EVE Energy: Negative Impact from E-Cigarette Business Gradually Fading

The e-cigarette business is recovering, and the subsidiary Micwell is expected to achieve a 60% growth rate in performance for 2015. From the third quarter of 2014 to the first quarter of 2015, the e-cigarette market was in an adjustment phase, and changes in market structure led to a sharp decline in demand for lithium batteries. The company's lithium battery business was also significantly affected in 2014, with revenue dropping by 54%. The subsidiary Micwell actively adjusted its product structure and increased the sales of tobacco sticks to meet market demand. In the first half of the year, the company's e-cigarette business revenue reached 141 million yuan, a substantial year-on-year increase of 220%. For the whole year, Micwell's performance is expected to exceed 60 million yuan (net profit of 38.1 million yuan in 2014), with a year-on-year growth rate close to 60%! In addition, the company is continuously expanding the downstream market for consumer lithium batteries, currently forming a situation where e-cigarettes, wearable products, and bank password cards each account for one-third of the demand for consumer lithium batteries. The company's consumer lithium battery business will also return to a growth track.

The construction of power battery capacity is rapidly advancing and will become a new profit growth point starting in 2016. The company began to enter the power lithium battery market this year, planning to build a 0.7GWh ternary material battery project in Huizhou and an 0.8GWh lithium iron phosphate battery project in Jingmen (construction has already started), which will gradually be put into production by the end of this year. The company is closely cooperating with Nanjing Jinlong, Shenzhen Wuzhoulong, and Chengdu Yema in the field of power lithium batteries, and will continue to develop electric passenger vehicle customers in the future. Conservatively estimated, these two projects will bring an additional revenue of 500-700 million yuan to the company in 2016, which will become a new profit growth point for the company.

The lithium primary battery business is blooming in multiple areas, and an annual revenue growth rate of over 20% is highly probable. Lithium primary batteries are the company's traditional strong business. In the first half of the year, the company's lithium primary battery business revenue increased by 25% year-on-year, and the gross profit margin improved by 7 percentage points. The revenue share of the company's lithium primary battery in the three major downstream markets—smart meters, intelligent transportation, and security—was 50%, 20%, and 13% respectively in the first half of the year. The intelligent transportation market refers to products like ETC, TPMS (Tire Pressure Monitoring System, with downstream customers mainly being TPMS system integrators such as Shanghai Baolong, Shanghai Shian, Beijing Times Guanghua, etc.), RFID, etc., while the security market mainly uses lithium manganese batteries for smoke alarms, with downstream customers including global top companies like Tyco, Wizmart, and fireAngel. With the joint efforts of multiple downstream markets, we estimate that the company's lithium primary battery business will achieve an annual revenue of 720 million yuan, with a year-on-year growth rate of 24%.

We have lowered the profit forecast for 2015-2016 and maintained an overweight rating. Due to the e-cigarette business development not meeting expectations, we have lowered the company's profit forecast for 2015-2016. We expect the company's net profit for 2015-2017 to be 142/237/402 million yuan (the original forecast was 276/358 million yuan for 2015-2016), with basic EPS of 0.36/0.59/1.01 yuan, and the current stock price corresponds to dynamic P/E ratios of 54X/33X/19X. We believe the company has outstanding technical strength in the lithium (primary) battery field, and the approval of the additional issuance plan (which is being re-evaluated for the issuance price) will help the company enter the power lithium battery market. Additionally, the establishment of a 1 billion yuan industrial merger and acquisition fund has opened up the imagination for external mergers and acquisitions, and the future implementation of an employee stock ownership plan will also be a potential catalyst. Considering all these factors, we maintain an overweight rating on the company.