How to Invest in a Big Chinese Lithium Company
Ever since Elon Musk decided to coat the planet with gigafactories, people have been looking to lithium as a possible “picks and shovels” play on related themes like electric cars or home solar units that use large home batteries. Back in August of 2015, we warned our readers about the dangers of lithium junior mining stocks and at the same time pointed out how just 3 mining companies produce 90% of the world’s lithium. At the same time, we created a motif which contained those 3 stocks and here is how it has performed since then:
So these 3 lithium companies returned just over +100% in the past 21 months while the NASDAQ returned just under +21%. We didn’t invest in these stocks because back then, lithium revenues made up just a small proportion of total revenues (kicks rocks…). Here’s how that has changed since then:
- ALB net income attributed to lithium increased from +5.5% to +27%
- FMC net income attributed to lithium increased from +2.8% to +10.7%
- SQM revenues increased +111% and gross profits attributed to lithium are surpassed+50%
Because lithium is not a publicly traded commodity, there’s no saying what the price of lithium did during that time frame but according to an article in the FT (sorry subscribers only) it’s “jumped threefold since 2014”. The above table shows that all three of these lithium stocks now have meaningful percentage of revenues coming from lithium. So what should lithium investors do (both existing and prospective)? Back up the truck and load up before the train leaves the station or trim your position and get out before the bubble bursts?
Since we missed this completely the first time around, we’ll just talk about how “cautiously optimistic” we are and avoid actually dispensing any actionable advice about what lithium investors should do at the moment. What we will do though is introduce you to one of the largest producers of lithium in China which is accessible to any U.S. investor.
We happen to have some boots on the ground in China, so we’ve talked before about how Chinese startups generally fly under the radar and how China is making great strides in developing artificial intelligence. In what seemed like a very unexpected twist, the Chinese government suddenly decided to “go green” and is now the second biggest installer of solar and also the world’s biggest producer of electric vehicles with plans to have 12% of all their cars running on electric by 2020:
A Chinese company called BYD (HKG:1211) (backed by Warren Buffet) has over 180,000 employees developing all kinds of “new energy” products being sold around the world. We’ll look to highlight BYD in a future article but right now we want to talk about Chinese lithium.
Founded in 2000, Ganfeng is a big Chinese lithium company which has traded on the China Stock market since 2010, and has returned a remarkable +555% in the past 5 years giving the Company a present day market cap of $4.58 billion USD (about half the size of SQM):
Ganfeng stock trades on the Shenzhen Stock Exchange (SHE:002460) and has a total of 4 subsidiaries that handle all aspects of their business from shipping to sales. Ganfeng is making aggressive investments all over the world and acquiring lithium projects, which is probably how they managed to create that chart on the right seen below:
Ganfeng is not timid about looking outside their borders for opportunity. In January of 2017, the Company made a $174 million investment in Lithium Americas (TSE:LAC) – (OTCQX:LACDF) in which Ganfeng agreed to financing terms in an aggregate amount of $174 million in exchange for 19.9% of the outstanding common shares of Lithium Americas. Ganfeng also owns 18% of International Lithium (CVE:ILC), a Canadian listed mining company who owns Lithium properties in Argentina, Canada and Ireland. They have a 43% stake in Reed Industrial Minerals which is a lithium project in Australia, and also made a 5% investment in Australian lithium firm Pilbara Minerals (ASX:PLS) just last month.
In short, Ganfeng has their fingers on every continent securing their supply of lithium to fuel the growth of electric vehicles. All those investments have given Ganfeng a 30,000 metric ton per year production capacity, and they produce over 20 unique lithium products that are then exported around the world:
The above slides came from a presentation that is dated “2015” but hasn’t been updated in half a decade. One problem with investing in Chinese companies like this one is that you won’t find much collateral about Ganfeng that’s available in English. If you are very patient, you can probably use Google Translate to sift through their financials provided you have a good understanding of how Engrish works. We were able to find this table courtesy of AnalytixInsight which shows revenues and profitability for Ganfeng from 2011-2015 (we converted all numbers to USD):
|Revenues (millions USD)||$ 68.83||$ 91.03||$ 99.45||$ 126.00||$ 196.22|
|Revenue Growth (YOY)||N/A||+32%||+9%||+27%||+56%|
|Earnings (millions USD)||$ 7.87||$ 10.09||$ 10.74||$ 12.42||$ 18.14|
|Earnings Growth (YOY)||+28%||+6%||+16%||+46%|
|EPS||$ 0.026||$ 0.033||$ 0.036||$ 0.035||$ 0.049|
So how can you buy Ganfeng Lithium stock if they trade over there in China? You simply use one of the best brokerage firms we know of and the only brokerage firm that allows you to buy foreign stocks from all over the world – Interactive Brokers. You can see below where we’ve pulled up a trade:
Notice that the trade is happening in CNY. That means you’ll need to buy CNY first before you do the trade (unless you have a margin account). The only “downside” to Interactive Brokers is that in most cases you need $10,000 to open an account. For serious investors, it’s a must have.
China is a huge opportunity which U.S. investors largely ignore due to something called domestic bias which loosely translates to “bad isht can happen in foreign countries you can’t control and therefore people would rather invest in companies they are familiar with“. There is good reason to be cautious too. Remember Enron? China has had loads of Enrons. When you do business in China, there is something known as guanxi which loosely translates to lots of drunken nights slamming shots of baijiu in an attempt to build personal relationships. Once relationships are formed, people do not like to lose face. Sometimes this can result in things going pear shaped. The point is, things work differently in China.
Then you see exciting charts like this showing that China sold over 100,000 electric buses in 2016 and you think to yourself, “I want a piece of that action“:
Our advice? Proceed with cautious optimism.