20210607-招银国际-中国宏桥-01378.HK-Aiming_for_long-term_growth_7页_1mb

China Hongqiao (1378 HK) Equity Research Summary

Core Content and Main Points

China Hongqiao (CHQ) has been experiencing range-bound trading from March to May, influenced by fluctuations in aluminum spot prices and government pricing controls. The report suggests that investors should focus on long-term growth rather than short-term price movements due to several factors:

1. Aluminum Strong Cycle Extension: The Chinese government's carbon emission controls are expected to reduce aluminum supply in the short to medium term, extending the strong cycle for aluminum prices.
2. Green Development Advantage: CHQ has shifted a significant portion of its production from Shandong to Yunnan, leveraging low-carbon hydro power resources. The company has already put 0.3mtpa of Yunnan capacity into production, and is expected to fully ramp up the capacity by 2023.
3. Secondary Aluminum Growth: CHQ is expanding its secondary aluminum business, with a 0.2mtpa operational capacity and plans for a second phase. Additionally, a joint venture with Scholz Recycling Group is expected to add 0.5mtpa in recycling capabilities by 2022.
4. Improved Financials: CHQ has repaid over RMB20bn in matured bonds and has a reduced short-term debt burden. The company issued US$500mn senior unsecured notes at a historically low interest rate, indicating improved market confidence.

Key Financial Highlights

• Earnings Projections: CHQ's FY21-23E EPS has been revised upward by 16.6–19.4% to RMB1.81, RMB1.86, and RMB1.98 respectively.
• Revenue: Projected to grow from RMB102,925mn in FY21E to RMB108,185mn in FY23E.
• Net Income: Expected to rise from RMB16,268mn in FY21E to RMB18,035mn in FY23E.
• Valuation: Trading at 5.0x FY21E P/E, with a potential dividend yield of 9.5%. The current share price is HK$10.86, with a target price of HK$15.00, indicating a potential upside of +38.1%.
• Dividend Yield: Increased from 3.13% in FY19A to 10.62% in FY23E, reflecting improved profitability and cash flow.

Strategic Initiatives

• Capacity Expansion: CHQ plans to increase its production capacity through secondary aluminum and light-weight product lines, aiming to capitalize on future growth opportunities.
• Environmental Compliance: The company's shift to Yunnan's low-carbon hydro power resources positions it well for future environmental regulations.
• Financial Flexibility: CHQ has improved its net gearing ratio from 56.5% in FY19A to 7.1% in FY23E, indicating a stronger balance sheet.

Share Performance and Market Position

• Share Price Performance: Over the past 12 months, the share price has increased by 259.2%, outperforming the market.
• Market Capitalization: At HK$103,983mn, CHQ is among the larger players in the aluminum sector.
• Peer Comparison: CHQ's valuation is considered attractive compared to peers, with a projected 26.1% CAGR for FY20A–FY23E.

Risks

• Government Intervention: There is a risk that the Chinese government might release national reserves to suppress aluminum prices.
• Market Volatility: The aluminum price is subject to fluctuations due to supply and demand dynamics.

Summary Table

Conclusion

The report maintains a BUY rating for CHQ, with an unchanged target price of HK$15.00, citing long-term growth potential, favorable green development positioning, and improved financials. Investors are encouraged to focus on the company's strategic direction and long-term prospects rather than short-term commodity price fluctuations.