国轩高科(002074)

New capacity on the way, but yet to see meaningful shipments of NMC battery;Hold

Guoxuan High-Tech, the third-largest battery player in China, aims to double itscapacity by 2020, and even to triple it starting in 2021. The company started withthe LFP (lithium iron phosphate) battery, and it is now trying to ramp up the NMC(lithium nickel cobalt manganese oxide) battery business. However, meaningfulprogress is yet to be seen in the NMC battery, with Guoxuan having only 0.4%NMC market share by 9M18. We set our target price at 15x 2019E P/E, in line withthe industry average. With 9% upside potential, we maintain our Hold view onGuoxuan. This report marks the transfer of coverage from James Kan to SharonDing.

Weak 3Q due to lower shipments; keep an eye on NMC battery

Guoxuan recorded RMB4.1bn revenue in 9M2018, achieving only 59% of ourestimate, as a result of weak shipments due to the subsidy cut in the middleof this year. Gross margin in the first nine months also missed our expectationby 2ppt, a result of ASP pressure and lower volume. In terms of NMC battery,management mentioned there is no technical or customer issue, but it is awaitingmassive commercial shipments. The company is yet to prove it can repeat itssuccess in LFP battery.

Cutting target price to RMB13.3 and maintaining Hold; risks

Despite the company's aggressive capacity expansion plan, we are yet to seemeaningful shipments in NMC battery. We lower our 2018 and 2019 earningsestimates by 12% and 10%, respectively, to factor in its weaker-than-expectedshipments and ASP pressure. Our target price of RMB13.3 (down from RMB15.58)is based on a target multiple of 15x 2019E P/E, in line with the battery industryaverage; the lower TP reflects a shift from a 15.4x multiple and our lowerestimates. We maintain our Hold rating. Risks include faster or slower capacityramp-up and shipments.