BYD has made a strategic investment of RMB 2 billion in Chengxin Lithium, acquiring a 5.11 percent stake.

(Image credit: BYD)

BYD has made a strategic investment of RMB billions in a local lithium producer, officially becoming one of its biggest shareholders to lock in the supply of key raw materials.

Shenzhen Chengxin Lithium Group (SHE: 002240) completed a private placement of shares to BYD, securing an RMB 2 billion ($300 million) investment from the latter, according to a December 6 announcement from the Shenzhen-listed lithium producer.

BYD became Chengxin's third-largest shareholder with a 5.11 percent stake, or 46.6 million shares, according to the announcement.

Chengxin was founded on December 29, 2001, and its headquarters were originally located in Shenzhen, though it announced on April 20 that it had moved its headquarters to Chengdu, Sichuan province.

The company is one of the largest lithium producers in China, and in the first three quarters of this year it achieved a net profit attributable to shareholders of the listed company of RMB 4.35 billion, up more than seven times year-on-year.

On March 22, Chengxin announced that it plans to introduce BYD as a strategic investor and raise total funds of up to RMB 3 billion through a private placement of shares to it.

From the company's latest announcement, the final amount of funds raised has shrunk.

Chengxin is a long-term supplier of lithium products to BYD, with sales to the latter amounting to RMB 3.02 billion from January to November this year.

On May 18, BYD said in an announcement that it would purchase and commission lithium products from Chengxin for an estimated RMB 4 billion in 2022.

As of then, BYD had already purchased RMB 436 million worth of lithium products from Shenzhen Chengxin, according to BYD's announcement.

BYD made the announcement because Chengxin is a company with which it has an interest, and its board secretary, Li Qian, was elected as a non-independent director of the latter on May 17.

BYD's investment in a leading lithium supplier is an attempt to strengthen supply chain security in order to ensure the supply of strategic resources in times of shortage, the Securities Times said in a report today, citing an industry source.

In addition, it is a move by BYD to boost its voice in the power battery industry chain, the source said.

In the second week of November, the price of battery-grade lithium carbonate in China at one point exceeded RMB 600,000 per ton, 10 times the price two years ago.

But it's worth noting that lithium carbonate prices have recently shown signs of stopping and stabilizing, with upstream raw material sellers starting to loosen their offers.

In a November 28 research note, Morgan Stanley argued that a material adjustment in lithium prices is possible in 2023 as headwinds from demand growth allow supply to catch up.

Morgan Stanley sees Chinese lithium carbonate prices at $67,500 per ton in the first half of 2023, falling to $47,500 per ton in the second half of 2023, the latter implying a 35 percent decline from current spot.