Greatpower Nickel Restarts IPO Engine after Earnings Setback

The producer of battery materials used in electric vehicles has filed for a second time to list on the Hong Kong Stock Exchange, fortified by an LG supply deal

Key Takeaways:

• Greatpower Nickel and Cobalt, hit by Covid disruptions and falling prices, swung to a loss in the first half of the year after writing off a large sum for cobalt products inventory
• But the company benefits from a six-year supply agreement with South Korean lithium battery powerhouse LG Energy Solution, assuring a future revenue stream

By Fai Pui

Companies supplying ingredients for lithium batteries have hitched a ride on the booming market for new energy vehicles over the past two years, including Shanghai Greatpower Nickel and Cobalt Materials Co., Ltd., which setits sights on an IPO early this year.

But the application to list on the Hong Kong Stock Exchange lapsed after six months, after the cobalt salt refiner hit unexpected business obstacles that stalled its earnings momentum.

Last Monday, Greatpower Nickel and Cobalt renewed its IPO ambitions and filed again for a Hong Kong listing, with Haitong International and China Securities International as joint sponsors. However, the company’s finances have taken a downward turn since the first listing bid back in January. A sharp fall in its first-half earnings may take some energy out of the fundraising drive.

According to the prospectus, the company was the world’s second-largest refiner of cobalt salt last year in sales volume. Its businesses are geared towards providing the raw materials for lithium battery cathodes used in clean-energy products, including processing and selling refined cobalt products, trading nickel and cobalt products, and the supply of other non-ferrous metal related products.

The burgeoning market for electric and new-energy vehicles has revved up demand for the battery components in recent years. The company’s revenue tripled from 1.06 billion yuan ($149 million) in 2019 to 3.56 billion yuan last year, and its profit rose more than 10 fold from nearly 27 million yuan in 2019 to 309 million yuan last year. The glowing financials clearly spurred the company to seek a listing earlier this year with a high valuation.

Large impairment loss

The price of cobalt, a strategic national resource, topped $80,000 per ton in March this year, up 1.24 times from the beginning of last year. Meanwhile the price of nickel nearly tripled, rising to $48,000 per ton from $17,000 at the beginning of last year.

But then the market took a sudden turn for the worse. Demand for new EVs plummeted when a renewed Covid outbreak put major cities such as Shanghai under prolonged lockdown from April, sending cobalt and nickel prices tumbling. Adding to the misery, Shanghai-headquartered Greatpower Nickel and Cobalt saw its inventories piling up as the city’s two-month lockdown severely disrupted operations.

As of this June, the company’s cobalt and nickel inventory had reached 1.436 billion yuan, accounting for nearly half of its current assets. The company wrote down some of its inventory of cobalt products and logged an impairment loss of 357 million yuan, resulting in a net loss of nearly 99 million yuan in the first half of the year, despite a 10% rise in revenue from the year-earlier period.

Even excluding those extraordinary factors, the company still lags its peers in terms of gross margin. Ganzhou Tengyuan Cobalt (301219.SZ), Zhejiang Huayou Cobalt (603799.SH) and Nanjing Hanrui Cobalt (300618.SZ) had gross margins ranging between 20% and 42% last year, while Greatpower Nickel and Cobalt came in at just under 16%, despite a significant increase from 8% and 10% in the previous two years.

In fact, Greatpower Nickel and Cobalt is a relative latecomer to the metal processing business. Founded in 2006, it only started processing cobalt and nickel officially in 2018, while its peers Tengyuan Cobalt, Huayou Cobalt and Hanrui Cobalt entered the fray as early as 2002 and 2005. Moreover, the three established counterparts have built up integrated businesses spanning ore supply through smelting and product manufacture to battery recycling. The peers’ higher gross margins are no surprise, given their reliable access to nickel and cobalt supplies.

By contrast, Greatpower Nickel and Cobalt lacks an integrated model and still relies heavily on cobalt and nickel from overseas, 80% of which is held by its five major suppliers. Therefore, limited price leverage has weighed heavily on the company’s gross margin.

As a rising star in nickel and cobalt processing, Greatpower Nickel and Cobalt has had no shortage of financial backers. Since 2019, the company has gained more than 2 billion yuan of financing from state-owned and private institutions, including Xiaoxian Jiuyou Investment Fund, controlled by the Xiaoxian County government in Anhui Province, Sino-Russia Energy Cooperation under the State Power Investment Group, Xiamen ITG Group (600755.SH), and LG Energy Solution Ltd. (373220.KS), a supplier of lithium batteries for electric vehicles under LG Corporation (003550.KS). After the last round of Series E financing in January this year, Greatpower Nickel and Cobalt’s valuation reached 10.3 billion yuan, closing in on Hanrui Cobalt’s market value of about 13.6 billion yuan.

Valuation gap

LG Energy Solution, the world’s second-largest supplier of power batteries, is the fourth-biggest shareholder of Greatpower Nickel and Cobalt, with a 4.02% stake. The companies have signed a six-year sales deal under which LG Energy Solution will buy 20,000 tons of nickel starting from 2023. The Korean firm will also explore opportunities for cooperation on lithium battery recycling, providing powerful backing for Greatpower Nickel and Cobalt.

Now that orders are flowing, production expansion is set to follow. The company aims to use the IPO funds to scale up and improve its overall gross margin. Plans include expanding its Zhejiang plant, creating a Guangxi plant, improving quality and efficiency on its production lines, and exploring the battery recycling business. The expansion strategy could add up to 105,000 tons of production capacity, equivalent to 15 times current capacity.

Cobalt and nickel prices have gradually stabilized after their big fall, reducing the risk of write-offs from high inventories at cobalt salt refineries. Rebounding demand for electric vehicles has put the market for lithium battery materials back on track and could make it a favorite with investors again. However, the weakness of the Hong Kong stock market could still throw obstacles in the path of the company’s listing.

In fact, the peer group’s share prices have been under pressure. As of last Friday, shares in Tengyuan Cobalt, Huayou Cobalt and Hanrui Cobalt had dropped between 37% and 47% from their yearly highs, and their price-to-earnings (P/E) ratios had sunk to 12.5 times, 22.6 times and 22.5 times respectively.

The P/E ratio of Greatpower Nickel and Cobalt would be as high as 33 times based on the latest valuation of 10.3 billion yuan. But given its relatively lower profitability, and the fact that Hong Kong shares generally trade at a discount to A shares, the company may have to be priced more attractively to entice investors if it gains listing approval.

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