shareholders are Tianqi, with a 51% stake, and Albemarle, with 49% shares. Talison is supplying c. 35% world market supply. And 51%’s equity of Talison gives Tianqi an effective c.18% world market share. Tianqi and Albemarle together have controlled above 50% global market share. See Figure 11 and Figure 13.

Almost the only supplier able to increase output in a timely manner Albemarle, FMC and SQM are almost all brine-based lithium compound producers. Most salt lakes with ample lithium resources are located in the US and South American countries (lithium triangle), including Bolivia, Argentina, and Chile. As the content of lithium is low, it is usually not economical to produce only lithium compounds from brine. As a matter of fact, most brine-based lithium compounds are produced as a byproduct during potash production. The major big projects are SQM’s Salar de Atacama/Salar del Carmen in Chile, FMC’s Salar del Hombre Muerto in Argentina, Albemarle’s Silver Peak in the US and Orocobre’s Salar de Olaroz Lithium Project in Argentina. See Figure 12.

Figure 13: Major lithium projects in the world Company Project/Mine Lithium type Country as % of total

SQM Salar de Atacama/ Salar del Carmen Brine Chile 23%

FMC Salar del Hombre Muerto Brine Argentina 12%

Albemarle Salar de Atacama/ La Negra Brine Chile 13%

Albemarle Silver Peak Spodumene US 3%

Albemarle Greenbushes @49% Spodumene Australia 17%

Tianqi Greenbushes @51% Spodumene Australia 18%

Total 86%Source: Deutsche Bank estimates, Company data

Compared with brine-based lithium compound production, hard-rock-base has a different economic structure. Hard rock mine usually has lower capex and is easier to expand. Talison has expanded its nominal production capacity of lithium concentrates twice, from 260ktpa in 2009 to the current 740ktpa, equivalent to 1,500ktpa of ore feed, which yields 110kt LCE, and we believe it should be able to expand this further, to 850ktpa later probably in 2020E.

Its current low utilization rate of 60% gives Talison huge flexibility to ramp up its spodumene sales volume to catch up with the strong demand rally. See Figure 14. In spite of that, Talison’s strategy is to prioritize supplying its two shareholders at current stage. Both of them have large capacity of lithium processing in China (self owned for Tianqi and OEM factories for Albemarle). Overall, we forecast that Talison’s spodumene output will grow by, 30%, 20% and 20% in 2016, 2017 and 2018, respectively.

At the end of 2015, Albemarle announced that it is going to build a new processing factory in 2020, with capacity of 50ktpa lithium carbonate, implying c.350~400ktpa spodumene concentrate demand. Albemarle has said that this new project will be fed by Talison’s spodumene, which we believe will push forward Talison’s capacity enlargement in the coming years, in line with our

Figure 11: Global market share of

lithium resource providers estimated

Source: Deutsche Bank estimated, Company data

Figure 12: Global potash price

Source: Deutsche Bank, Bloomberg Finance LP

Figure 14: utilization rate of Talison

Source: Deutsche Bank estimated, Company data

1 February 2016

Metals & Mining

Tianqi Lithium


expectations. Figure 15 demonstrates the capacity expansion plan and sale volume of Talison spodumene concentrates estimated.

Figure 15: Talison spodumene capacity and sales volume


High-quality mine produces special products with price premium. We note that Talison is not only the biggest hard-rock spodumene mine in the world, but also the best in terms of mine grade, 2.8% on average. Compared with hard-rock mines in operation or still in feasibility study stages, Talison’s asset quality is non-comparable from various points of view, such as potential annual capacity, reserve volume or mine grade.

Figure 16: Comparison of grade, mine reserve and capacity


Talison mainly produces two different products, technical grade spodumene concentrates (high-grade and contains less than 0.1% Fe2O3) and chemical grade spodumene concentrates (Standard grade).

1 February 2016

Metals & Mining

Tianqi Lithium


Without needing further processing, technical grade is suitably qualified for downstream users. But for chemical grade, it usually needs to be further processed into industry/battery grade lithium compounds for various industry usages. See Figure 17.

Figure 17: Lithium source and end-users


As such, ceramics and glass users can freely choose either technical-grade spodumene or industry-grade lithium compounds. Consequently, technical-grade spodumene has maintained a price premium over chemical-grade spodumene in the past several years, to reflect higher purity of spodumene and cost of further processing. For 2015, we estimate the ASPs of technical and chemical-grade spodumene at c. US$620/t and c. US$430/t, respectively.

Price hike of technical grade, reflecting increasing demand With the price of industry-grade lithium carbonate reaching c.RMB10,000/t, at the end of 2015, up c.120% in the past six months, increasingly more ceramics or glass users should start to show a preference for technical grade spodumene concentrates and increase the demand of technical grade spodumene.

However, it will be almost impossible for Tianqi to quickly enlarge its production volume of technical grade spodumene alone, as the proportion of technical grade spodumene concentrate to total spodumene concentrate is reasonably steady at 20%, in terms of volume after the washing process. We believe a price hike is highly expected to reflect increasing demand for technical grade. By contrast, we don’t expect the price of chemical spodumene to go up significantly, as Talison mainly sells chemical grade spodumene to two major shareholders.

As such, we expect the price premium of technical grade spodumene concentrates over chemical grade spodumene concentrates to enlarge in the coming years. Overall, we forecast an ASP hike of 30%/20% for spodumene concentrates, a sixth consecutive years of price increase.

1 February 2016

Metals & Mining

Tianqi Lithium


Figure 18: Spodumene concentrate price and forecasts


Lithium compounds operation: driven by both price and volume improvements

Tianqi has the ability to produce lithium hydroxide, lithium carbonate, lithium chloride and lithium metal, but it mainly focuses on batter-grade lithium carbonate and hydroxide. Total capacity of battery-grade lithium carbonate/hydroxide accounts for c.93% of its total capacity.

Figure 19: Processing path for lithium products


Tianqi owns and operates two processing plants in China. The acquisition of Zhangjiagang processing factory, from Galaxy Resources quickly doubled its capacity of lithium compounds processing to 34.8ktpa. Now, Tianqi is one of the largest lithium processing manufacturers in China.

Tianqi’s factories in Sichuan Sheyang produce various lithium compounds, including industry/battery-grade lithium carbonate of 10.5ktpa (can switch freely), lithium hydroxide 5ktpa and lithium chloride 1.5ktpa, and its ZhangJiaGang factory in Jiangsu province mainly produces lithium carbonate of 17ktpa. See Figure 9.

Tianqi has ambitions to expand further in the long term, in order to maintain its market share and balance, and compete with Albemarle’s new plan of building

1 February 2016

Metals & Mining

Tianqi Lithium


a new factory with capacity of 50ktpa lithium carbonate in 2020. We believe Tianqi will likely prepare itself to continue to increase its capacity before 2020, with the lithium demand for EV batteries remaining high.

Full capacity operation is expected after new factory ramp-up Aware of industry development trends, Tianqi has attempted to improve its product mix by focusing on high-end battery-grade lithium production in the past several years. Battery-grade lithium carbonate sales have climbed gradually, from c.2.5kt, representing 37% of total revenue, in 2007, to c.7.1kt in 2014, accounting for 54% of total revenue, while sales of other low-end products, such as industry-grade lithium carbonate and lithium chloride, remained low, at 3.2kt and 0.95kt, respectively, in 2014.

Figure 20: Lithium compound sales breakdown, by

product

Figure 21: Lithium compound sales breakdown, in

tonnage

Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data

Figure 22 demonstrates the lithium compounds production estimated for Tianqi in the next three years.

Figure 22: Tianqi’s major lithium compounds production estimated 2016E 2017E 2018E

Major lithium compounds

Lithium hydroxide 5,000 5,000 5,000

Lithium carbonate 22,500 24,500 24,500

Industry grade 2,500 1,000 0

Battery grade 20,000 23,500 24,500


As market demand for lithium compounds is increasing at a rapid pace, driven by strong EV sales, the downstream are suffering from short of supply. Tianqi’s Sheyang factory will probably run at full capacity after 2015, improving the utilization rate from 74% in 2014 to c.100% in the coming three years.

For the Zhangjiagang factory, it is still suffering from technical problems in its rotary kiln furnace which was originally designed to be feed with spodumene concentrates from Mt. Cattlin of Galaxy resource. Current monthly production volume of lithium carbonate in the Jiangsu factory is c.800t, equivalent to c.9.6ktpa, representing a 56% utilization rate. We believe Tianqi will be able to solve the technical problems in the rotary kiln furnace and ramp up quickly in the middle of 2016. We expect it to run at full capacity in 2H16.

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Figure 23: China EV sales estimates Figure 24: Lithium demand estimate for China EV

Source: Deutsche Bank estimates, MIIT Source: Deutsche Bank estimates, MIIT

As whole, we expect Tianqi’s total lithium compound sales in LCE to increase from c. 14.7ktpa in 2015 to 28.4kpta and 30ktpa in 2016 and 2017, driven mainly by the increase in sales of battery-grade lithium carbonate from c.9.5kt in 2015 to c.22.5kt in 2016 and 23.5kt in 2017.

Tianqi’s biggest strategic advantage is supply control. On the one hand, it can self-supply sufficiently; on the other hand, it is able to restrict the supply to its competitors. As Talison prioritizes supply to its major owners, Tianqi is able to expand its output without any concerns about low raw material supplies or worries about flooding the market with new capacity.

High price of lithium carbonate helps boost gross profit significantly After a hike of 44% YoY in 2015, we believe that the average price of lithium carbonate in 2016 will have another 126% YoY increase and remain high at above RMB120,000/t, until at least 2018. Strong EV sales in China and slow ramp-ups of new lithium supply should allow the tight supply of lithium to continue. Meanwhile, the top four suppliers of lithium control almost 86% of the supply. Lithium’s story in coming years looks very similar to iron ore’s boom story in the past decade. See Figure 25 and Figure 26.

Lithium compound spread enlarged significantly when major costs of other raw materials remained flat or even continued to drop in 2015, and we would not expect the cost of these materials to increase significantly in the coming several years.

Figure 25: Global supply/demand deficit Figure 26: Lithium carbonate price

Source: Deutsche Bank estimates, orocobre Source: Deutsche Bank estimates, wind

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Figure 27: Lithium carbonate spread since 2013 (daily) Figure 28: Lithium compound spread, 2016-18E

Source: Deutsche Bank estimates, Bloomberg Finance LP, Company data Source: Deutsche Bank estimates, Bloomberg Finance LP, Company data

As we discussed earlier, the technical spodumene price, determined by Tianqi itself, will be stable, as Tianqi is likely to realize great profit during the processing stage due to favorable income tax in China. (15% in Sheyang, 25% in Zhangjiagang and 30% in Australia) As such, we expect the spread of lithium compounds price over cost will remain high. We expect Tianqi’s lithium compounds production cost will arrive at c.RMB36k/t and RMB40k/t in 2016 and 2017 respectively. We estimate that the spodumene cost as a percentage of the total cost of lithium compound production will only slightly increase from the current c. 70% to 74% in 2017E.

Figure 29: COGS/t breakdown estimates for Tianqi 2016E 2017E 2018E

Raw material costs 76.6% 79% 79.5%Spodumene 67.3% 69% 70.2%Others raw material 9.3% 10% 9.3%Manufacturing costs 20% 18% 18%Labor 3% 3% 3%Source: Deutsche Bank estimate, Company data

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Earnings forecasts

Profit centre shifts from spodumene to lithium compounds

Before Tianqi acquired Talison in 2014, Tianqi was a simple lithium compound processing company. It would process raw material spodumene purchased from Talison and sell to various downstream users. Its gross profits were relatively steady, with a comfortable gross profit margin at a level of around 20%.

Now, Tianqi’s business mainly constitutes the sale of spodumene concentrates and lithium compounds. The spodumene business has been the key profit source, accounting for 72% of total revenue (before elimination) and almost 90% of gross profit in 2014. The gross profit of lithium salt compounds remained thin in 1H15, but has been growing quickly since 2H15. With the ramp-up of the Zhangjiagnag factory in 2016 and a higher spread between the price of lithium salt compounds and the spodumene price, we estimate that the gross profit of lithium compounds will increase by almost 10 times in the coming year and come to be more important than the gross profit from the spodumene operation.

We expect gross profit of lithium compounds processing will reach RMB2,393mn, up 669% YoY in 2016 and gross profit of lithium spodumene will increase to RMB824mn, up 59% YoY in 2016.

Figure 30: Gross profit of Tianqi before 2014 (you have

2015….)

Figure 31: Gross profit breakdown of Tianqi after 2014

Source: Deutsche Bank estimates, Company data Source: Deutsche Bank estimates, Company data

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Key assumptions and how we differ from consensus

We summarize below our key earnings forecasts for each of the Tianqi subsectors, including the price of spodumene, price of battery grade lithium carbonate, cost of lithium compounds, and sales volume of both spodumene and lithium carbonate.

Figure 32: Key assumptions for financial modeling 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

ASP of spodumene 1,987 2,310 2,886 3,464 4,156 4,156 4,156 4,156

% Change 20% 20% 0% 0% 0%

ASP of lithium carbonate 39,016 36,821 53,000 120,000 120,000 100,000 100,000 80,000

% Change 44% 126% 0% -17% 0% -20%

Sales volume of spodumene concentrates

253,203 318,820 447,557 581,824 698,189 768,008 844,809 844,809

% Change 30% 20% 10% 10% 0%

Sales volume of lithium compounds 11,044 13,164 14,730 28,430 30,430 30,430 30,430 30,430

% Change 93% 7% 0% 0% 0%

COGS - Lithium compounds 31,800 32,882 32,043 36,241 38,483 39,887 39,955 39,894

% Change ` 13% 6% 4% 0% 0% Source: Deutsche Bank estimates

Overall, we expect Tianqi’s revenue to grow by172% and 22% in 2016 and 2017 respectively, and Tianqi’s bottom line to increase impressively by 744% and 14%, respectively, over the period. Our estimates of revenue and NPAT in 2016 are 161% and 474% of Bloomberg consensus in 2016, respectively. We believe Bloomberg consensus does not factor in recent price hike of lithium compounds.

Figure 33: Deutsche Bank earnings estimates vs. consensus for Tianqi Lithium 2015E 2016E 2017E

DB estimate Consensus DBe/Con. DB estimate Consensus DBe/Con. DB estimate Consensus DBe/Cons

Revenue 1,805 2,060 88% 4,903 3,045 161% 5,991 3,611 166%

EBIT 608 645 94% 2,772 998 278% 3,375 1,408 240%

NP 224 153 146% 1,888 399 474% 2,156 521 414% Source: Deutsche Bank estimates, Bloomberg Finance LP

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Financial Summary

Key financials of Tianqi

Tianqi’s top line and bottom line will be significantly boosted by increase in both ASP and volume. And we don’t expect minority interest will increase significantly as the most part of profitability will be transferred from Talison to the Chinese processing factory to take advantage of lower income tax rate in China. As the bottom line improved significantly, we expect the ROE to climb to 49% in 2016 and 40% in 2017.

Figure 34: Tianqi’s P&L summary (RMB mn) 2013 (Restated) 2014 2015E 2016E 2017E

Revenue 1068.2 1422.4 1805.2 4902.5 5991.2

COGS 889.9 965.7 977.7 1687.3 1959.0

Gross Profit 178.3 456.7 827.5 3215.3 4032.2

SG&A 408.1 134.7 164.0 445.4 659.0

Investment income 1.3 2.4 2.2 2.2 2.2

Operating Profit (EBIT) -270.8 312.6 608.2 2772.1 3375.4

D&A 95.9 121.6 181.6 188.6 186.9

EBITDA -174.9 434.2 789.8 2960.6 3562.3

Net interest 41.5 24.6 34.0 24.3 -0.2

Foreign exchange loss (gain) -22.6 -8.8 2.8 2.8 2.8

PBT -282.9 327.8 573.7 2747.3 3375.0

Income Tax 10.8 46.3 190.0 604.4 742.5

Effective tax rate -4% 14% 33% 22% 22%

PAT -293.7 281.5 383.7 2142.9 2632.5

NPAT -191.0 130.5 223.7 1888.2 2156.4

EPS -1.30 0.54 0.86 7.3 8.33

ROE 7.3% 48.5% 39.9%

PE 125 x 15x 13x

PB 9x 6x 5x Source: Deutsche Bank estimates, company data

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As the downstream demand is strong, we expect the inventory days, AR and AP days to improve and enhance the company’s liquidity. We forecast the inventory days to decrease to 120 days in 2017 from the current 160 days while AP days will decline to 60 days from the current 80 days in 2015 and AR days will drop from 50 days to 40 days in 2017E.

Figure 35: Tianqi’s balance sheet summary (Currency: RMB mn) 2013 (Restated) 2014 2015E 2016E 2017E

Current Assets

Cash and equivalents 682.5 437.1 765.9 1831.8 3751.7

Accounts receivable 352.6 332.0 395.7 940.2 984.9

Inventory 585.7 511.2 428.6 554.7 644.1

Others 49.6 125.5 125.5 125.5 125.5

Total current assets 1670.3 1405.7 1715.6 3452.2 5506.1

Non-current assets

Associates 244.4 539.5 539.5 539.5 539.5

PPE 1075.4 1026.0 1072.1 1061.3 1052.1

Construction in progress 186.1 183.8 183.8 183.8 183.8

Intangible assets 2975.4 2773.9 2776.1 2768.4 2750.7

R&D 3.8 4.9 4.9 4.9 4.9

Deferred Tax 143.5 108.1 108.1 108.1 108.1

Other Investments 9.2 8.2 8.2 8.2 8.2

Other non-current assets 357.8 77.1 77.1 77.1 77.1

Total non-current assets 4995.6 4723.8 4769.9 4751.3 4724.4

Total assets 6665.9 6129.6 6485.5 8203.5 10230.5

Current liabilities

ST borrowing 573.3 595.9 545.9 495.9 445.9

Account payable 148.0 111.7 133.9 231.1 214.7

Tax payable 370.1 114.5 114.5 114.5 114.5

Current portion of long term debt 37.8 85.4 85.4 85.4 85.4

Others 89.0 213.5 213.5 213.5 213.5

Total current liabilities 1218.1 1121.0 1093.3 1140.5 1074.0

LT borrowings 180.2 2.5 2.5 2.5 2.5

Other long-term debt (interest bearing) 0.0 0.0 0.0 0.0 0.0

Other long-term debt (no interest bearing) 160.7 260.6 260.6 260.6 260.6

Total non-current liabilities 340.9 263.1 263.1 263.1 263.1

Total liabilities 1559.0 1384.1 1356.3 1403.5 1337.1

Shareholders' equity 3087.9 2958.2 3181.9 4598.0 6215.3

Minority interest 2019.0 1787.3 1947.3 2202.0 2678.1

Total Equities 5106.9 4745.5 5129.2 6800.0 8893.4

Total liabilities and Equities 6665.9 6129.6 6485.5 8203.5 10230.5 Source: Deutsche Bank estimates, company data

Cash flow from operations will be strong due to significantly improving primary operation. There is no significant CAPEX forecast at the current stage as Tianqi prioritizes ramping up its current factory in Zhangjiagang. As the current utilization rate at Talison remains low, it is not necessary to expand capacity in the short term.

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Figure 36: Summary of Tianqi’s cash flow forecasts (RMB mn) 2013 (Restated) 2014 2015E 2016E 2017E

Cash flow from operation 222.6 302.3 606.5 1758.0 2669.0

Net profits 0.0 0.0 383.7 2142.9 2632.5

D&A 95.9 121.6 181.6 188.6 186.9

Changes in working capital 443.4 -248.9 41.2 -573.5 -150.4

Cash flow from investment -3664.7 -3117.8 -227.7 -170.0 -160.0

Capex -123.4 -85.4 -230.0 -170.0 -160.0

PPE 0.0 0.0 -200.0 -150.0 -150.0

Construction in progress 0.0 0.0 0.0 0.0 0.0

Cash flow from financing 3632.0 2616.7 -50.0 -522.0 -589.1

Equity raised 3671.9 3036.7 0.0 0.0 0.0

Borrowing 826.0 878.4 150.0 150.0 150.0

Payback -784.7 -985.9 -200.0 -200.0 -200.0

Dividend paid -87.2 -57.9 0.0 -472.0 -539.1

Net cash flow 137.9 -234.9 328.8 1065.9 1919.9

Cash beginning 47.8 682.5 437.1 765.9 1831.8

Cash ending 133.6 411.5 765.9 1831.8 3751.7 Source: Deutsche Bank estimates, company data

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Appendix A

Company profile and company history

Founded in October 1995 and listed on the Shenzhen Stock Exchange (SZSE) in 2010, Sichuan Tianqi Lithium Industries, Inc (Tianqi Lithium) is one of the world’s largest companies in the production spodumene concentrates and lithium chemical compounds.

Tianqi Lithium’s portfolio of products includes lithium carbonate high purity, lithium carbonate battery grade, lithium carbonate industrial grade, lithium hydroxide monohydrate, battery grade, lithium hydroxide monohydrate, dust-free grade, lithium chloride anhydrous, lithium chloride anhydrous, battery grade, lithium metal and lithium hydrogen phosphate.

The parent company is Chengdu Tianqi Industrial, which is owned by Mr. Jiang Weiping. Mrs. Zhang Jing, the wife of Jiang Weiping.

Figure 37: Sichuan Tianqi Lithium shareholder structure


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Tianqi has been significantly expanding in the past decade. The key milestones are acquiring Talison in 2013, acquiring Galaxy lithium international (Zhangjiagang factory) and purchasing 20% of Tibet Shigates Lithium Technology.

Figure 38: Key milestones of Tianqi Lithium

1997

1998

2000

2002

2004

2005

2006

2007

2010

Tianqi Industrials Co., Ltd incorporated

Tianqi Machinery, Metals & Minerals Import & Export Co., Ltd incorporated

Tianqi Metal incorporated

Tianqi Group incorporated

Shehong Lithium acquired

Tianqi Huifeng and Tianqi Mineral incorporated

Ya'an Huahui Lithium incorporated

Tianqi Lithium Reorganized

Tianqi Lithium listed on Shenzhen Stock Exchange, TianqiTechnology incorporated

Tianqi Lithium

2013

2014

Tianqi Lithium acquires Talison Lithium

Tianqi Lithium acquires Galaxy Lithium International limited

2014 Tianqi Lithium acquires 20% of Tibet Shigatse Lithium Technology Company


Strategic M&A summary

Talison (2012-14)

This was the biggest overseas merger and acquisition case in history in Sichuan Province. The amount of capital involved in this M&A reached RMB 5bn, when Tianqi’s total asset was RMB 3bn. It took as long as one and a half years for Tianqi Lithium to finally complete the acquisition of Talison in May 2014.

Talison Lithium is a leading global lithium producer, headquartered in Perth, Western Australia. Talison produces lithium concentrate at its lithium mineral project in Western Australia, located in the town of Greenbushes, and exports to the world, especially China.

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Talison was the sole raw material supplier for Tianqi before 2013. By strategically acquiring Talison, Tianqi has successfully integrated the upstream and been transformed from a pure lithium processor into an international lithium company with a large amount of high-quality spodumene resources. More importantly, this deal has helped to remove the bottleneck of supply for Tianqi in the long-term.

Tianqi was not planning to integrate Talison until Rockwood Holdings announced a plan to acquire 100% of Talison’s common stock equity at CAD6.5 per share on 23 August 2012. This acquisition greatly threat Tianqi’s supply when Rockwood was already one of the big four giants at that time. In order to stop Rockwood’s plan, Tianqi made a bold move.

Tianqi obtained a decisive vote first by gradually purchasing 19.99% of Talison in the secondary market. After that, it started to negotiate with Talison to acquire the remaining 80.01%. After a long-process, finally Tianqi controls 51% of Talison and became the biggest shareholder while Rookwood (now acquired by Albemarle) holds the remaining 49%.

Galaxy Lithium Jiangsu factory, 2014

In order to better match the high-quality lithium ores of Talison, in 2014, Tianqi announced the acquisition of Galaxy Lithium (Jiangsu) Limited, focusing on its Jiangsu factory, while Galaxy was positioning itself to become a major supplier of high-quality lithium. The deal was valued at US$173.2m, in terms of enterprise value. The acquisition was made with 100% cash, and Tianqi will undertake Galaxy’s debts.

Galaxy’s Jiangsu factory was the first automatic lithium carbonate production line in China, and it is still the biggest factory in terms of single production line capacity and the best factory in terms of automation, with a super-high automation level. The factory needs only 170 workers, with 17kpta annual capacity of lithium carbonate.

20% equity in Tibet Shigatse salt lake brine, 2014

In August 2014, Tianqi bid for 20% of Tibet Shigatse Lithium, a high-tech company, for RMB 311m. Tibet Shigatse Lithium has large reserves of 1.83 mt Lithium Carbonate Equivalent (LCE). Meanwhile, the reserve is high-grade and has a low Mg-Li ratio. We believe the acquisition is positive for Tianqi’s strategy and long-term growth.

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

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Appendix 1

Important Disclosures Additional information available upon request Disclosure checklist

Company Ticker Recent price* Disclosure

Tianqi Lithium 002466.SZ 117.00 (CNY) 29 Jan 16 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 theprimary 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. 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=002466.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: Tianqi Lithium (002466.SZ) (as of 1/29/2016)

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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

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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. Notes:

1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

53 %

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11 %21 %17 % 20 %

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Buy Hold Sell

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

Regulatory Disclosures

1.Important Additional Conflict Disclosures

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.

2.Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

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Metals & Mining

Tianqi Lithium


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