2022-11-24 19:20:05 和讯  中信证券TANG Chuanli/AO
  Core views:
  Pangang Group Vanadium & Titanium Resources (PGVT) is the largest vanadium producer and one of the top three titanium dioxide (TiO2) producers in China. With the accelerated upgrading and transformation of the global energy structure, the collaborative development mode of “renewable energy + supporting energy storage systems” has gradually become a consensus. As an important equipment and technology infrastructure for the new power system, the construction of energy storage facilities and power stations is imminent. The vanadium flow battery (VFB) is naturally suitable for large-scale and long-duration energy storage projects. Relying on its own abundant vanadium & titanium ore resources, PGVT closely cooperates with Dalian Rongke Power, a leader along the vanadium battery value chain, to tap into the electrolyte market. As the largest producer of vanadium products, the Company is well-positioned to become an immediate and sustained beneficiary with the ramp-up of VFB cells in the future. Its titanium dioxide business remains solid as it proactively expands production via the chlorination process and advances the titanium extraction technology from blast furnace slag to further enhance its competitiveness in the titanium dioxide sector. We forecast its 2022E/23E/24E EPS to be Rmb0.19/0.22/0.32 and assign a target price of Rmb6.5. We initiate coverage with a “BUY” rating.
  Resource endowment justifies the leading position in vanadium and titanium, while the energy storage boom creates development space.
  The predecessor of PGVT, Pangang Group Steel Plate, was established in 1993, and the early main business covers steel, iron, vanadium, titanium, coke and so on. After several restructurings and mergers and acquisitions, PGVT has established a stable business structure focusing on vanadium and titanium products with a small electricity segment. The Company is located in the Panxi region of Panzhihua and Xichang, which warrants a natural resource barrier thanks to the rich reserves of vanadium and titanium magnetite ores there. The Company's vanadium production ranks first in the world, and its titanium dioxide production ranks among the top three in China. Its products are widely used in steelmaking, electronics, nonferrous metals & coating ink, aerospace, defense, etc. In 2021, the Company achieved revenue of Rmb14.06bn (+33.4% YoY) and attributable net profit (ANP) of Rmb1.33bn (+248.56% YoY); in 1H22, it achieved revenue of Rmb8.25bn (+16.0% YoY) and ANP of Rmb1.07bn (+55.5% YoY). Revenue and net profit both recorded robust growth YoY, mainly benefiting from the rising shipment and price of vanadium products and the steady shipment but rising price of titanium dioxide products in the context of the geopolitical conflict. Looking ahead, if the all-vanadium liquid flow battery system can realize the cost reduction to warrant the in-line progress of penetration in the field of energy storage, the Company, as the upstream raw materials leader in the vanadium battery industry chain, may take the lead to continuously benefit, and its earnings may achieve high growth beyond expectations.
  VFB cells are naturally suitable for large-scale LDES scenarios, and in the case of smooth progress in industrialization, vanadium demand and price will both exceed expectations.
  The all-vanadium liquid flow battery has the advantages of high power, high capacity, high safety, long life, flexibility, and resource security. As a large-capacity, safe and environment-friendly energy storage battery, it can be deeply charged and discharged. Due to such characteristics, the technology is perfectly suited to large-scale medium- and long-duration energy storage scenarios. Currently, the vanadium battery industry is in the early stages of commercialization, and driven by policy support and technical advancement, the vanadium battery is likely to achieve large-scale industrialization in the next few years, becoming a strong new growth driver of vanadium products in addition to the steel industry which used to account for 90% of demand. Based on the logistic curve and the development trend of lithium-ion battery (LIB) penetration in energy storage over the past decade and taking into account the gap in the energy density, conversion efficiency and initial investment of all-vanadium liquid flow batteries vs. LIB under the current technology level, we estimate that the vanadium battery will achieve a rapid increase in the penetration rate in 2024-2026 and become a strong competitor of mainstream lithium batteries in the field of energy storage. We estimate that the newly installed capacity of vanadium batteries will probably reach 9.8GW in 2023 and the supply and demand gap of vanadium will reach 136kt (in V2O5 equivalents), pushing vanadium into the ranks of energy metals, with the price likely to return to Rmb200k/t (in V2O5 equivalents).
  Teaming up with Rongke Power to forge a strong alliance and tap into the electrolyte segment of vanadium batteries:
  Rongke Power is one of the leaders in the production and system integration of domestic vanadium batteries and a worthy technology pioneer in the field of domestic vanadium batteries, as well as the leader in the electrolyte segment of vanadium batteries, with an international market share of 80%. PGVT announced on Oct 11, 2022, the establishment of a vanadium energy storage joint venture with Rongke Power, with a 51% stake in the JV, planning to build an electrolyte production line with a capacity of 2,000 cubic meters/year in 2022 and then invest in the construction of a vanadium electrolyte capacity of 60,000 cubic meters/year during 2023-2024. In addition, one of PGVT's projects funded by private placement proceeds announced in Sep this year is about the industrialization and application research of vanadium battery electrolytes, signaling that it has been consistently building its presence in vanadium battery electrolytes. According to our calculations, for vanadium battery energy storage systems with a storage length of 4 hours, the cost of the system accounts for 50%. As the length of energy storage increases, the value of electrolytes in the energy storage system will account for a higher proportion, and electrolytes will become a core link of the vanadium liquid battery value chain.
  As the vanadium leader, PGVT expects to raise its production capacity to 60ktpa, with a market share of more than 30%.
  The Company's future earnings elasticity will mainly come from the vanadium business segment. The Company currently has a capacity of 40ktpa of vanadium pentoxide. The annual capacity of the headquarters is 22ktpa, using sodium vanadium technology. Its subsidiary Xichang Vanadium has a capacity of 18ktpa, using calcium vanadium technology. The Company's current production capacity of vanadium products ranks top worldwide.
  The titanium dioxide business maintains stable operations.
  PGVT is one of the five domestic companies with titanium dioxide production lines via the chlorination process and one of the few companies with titanium dioxide production capacity using both the sulfate process and the chlorination process. In addition, it has made progress in titanium extraction from blast furnace slag. At present, PGVT has a titanium dioxide production capacity of 235ktpa, with 100ktpa via the sulfate process from Chongqing Titanium and 120ktpa via the sulfate process and 15ktpa via the chlorination process from Dongfang Titanium. PGVT announced in Sep 2022 that it would add 60ktpa capacity via the chlorination process, and in the long term, it plans to raise its chlorination titanium dioxide production capacity to 200ktpa. For the titanium dioxide business, the Company will continue to expand export markets and step up the promotion of new products such as R249 & CR340.
  Potential risks:
  The installed capacity of all-vanadium liquid flow batteries disappoints; the demand for vanadium in the traditional sector is significantly reduced due to the downward trend of the steel industry; the progress of the construction of the Company's 20ktpa vanadium pentoxide production line falls short of expectations; the progress of the construction of the Company's planned electrolyte project fails expectations; the prosperity of the titanium dioxide industry declines; the capacity commissioning of the Company's chlorination titanium dioxide project misses expectations; the approval progress of the Company's private placement falls below expectations.
  Investment recommendation:
  PGVT is the domestic vanadium leader and one of the top 3 suppliers of titanium dioxide. At present, its incremental earnings mainly come from vanadium products and titanium dioxide. The vanadium product business is likely to benefit from the industrialization of vanadium liquid flow energy storage batteries, which will allow PGVT to embrace broader headroom for growth, and in the future, this may become the main source of its earnings elasticity. If the titanium dioxide expansion project can be successfully put into production, the titanium dioxide business will contribute to its solid earnings growth. Based on the above analysis, we forecast 2022E-2024E revenue of Rmb15.634bn/16.398bn/18.176bn and ANP of Rmb1.607bn/1.892bn/2.721bn, corresponding to EPS forecasts of Rmb0.19/0.22/0.32. Considering the business structure of the Company, we adopt the sum-of-the-parts (SOTP) valuation framework and the DCF valuation method to derive a one-year target price of Rmb6.50 and initiate coverage with a “BUY” rating.
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