Company Update

    　　What's new

    　　On November 10, Yunnan Energy New Material (YENM) announced that ithad established a joint-venture (JV) with CATL to invest in two wet-processseparator projects with planned capacities of 1.6bn and 2bn sqm. YENMwill hold a 51% stake in the JV, and CATL a 49% stake.

    　　Comments

    　　Alliance with CATL to boost high growth. The new JV separatorfactories will prioritize supply to CATL. As part of the deal, YENM willprioritize supply of its wet-process separators to CATL and CATL willprioritize purchases from YENM under the same commercial conditionsover the next five years. We think the cooperation will align the interests ofYENM and CATL in the near and medium-to-long terms, bolstering highgrowth for both firms.

    　　JV shows CATL recognizes YENM’s dry-process separator products;to cement YENM leadership in global separator market. In August,YENM established a JV with EVE to build wet-process coated separatorcapacity. We think that the JV with CATL demonstrates YENM’s strong tieswith major downstream clients, backed by its cost advantages, solidproduct quality, and economies of scale. We expect YENM’s share inglobal separator market to increase to 50% over the medium-to-long term.

    　　We think that the plan for the JV to build dry-process separator capacityshows that CATL recognizes the quality of YENM’s dry-process separators.

    　　JV to ensure near-term supply of wet-process separators for CATL;cater to demand for energy storage in the medium-to-long term. Webelieve that the strong growth in AFV demand has exacerbated the supplyshortage along the lithium-ion battery (LiB) value chain and that a stablesupply of raw materials will be a major competitive strength for LiBproducers. Given tight supply of separator equipment and the long periodrequired to expand capacity, we expect separator supply to remain tightover 2022 and 2023. We think the JV’s priority of supplying supplywet-process separators to CATL under same conditions will ensureshort-term supply of the raw materials. We think that construction of 2bnsqm of dry-process separator capacity C enough to produce morethan100GWh LiB C will satisfy demand for energy storage over themedium-to-long term.

    　　Valuation and recommendation

    　　We think strengthening cooperation with CATL will strengthen YENM’sbarriers to entry in the dry- and wet-process separators sector. We leaveour 2021, 2022, and 2023 net profit forecasts unchanged at Rmb2.52bn,Rmb4.59bn, and Rmb7.31bn. The stock is trading at 32.3x 2023e P/E. Wemaintain OUTPERFORM and our TP of Rmb330, implying 40.3x 2023eP/E, offering 24.8% upside.

    　　Risks

    　　Global AFV sales volume disappoints; separator capacity expansion fasterthan expected; price decline caused by intensified competition sharperthan expected.

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