The company recently entered into a memorandum of understanding (MOU) to acquire an 81.91% equity interest in Sichuan GCL Lithium Battery Technology (GCL Lithium Battery), marking a strategic entry into the lithium iron phosphate (LFP) cathode material segment. GCL Lithium Battery is a leader in LFP cathodes and one of the few producers with mass-production capabilities for fifth-generation products. Under the MOU, the preliminary consideration is approximately RMB2.5bn, comprising roughly RMB650mn in cash and roughly RMB1,850mn via the allotment and issuance of consideration shares at an issue price of not less than HKD1.3 per share (capped at 1,671mn shares). We view the proposed acquisition as a key positive catalyst on three fronts. 1) Attractive transaction valuation: The implied acquisition valuation compares favorably to peers such as Hunan Yuneng and Fulin Precision, and settling the consideration through a combination of cash and equity optimizes capital efficiency. 2) Elevated entry barriers and superior business model: The LFP sector carries high entry barriers, with only a handful of players capable of commercializing fifth-generation products. GCL Lithium Battery’s proprietary iron oxide red method offers a business model superior to the commoditized PV space, enhancing the group’s overall commercial profile. 3) Platform synergy: Leveraging the listed company’s financing and operational platform is poised to accelerate the industrialization of iron oxide red-process LFP cathodes, bolstering overall competitiveness across products, capacity, and profitability. We maintain our BUY rating.
Earnings forecasts and valuation
Because the MOU represents an expression of intent prior to entering into a formal agreement, and given that the profitability and shipment of the new business remain uncertain, we leave our 2026/2027/2028 attributable net profit forecasts unchanged at RMB-2,990/+2,332/+3,158mn, with EPS of RMB-0.09/+0.07/+0.10. Excluding Tongwei due to its distorted 2027E PE caused by a prolonged turnaround timeline, we reference the peers’ average 2027E PE of 19.02x on Wind consensus. Factoring in the company’s H-share discount alongside long-term growth expectations from the GCL Lithium Battery injection, we value the stock at 20x 2027E PE, yielding our target price of HKD1.63 based on the latest HKD/RMB exchange rate of 1:0.857 (previous: HKD1.62, based on 20x 2027E PE). Maintain BUY.
Risks: overseas policy headwinds, weaker-than-expected downstream demand, slower-than-expected domestic supply-side structural reform, uncertainty surrounding the acquisition deal, non-execution of formal agreements, consolidation risks.