The demand of natural flake graphite meets the turning point

As the demand for flake graphite increases, Chinese graphite companies have encountered opportunities.

The rapid development of large-scale fuel cells, lithium-ion batteries, and lightweight high-strength composites is stimulating the demand for graphite raw materials in many industries.

According to Frost Sullivan’s report, in 2019, China’s local natural graphite production rebounded from about 625000 tons in 2017 to about 700000 tons, mainly driven by the growth of lithium-ion batteries and China’s electric arc furnace steel sector. In the future, with the rising demand of downstream industries including refractories, lubricants, and lithium-ion batteries, the local natural graphite production is expected to continue to grow at a compound annual growth rate of about 5.4%, from about 874000 tons in 2021 to about 1080000 tons in 2025, with a compound annual growth rate of about 5.4%.

It is worth noting that China is the strongest “supply-side” in the global graphite market. In 2019, China produced more than 60% of the world’s graphite. Standing at the turning point of graphite demand growth, China graphite Group Co., Ltd. (hereinafter referred to as “China graphite”) submitted a listing application to the main board of the Hong Kong Stock Exchange on June 1. As the fifth-largest company in China’s flake graphite concentrate industry, can China graphite make the market look higher?

The sales volume of core products is increasing year by year

According to the China graphite prospectus, the company’s business mainly includes the sale of flake graphite concentrate and spherical graphite processed in the company’s plant. At present, the main products produced by the company’s Beneficiation and processing plant are supplied by raw graphite mine from Beishan mine (located in Luobei County, Heilongjiang Province) and purchased from third-party suppliers. In addition, China graphite also sells raw marble, a by-product of its mining business.

Due to the high carbon content of flake graphite concentrate, the Group believes that it is suitable for heat-resistant materials and spherical graphite. It is widely used as anode material for lithium-ion batteries in electronic devices and new energy vehicles. The group also sells micro graphite powder and high purity graphite powder.

In 2019, the group obtained the mining right of the Heilongjiang Beishan mine, and the raw graphite mined was only used by the group. According to the independent technical report, the graphite resources of the Beishan mine are composed of about 14 million tons of controlled resources and about 1 million tons of inferred resources. The estimated mine life is about 21 years. The project enables the group to obtain guaranteed and stable raw graphite resources, and obtain benefits from the synergy effect of vertical integration.

According to the report, the group’s open-pit mining method is more cost-effective, environmentally friendly, and safer. Considering the increasing global demand for lithium-ion batteries and the fact that a lot of graphite from Heilongjiang is actually processed in Shandong, the Group believes that the business model of operating a comprehensive graphite production company in Heilongjiang still has strong advantages.

According to Frost Sullivan’s report, in terms of sales revenue, the company ranked fifth in China’s flake graphite Concentrate Industry (with a market share of about 2.9%) and sixth in China’s spherical graphite industry (with a market share of about 2.9%) in 2019.

As of December 31, 2018, 2019, and 2020, the company generated total revenue of about 120 million yuan (RMB, the same below), 124 million yuan, and 169 million yuan respectively, and net profit of about 25.8 million yuan, 24.5 million yuan, and 37.9 million yuan respectively. The gross profit was about 53 million yuan, 59.4 million yuan, and 83.2 million yuan, accounting for 44.2%, 48%, and 49.3% of the gross profit respectively.

From 2018 to 2020, the company’s revenue from selling spherical graphite and its by-products is about 65.4 million yuan, 66.4 million yuan, and 76.2 million yuan respectively, while the revenue from selling flake graphite concentrate is about 54.5 million yuan, 57.4 million yuan, and 85.7 million yuan respectively. In the same period, the company has sold about 14800 tons, 18400 tons, and 34100 tons of flake graphite concentrate respectively; The sales volume of spherical graphite and its by-products were about 9100 tons, 8300 tons, and 10400 tons respectively.

We haven’t got rid of the dependence of big customers yet

Zhitong financial app noted that in the past three years, China’s Graphite sales scale has been expanding, but the company has a large dependence on a few suppliers and customers.

According to the prospectus, the company’s main suppliers mainly include suppliers of raw materials, electric power, and other utilities, as well as third-party service providers providing graphite product processing, mass outsourcing, and blasting services. From 2018 to 2020, the procurement of the company’s five major suppliers accounted for 73.1%, 69.2%, and 63.8% of the total procurement in the same year respectively, while the procurement of the largest supplier accounted for 30.1%, 36.1%, and 34.7% of the total procurement in the same year respectively.

In terms of downstream, from 2018 to 2020, the main customers of graphite in China are industrial manufacturers and retailers of refractory materials, accounting for 65.1%, 62.9%, and 59.0% of the company’s total revenue respectively. During the above period, the company’s sales to the largest customer group, Bertrand New Materials Group Co., Ltd., and several subsidiaries accounted for about 38.8%, 37.9%, and 37.9% of the company’s total revenue respectively.

Usually, a company depends on a few suppliers and customers and will present in the financial report in the form of prepayment and accounts receivable.

Zhitong financial app noted that China’s Graphite trade receivables and notes receivable will reach 161 million yuan in 2020, which is close to the sales revenue of that year. During the same period, the number of deposits, prepayments, and other receivables reached 4.566 million yuan, the highest in nearly three years.

In addition, China’s Graphite still has a situation of price reduction at the end of the sale. The company said in the prospectus that in 2020, the gross profit margin of spherical graphite sales of the company will drop to 45.9%, mainly to maintain the market share and downstream customer relationship, so as to reduce the average price of products.

For China’s graphite, the best strategy to improve this situation is to increase the production rate to achieve the maximum amount of graphite extraction allowed by the Beishan mine. At the same time, improve the processing capacity of flake graphite concentrate and spherical graphite, so as to expand the customer base and contact more markets.

According to the prospectus, according to the mining license of China’s graphite, the permitted graphite mining capacity of the Beishan mine is set at 500000 tons per year. As of May 27, 2021, the company’s latest graphite production is about 211200 tons per year. To fully improve the vertical

Integrating the value and benefits of the supply chain, the company will make further investments to increase the production rate, so that the permitted graphite production will reach 500000 tons per year by the end of 2023. Among them, the target of graphite mining in 2021 is 300000 tons per year.

If China graphite can upgrade its production capacity, improve its business scale and bargaining power, the company’s profit quality will rise to a higher level. In the context of accelerated graphite demand, the company is expected to become an investment target of high-quality growth.