Company forges ahead with new IPO, even as the metal that’s its big bread winner is being phased out of many EV car batteries

Key takeaways:

  • Cobalt producer Nanjing Hanrui has applied to list in Hong Kong for a second time
  • The company’s core products could face headwinds as names like Tesla and Nissan strive to use cobalt-free batteries in their EVs

By Jony Ho

Known by the symbol “Co” on the periodic table, cobalt may be relatively unfamiliar to most. But the silvery gray metal has boomed in recent years as a key component for electric vehicle (EV) batteries, used in the cathode to prevent overheating, improve battery safety and extend service life.

Nanjing Hanrui Cobalt Co. Ltd. (300618.SZ) is hoping its position as a major cobalt powder maker will attract investors to its second attempt at a Hong Kong IPO, as it filed a listing application on Monday. The private company is mainly engaged in the production of cobalt powder and cobalt compounds, which are used in EVs and electronic devices.

But Hanrui could face major headwinds as several global EV and battery makers move toward cobalt-free products, and instability remains a regular threat in the Democratic Republic of Congo (DRC) where the company’s main business is based.

Hanrui was the world’s third largest and China’s largest cobalt powder producer at the end of last year, according to data from market research firm Frost & Sullivan cited in the company’s prospectus. The company’s revenue in the first nine months of this year doubled year-on-year to 3.2 billion yuan ($500 million), and its profit tripled to 486 million yuan, mainly due to a depressed market for cobalt products in the year-ago period during the start of the global pandemic.

Cobalt prices rebounded as the market returned to more normal conditions this year, putting the company back on a strong growth track.

Money maker

Cobalt powder and cobalt compounds are Hanrui’s biggest breadwinners, accounting for 50.5% to 76.2% of the group’s revenue in the last three years, and 59.4% in the first nine months of this year. But recent trends by major EV makers don’t favor the company.

A worrisome signal came in September when EV giant Tesla (TSLA.US) announced its aim to go cobalt-free by switching to lower-cost lithium iron phosphate. It will initially try out the strategy in its low-cost models.

Japan’s Nissan has also expressed concerns about rising cobalt prices, and will begin using cobalt-free EV batteries as early as 2025 to reduce costs.

Closer to home, China’s newly minted EV battery maker Svolt Energy also released its first cobalt-free battery in August, with plans to become a global powerhouse in the space. Its customers include well-known domestic brands such as Great Wall Motor (2333.HK), Dongfeng Group (0489.HK) and Geely Automobile (0175.HK), which could deal a sharp blow to Hanrui if they use cobalt-free batteries in their future EVs.

Hanrui is well aware of the changing landscape. In the risk section of its prospectus it said the global new energy vehicle industry and demand for cobalt in EVs isn’t living up to initial hype. As a result, the price of MB standard-grade cobalt has plunged 56.3% year-on-year from 544,000 yuan per metal ton in 2018 to 238,000 yuan in 2020. As that happened, the company’s revenue and gross profit also fell in 2019, with its gross margin plummeting from 42.3% in 2018 to just 19.8% in 2020.

The company believes that rapid development of laptop computers and mobile communications equipment will boost battery makers, driving up demand for its cobalt compounds.

While the fading role of cobalt looms large, Hanrui also faces risk due to its heavy reliance on the DRC, which supplies the vast majority of its cobalt and copper raw materials and where it has done rough processing of those materials since 2007. The Central African country, which relies on mining to support its economy, has been plagued by unrest, most recently after a controversial presidential election in 2019 sparked mass demonstrations and lawsuits.

DRC Dependence

Hanrui’s two DRC production facilities have designed annual capacity to produce 5,000 metal tons of cobalt hydroxide and 41,000 metal tons of copper cathode, representing about 45% and 100% of the company’s cobalt and copper production capacity, respectively.

Hanrui said it has strengthened its operational management in the country and taken out insurance for a range of potential problems, such as foreign exchange restrictions, expropriation of facilities, social unrest and war. Still, its business and operating results could take a hit in the event of a recurrence of armed conflict, it added.

In addition to its existing DRC facilities, Hanrui is building a new production line in the country, which will greatly increase its capacity for cobalt products by about 41,000 tons per year. It’s spending more than 800 million yuan on the project, which will start operations next June – a move that will only increase its risk associated with the country.

Details on Hanrui’s Hong Kong fund-raising plans have yet to come out because the IPO is still at its initial stage. But the company has been listed since 2017 in Shenzhen, where it has a current market value of about 25 billion yuan. That means that based on typical fundraising patterns, the group is likely to raise several billion Hong Kong dollars through the listing.

The company’s shares have risen steadily since the second quarter, from a low of 63.2 yuan in April to a high of 101 yuan at the end of November. They’ve come down from those highs this month, closing at 80.98 yuan on Tuesday, giving the company a price-to-earnings (P/E) ratio of about 38 times.

By comparison, Huayou Cobalt (603799.SH) has a P/E ratio of about 48 times.  Ganfeng Lithium (002460.SZ) and Shengxin Lithium (002240.SZ) currently trade at ratios of 63 times and 94 times, respectively, reflecting Hanrui’s relatively low valuation compared with its peers.

Hong Kong investors’ low risk appetite may force Hanrui to be conservative in pricing its local listing, assuming the deal is completed this time. Thus, it may need to seek a P/E ratio even slightly below where its A-shares now trade to win over investors.

To subscribe to Bamboo Works weekly free newsletter, click here

Recent Articles

So-Young dolls up with move to high-end cosmetic surgery

So-Young dolls up with pivot to high-end services

The cosmetic services social media platform is developing its own clinics as well as a premium platform for high-end users Key Takeaways: So-Young reported an annual profit last year, reversing…
Founded in 2009, CMGE is a global game operator that listed in Hong Kong in 2019.

FAST NEWS: CMGE’s loss narrows on cost controls

The latest: Game operator CMGE Technology Group Ltd. (0302.HK) reported Wednesday its net loss narrowed 90.2% last year to 20.08 million yuan ($2.78 million). Looking up: The company’s expenses decreased by 28% to…

NEWS WRAP: Nayuki pours up first annual profit

The premium tea chain aims to expand through franchising to boost its growth amid intense competition  By Teri Yu  Premium tea seller Nayuki Holdings Ltd. (2150.HK) on Wednesday reported its first annual profit since…