Resilient lithium compound price explained by supply disappointment。    We believe the lithium compounds production output needs more time to gettraction in China, and domestic supply disappointment explains the battery-gradelithium carbonate price increase by c. 9%/10% in 2Q17/3Q17. After examining thelatest effective capacity landscape, we believe resilient lithium compound pricingcould potentially extend into 2018. Meanwhile, more investments into the fieldshould lead to a slightly faster processing capacity expansion in the longer term,and reach 425ktpa in 2020E. We upgrade Tianqi to Hold from Sell on new pricingand volume assumptions, but downgrade Ganfeng to Hold from Buy as we believehas already factored in the positive catalysts.。    Tianqi: tightness in lithium compound S/D benefits industry leader。    Tianqi announced an aggressive capacity expansion plan to reach 105ktpa in2020E, or three-fold compared to YE2017. Given de-bottlenecking process inexisting lines (9ktpa), new capacity in Western Australia (48ktpa), and plan tonearly double the upstream raw material supply from 2Q19, we believe thecompany will further strengthen its industry-leading position in terms of volumestability and product quality.。    Ganfeng: decent fundamentals but positives are already in the price。    Ganfeng's incremental spodumene concentrate supply from Mt. Marion inAustralia has not reached its ideal 6% grade so far, but we expect the issue tobe resolved after end 1Q18with the help of beneficiation plant. In the meantime,the recently proposed restrictive stock incentive program and 4-year NPATproduction volume targets indicate optimistic outlook from the company, but webelieve the share price rally has already factored in the positive catalysts.。    U/G Tianqi on new assumptions; D/G Ganfeng on unattractive valuation。    We upgrade Tianqi after factoring in the new lithium compound pricing andfaster capacity assumptions (at a 3-year CAGR of 44%), implying a 21% 3-yearearnings CAGR and 30x / 25x FY18/19E PEx. Meanwhile, we believe Ganfeng'sc.180% share price surge (vs. +10% for SSE Composite) in the past 12monthshas factored in the positive fundamentals, and thus downgrade Ganfeng to Hold.Our new DCF-based target price for Tianqi is set at RMB70.7(6.5% WACC, 2%terminal growth rate), and the one for Ganfeng is set at RMB75.1(6.2% WACC,2% terminal growth rate). Our Tianqi and Ganfeng target prices imply 6% and14% downside potential, and we now rate both stocks Hold.。

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