2Q26 Net Profit Misses Expectations; Impairment and Fair Value Losses Weigh on Near-Term Performance

Overview

Morgan Stanley notes that Huayou Cobalt's 2Q26 net profit came in below expectations, with impairment losses and fair value losses as the main drags. Higher sulfur and nickel ore costs and weaker nickel product shipments also pressured earnings. The report maintains an Overweight rating, viewing growth in battery materials and lithium businesses, along with future raw-material self-sufficiency and cost reductions from the commissioning of Indonesian nickel projects, as support for the medium-term investment thesis.

Core views

Near-term earnings pressure was driven mainly by non-operating and temporary factors: impairment, fair value losses, and foreign-exchange losses were concentrated in 2Q26. Operating trends were clearly divergent, with strong growth in cathode materials, precursors, and lithium businesses, while cobalt product and MHP shipments were affected by weak consumer electronics demand and Huafei production cuts. Analysts expect fair value losses related to lithium futures may reverse in 3Q.

Analysis framework

The report dissects the earnings miss through segment revenue, sales volumes, and gross profit performance, and analyzes profit drags in conjunction with impairment, fair value changes, and finance expenses; valuation uses a DCF framework.

Methodology notes

• Valuation methodsDCF

  Discounted cash flow valuation

  The target price is based on a DCF model, assuming a WACC of 10.9%, a beta of 1.3, and perpetual revenue growth of 2%. The perpetual growth assumption considers that, with rising LFP battery adoption, ternary lithium battery penetration may be lower than market expectations.

• Earnings analysisSegment operating breakdown

  Cross-validation of sales volumes and gross profit

  Changes in sales volumes and gross profit across cathode materials, precursors, cobalt and nickel, and lithium products are used to identify sources of growth and drags.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Zhejiang Huayou Cobalt Co Ltd（603799.SS）

  Company covered by the report

  Strengths

  Rapid growth in cathode material and precursor sales volumes and gross profit; the lithium business benefits from higher lithium prices; Indonesian nickel projects are expected to improve raw-material self-sufficiency and reduce NCM costs after commissioning.

  Weaknesses

  2Q26 net profit materially missed expectations; weak cobalt product demand; MHP shipments affected by Huafei production cuts; finance expenses increased year-on-year.

  Comparison

  Relative to its Greater China materials sector coverage, analysts maintain Overweight, expecting its risk-adjusted total return over the next 12-18 months to exceed the industry average.

  Risks

  Cobalt and copper prices below expectations, precursor demand or sales volumes below expectations, slower-than-expected ramp-up of Indonesian nickel projects, and continued impairment, fair value, or foreign-exchange losses.

Key data

• 1H26 profitRmb3.5bn, +29% year-on-year2Q26 net profit was Rmb1bn, -30.8% year-on-year and -59.6% quarter-on-quarter.
• Impairment and fair value lossesRmb884mnIncluding 1H26 credit impairment of Rmb313mn, inventory impairment of Rmb306mn, and fair value losses of Rmb265mn, mainly concentrated in 2Q26.
• 2Q26 finance expensesRmb881mnRoughly flat quarter-on-quarter and up Rmb397mn year-on-year; 1H26 foreign-exchange losses were Rmb615mn.
• Cathode material sales volume76.3kt, +93% year-on-yearCorresponding gross profit was Rmb1.9bn, +219% year-on-year.
• Precursor sales volume80.8kt, +94% year-on-yearCorresponding gross profit was Rmb692mn, +94% year-on-year.
• Lithium productsShipments of 30.5kt, +17% year-on-yearGross profit was Rmb1.1bn, versus Rmb157mn in 1H25.
• Valuation and ratingOverweight, target price Rmb75.00Implies 79% upside from the Rmb41.87 closing price.

Impact & implications

Near-term market focus will be on whether impairments continue to expand, whether lithium futures-related fair value losses can reverse, and the persistence of foreign-exchange losses. Over the medium term, growth in battery material demand, lithium business profitability, and the commissioning progress of Indonesian nickel projects are key to earnings recovery and valuation realization.

Risks

• Cobalt and copper prices below expectations.
• Precursor sales volumes miss expectations due to weaker-than-expected demand.
• Commissioning and ramp-up of Indonesian nickel projects are slower than expected.
• Weak consumer electronics demand continues to pressure cobalt product sales volumes.
• Impairment losses, fair value losses, or foreign-exchange losses exceed expectations.

What to watch

• Whether lithium futures-related fair value losses reverse in 3Q26.
• Recovery in MHP production and shipments following Huafei production cuts.
• Whether sales volume growth in cathode materials and precursors can continue.
• Lithium price trends and the sustainability of lithium business gross profit.
• Commissioning, ramp-up, and raw-material self-sufficiency-driven cost improvements from Indonesian nickel projects.
• The impact of sulfur and nickel ore costs and exchange-rate movements on margins and finance expenses.