2465.HK 603906.SHG
Lopal loss narrows

The maker of cathode materials for lithium iron phosphate batteries appears to be on the mend after slipping into the red in 2023 and 2024

Key Takeaways:

  • Lopal said it expects to report a loss of 595 million yuan to 697 million yuan for all of 2024, or about half the 1.23 billion yuan it lost in 2023
  • The company’s inventory-related write-downs and accounts receivables both fell sharply last year, indicating its situation is stabilizing

  

By Doug Young

Will 2025 be the start of a new era for Jiangsu Lopal Tech Co. Ltd. (2465.HK; 603906.SH), with the potential to return to profitability?

That’s the big question for China’s leading maker of cathode materials for lithium iron phosphate batteries, and for the broader lithium battery supply chain that has suffered over the last two years as lithium prices plunged after soaring to record highs. Lopal’s business has been gradually improving over the last year, and its profit forecast for all 2024 issued a week ago seems to show continued improvement.

The other factor affecting the company is overcapacity among Chinese electric vehicle (EV) makers, the biggest buyers of the batteries whose manufacturers are Lopal’s own biggest customers. As those EV makers continue to suffer huge losses, many are asking their suppliers for big discounts, which is rippling down the supply chain to companies like Lopal. In this regard, Lopal also seems to be gaining better control of the situation.

The two analysts who follow the company polled by Yahoo Finance have yet to weigh in on whether they think Lopal will return to the black this year, though they do expect its revenue to grow for a second consecutive year after falling 40% in 2023. The company seems to be moving in the right direction, including taking large asset impairments in 2023 and last year related to the value of lithium it purchased at high prices before the collapse.

In one of two separate announcements the company issued a week ago, it said it will record 140 million yuan ($19 million) to 165 million yuan in asset impairments for 2024, most of that related to its lithium inventory. While large, that number is a big improvement from 2023 when it took 550 million in asset impairments.

Lithium prices continued to fall throughout last year, but the declines were relatively mild compared with 2023. All told, the price of lithium has fallen about 85% from its peak at the end of 2022 and start of 2023, with most of the declines coming in 2023.

In its other announcement issued Jan. 17, Lopal said it expects to report a net loss of 595 million yuan to 697 million yuan for all of 2024, or about half the 1.23 billion yuan it lost in 2023. Some calculations using data from the first three quarters of the year show the company expects to lose about 350 million yuan in the fourth quarter, versus an 82 million yuan loss in the third quarter. But we should note the fourth-quarter figure appears to include the impairment losses for the year.

The company’s complex situation is reflected in its share price and valuation metrics, which didn’t look too good in the first two months after its Hong Kong IPO in late October, but began to improve this month. The company raised about HK$500 million ($64 million) in its listing, selling shares for HK$5.50 apiece. The stock moved steadily downward from there, touching a low of about HK$4.40 in mid-December. It’s rebounded a bit since then, though at its Thursday close of HK$4.66 is still down about 16% from its IPO price.

Costs, unpaid bills under control

To get a better idea of how the company is doing, we should look at Lopal’s third-quarter report released at the end of October. That report shows the company’s revenue fell 22% in the third quarter to 2.09 billion yuan, which was far faster than the 13% revenue decline for the first nine months of the year.

The company didn’t comment on what led to the bigger third-quarter revenue decline. But it noted in the report that its average price of lithium carbonate in the first nine months of last year was down by 66.4% from the year-ago period. The prices it charged for its own LFP cathode materials also dropped sharply, though by a milder 48.3% year-on-year during the nine-month period, as battery makers under pressure from EV brands demanded lower prices.

Taking those factors into account, Lopal was able to lower its own cost of sales by 19% year-on-year in the first nine months of the year – outpacing the 13% revenue decline for the period. As a result, the company managed to sharply lower its operating loss for the first nine months of the year to 304 million yuan from 1.08 billion yuan in the year-ago period.

At the same time its operational efficiency was improving, the company also seemed to be getting its unpaid bills under control. Reflecting that, Lopal reported its accounts receivables dropped 25% to 1.62 billion yuan by the end of last September from 2.17 billion yuan at the end of 2023.

The extended turbulence over the last two years caused Lopal’s cash to drop by nearly half to 1.79 billion yuan by the end of last September from 3.31 billion at end of 2023. But we should note that its HK$500 million infusion from the IPO, combined with its stabilizing situation, should mean that its cash position should also be stabilizing and could even start to grow if it returns to profitability.

With its situation improving, Lopal’s shares really do appear to have the potential for some upside. Its stock currently trades at an anemic price-to-sales (P/S) ratio of just 0.32. That’s a fraction of the 1.79 P/S ratio for Ganfeng Lithium (1772.HK; 002460.SZ) and 1.59 for Tianqi Lithium (9696.HK; 002466.SZ), and the even higher 2.64 for leading lithium battery maker CATL (300750.SZ).

The big factors for Lopal in the upcoming Year of the Snake will continue to be lithium prices and the situation with EV makers. Lithium prices seem likely to finally stabilize and perhaps even begin to rise after the big collapse. The overcapacity in China’s EV sector also won’t go away anytime soon. Both of those could weigh on Lopal’s ability to return to profitability, though the company does seem likely to continue recovering after a difficult two years.

To subscribe to Bamboo Works weekly free newsletter, click here

Recent Articles

BRIEF: Alibaba to develop AI-powered iPhone with Apple for China

Alibaba Group Holding Ltd. (BABA.US; 9988.HK) and Apple Inc. (AAPL.US) have reportedly agreed to jointly develop and produce an iPhone equipped with artificial intelligence (AI) capabilities for the Chinese market,…