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On April 24-26, the 9th China International Energy Storage Conference, hosted by the Energy Storage Application Branch of the China Chemical and Physical Power Industry Association, was held at the Intercontinental Hotel in Hangzhou, Zhejiang Province. On the afternoon of April 26th, at the "Energy Storage Cost&Investment and Financing Special Session", Lu Zhikai from Qingyu Capital shared the theme report "Resource Recycling, Continuously Growing - Power Battery Recycling in the Eyes of Qingyu". The following is a transcript of the speech:

Lu Zhikai: Hello everyone! Recycling is the process of extracting valuable metals from discarded power batteries and converting them into products. For the recycling and utilization of power batteries, in addition to recycling, it also includes two steps: cascade utilization and battery recycling. The reason why we only talk about reusing today is because we haven't seen other sections clearly yet.

Regeneration and utilization can be further subdivided into positive regeneration, negative regeneration, diaphragm regeneration, and so on. Due to the highest value of positive electrode regeneration itself, today's discussion mainly revolves around positive electrode regeneration. Before delving into the topic, we also need to do a PR for our company. Our Qingyu Fund is an asset management institution with an ecological environment as its theme. Our management scale is not very large, almost a few billion dollars smaller. But I have been focused on it for a very long time in the industry. We really enjoy tracking in an industry for a very long time. As a very important sector in the ecological environment, new energy vehicles have been tracking and researching this industry since 2006. But it wasn't until 2013 that I invested in the first company. Afterwards, a small closed-loop was established around the use of power batteries in new energy vehicles, including the positive electrode material, battery operation, packaging, and battery recycling.

I was arranged by the company to conduct research on the power battery recycling industry in 2017. During the visit to some companies, I also sorted and organized the environmental assessment reports of the majority of enterprises in this industry. In tracking this industry for a year, in the first half of 2018, we invested in Shunhua Lithium, the first enterprise in the power battery recycling industry. When it comes to the four words lithium iron phosphate, I believe everyone present may have such a question. Why do you choose a start-up company that produces lithium iron phosphate batteries that seem to have been marginalized. I would like to share with you our superficial understanding of the power battery recycling industry.

When answering why Shunhua Lithium Industry is chosen, there are two questions that need to be discussed with everyone first. Why choose the process of recycling and why choose the regeneration of lithium iron phosphate. Only when the answer to these two questions is yes can Shunhua Lithium Industry be said to have investment value. These two questions are necessary conditions for us to choose Shunhua Lithium. Let's take a look one by one. Firstly, I would like to talk about why we chose the recycling process. Due to the sufficient number of retired batteries, the total economic return on regeneration is high enough. After being scrapped at the same time, it has a certain degree of toxicity and danger, and high returns and necessity are two very important factors in choosing this industry. There is only a lot of discussion among industry experts about these two factors. Today, I would like to change my perspective and discuss my thoughts on battery regeneration from the perspective of battery materials.

I would like to ask everyone to recall the charging and discharging process of power batteries or what kind of situation the charging and discharging process of power lithium-ion batteries is. In fact, lithium ions are embedded into the positive electrode material. Therefore, our positive electrode material actually has two very important components. The first component is the carrier of energy, with lithium ions accounting for 4% -7% of the positive electrode material. The second component is nickel cobalt manganese iron, which is a crystalline element, accounting for 35% -60%. What characteristics will this cause for the regeneration and utilization of power batteries? In summary, it's just two words, difficult to understand, or in other words, the technical threshold is very high. Why do you say that? Let's take a look at lithium. Lithium, as one of the most active metals, is very difficult to extract and capture. As you can see, currently our main recycling technology is to place lithium recovery or precipitation at the very end. This makes the recovery rate of lithium less ideal. The second nickel cobalt manganese iron is a continuous arrangement of four elements, indicating that their chemical properties are relatively similar. It is better to combine these elements together. But it becomes more difficult to separate them. Therefore, we believe that in this situation, it is impossible for non professionals to recycle the original gold, silver, and lead. It is impossible to set up a small workshop to recycle it. Even for professionals, it may be quite difficult.

First of all, have lithium iron phosphate batteries started to edge out? Many experts have just mentioned the issue of cost and safety. I think the first consensus we need to reach is that the increase in energy density must be an inevitable trend in the development of the power battery industry. But cost and safety are also two factors that this industry needs to focus on. It is precisely because of these two factors that the power lithium iron phosphate battery, although its installed proportion has declined year by year since 2016. However, its absolute quantity has not shown a linear decline. Instead, there was a significant rebound in 2018. Moreover, it was also mentioned that the rise of energy storage may create a new world for lithium iron phosphate battery. We have reason to believe that under the current situation, lithium iron phosphate battery must have its own life space due to its own characteristics. Our judgment may be at least five years or more. The battery has a lifespan of three to five years. We can think that the regeneration of lithium iron phosphate can last for at least eight to ten years. These eight to ten years are enough for companies to iterate, upgrade, transform, and adapt. So, the marginalization issue of lithium iron phosphate is not the main issue for us to invest in Shunhua.

Let's take a look again at the economic issue of lithium iron phosphate regeneration. Firstly, it is necessary to acknowledge this fact. Indeed, the economy of the regeneration of lithium iron phosphate is relatively poor, to the point where many processes no longer have economic benefits. What is the reason behind this problem? We believe there are two reasons. The first is that the price of retired batteries is too high. In addition, the cost of recycling enterprises themselves is still relatively high, making the profitability level less ideal. Take a look at these two questions one by one.

Firstly, the issue of high prices for waste batteries has resulted in a narrow profit margin for recycling enterprises. The profit margin or profit margin obtained from the recycling process is only two thousand yuan, which makes it difficult to cover all costs and expenses. Will this situation continue. With the increase of battery retirement, this situation will be improved or even reversed. The distribution of the entire industrial value chain will undergo restructuring. The technical barriers to recycling are very high. They should receive a relatively high value distribution throughout the entire industry chain. The current price system does not reflect this distribution of value. The core reason is that there are too few retired batteries. Recycling enterprises must compete with each other for this battery, and also compete with secondary utilization enterprises for batteries. In this situation, the situation where batteries are scarce has emerged. Batteries will periodically become overpriced. As the number of retired batteries increases, the contradiction between supply and demand will be reversed. At this point, the price of batteries will decrease.

The second reason is external factors, including the increase in the price of lithium carbonate or the cascade utilization. When it becomes commercially viable, it can share a portion of the procurement costs, and the government must subsidize this industry. These external factors will all increase the total value of battery regeneration. The recycling process will provide a relatively good profit margin. Let's take a look at the issue of the cost of recycling enterprises themselves. This may be a situation that most companies in the early stages of the industry will encounter. In the case of insufficient supply of raw materials, the management cost of most units of raw materials will actually be relatively high. As this issue scales up, costs will rapidly decrease. The innovation and iteration of technology have led to a decrease in the management costs of recycling enterprises. With the increase in battery retirement, the value chain of the entire industry will be redistributed. Moreover, coupled with the cost reduction efforts of the recycling and utilization enterprises themselves, the entire iron lithium regeneration will have good economic efficiency.

At this point, we have provided a brief discussion and report on why we choose lithium iron phosphate and the recycling process. Finally, why did you choose Shunhua Lithium Industry. The core reason is that relying on its technological advantages, even under the current price system of lithium iron phosphate, it still has economic benefits. What kind of method did Shunhua use? We can make a simple comparison with traditional craftsmanship. Let's take a look at traditional craftsmanship first. When traditional processes cannot extract lithium separately, it needs to be dissolved by fire or acid, including all lithium, iron, and phosphorus. Then, unused iron and phosphorus are precipitated and turned into solid waste, and lithium is precipitated into a product. This link seems to have an extra process. It is the act of dissolving low-priced iron and phosphorus into solution and then precipitating them into solid waste. This action will make the process more complex, consume more reagents, and have a lower recovery rate of lithium, resulting in lower costs.

What clever method did Shunhua use? Shunhua's technological innovation simulates the mechanism of lithium embedding and dragging from the cathode material during the charging and discharging of lithium iron phosphate battery, selectively extracting lithium without destroying the structure of the cathode material, and directly turning phosphorus and iron into solid waste. This eliminates the process of iron and phosphorus dissolution and precipitation. It is precisely because of this technology, which has been developed for six years, that it moved us and ultimately made us determined to invest in Shunhua Lithium.

Finally, to summarize, due to the high technical barriers involved in the process of power battery regeneration, the industry will receive relatively good value chain allocation. Due to the relatively small number of practitioners in the field of lithium iron phosphate regeneration, it provides a relatively good living environment for practitioners. Due to Shunhua's obvious technological advantages, we have become its shareholders. This concludes my speech. Thank you all!

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