Aggressive expansion target but uncertainty looms over NCM; maintaining Hold
As the third-largest Chinese battery player, Guoxuan positions itself to more thandouble its capacity from 7.5GWh in 2017to c.18GWh by end-2020, and targetsto triple its market share to c.18% in three years. However, we believe there isstill uncertainty regarding Guoxuan's endeavors in NCM (lithium nickel cobaltmanganese oxide) batteries (c.22% of 2017shipment) after the disappointmentsin the past 12months. We set our target multiple at 15.4x 2019E P/E, in line withthe industry average, and revise our target price to RMB15.6while maintainingHold.
Targets to triple its Chinese battery market share to 18% in 2020
On top of the existing 7.5GWh capacity in 2017(including 5.5GWh for LFP (lithiumiron phosphate) and 2.0GWh for NCM), Guoxuan is adding 2GWh LFP capacityand c.4GWh NCM capacity in 2018. Total capacity is expected to reach c.18GWhby end-2020at a 3-year CAGR of 33%, but revised down from 20-25GWhpreviously. The company's mid-term strategic target is to triple market share from6% in 2017to c.18% in 2020, to become a formidable competitor against thecurrent industry leader CATL.
Meaningful progress on NCM batteries in 2H18remains to be seen
The company is upgrading its NCM lines in Hefei and Qingdao for all NCM622production starting in 2H18, and expects its NCM battery shipment to reach1.3GWh in 2018, or +92% YoY. Guoxuan supplied it batteries to 45k units of NEVin 2017, and aims to reach 100k units in 2018with orders by domestic brandsincluding BAIC, Geely, Zotye, Chery, SAIC, and JAC. However, it remains to beseen whether Guoxuan, a previously LFP-focused battery manufacturer (c.78% of2017shipment), can have a meaningful presence in NCM batteries.
Cutting target price to RMB15.6; concerns factored in; risks
We believe the c.40% share price decline in the past three months has reflectedinvestors' concerns such as a) ASP/margin pressure in the medium term and b)the uncertainty regarding its transition to NCM batteries. Factoring the 19% YoYASP decline and shipment disappointment in 2017, we cut our 2018/2019NPATforecasts by -27%/-50%. We set the target multiple at 15.4x 2019E P/E, in linewith the industry average, and revise our TP accordingly. Risks: quicker/slowerthan-expected ASP cut or cost drop.
