20210208-招银国际-中国宏桥-01378.HK-Sail_through_the_winds_and_waves_33页_2mb

Summary of CMB International Securities Equity Research on China Hongqiao (1378 HK)

Core Content

China Hongqiao Group Co., Ltd. (CHQ) is the largest aluminum producer in the world, with a comprehensive business model that includes integrated supply chains for bauxite, alumina, aluminum, and fabrication products. The company has established a strong cost leadership position through captive power plants and global integration strategies. Despite facing challenges in 2017 due to short selling reports and government-enforced capacity cuts, CHQ has successfully recovered and is now poised to benefit from a re-rating opportunity in 2021E driven by economic recovery and strong aluminum prices.

Main Points

• Industry Outlook: The aluminum industry is expected to experience an improving supply-demand balance in 2021-2022E due to the global economic recovery, accelerated real estate completions, the adoption of lightweight automotive technologies, and orderly capacity releases.

• Demand Drivers:

  • Residential property construction is entering an accelerated completion phase, which will boost aluminum demand.
  • Auto sales are expected to recover, with increased NEV penetration driving higher aluminum consumption per vehicle.

• Supply Side:

  • Aluminum production capacity in China has been reduced due to government reforms and environmental controls.
  • Capacity utilization rates have rebounded, and the industry is expected to maintain high levels of operation in 2021-2022E.
  • Capacity addition is expected to be moderate, with 1.4mtpa and 1.3mtpa in 2021E and 2022E respectively.

• Price Projections:

  • China's aluminum average spot price is projected to increase by 6.5% YoY to RMB15,138/tonne in 2021E and remain high in 2022E.
  • The price is expected to reflect an industry upcycle.

• Cost Advantages:

  • CHQ's comprehensive aluminum costs are estimated to be RMB1,500-1,600/tonne lower than the capacity-weighted average in China.
  • The company benefits from captive power plants and global supply chain integration, reducing electricity and alumina costs significantly.

• Financial Performance:

  • Revenue is expected to grow mildly from 2020 to 2022E, with a 3-year CAGR of 7%.
  • Net profit is projected to increase by 16.7% CAGR over the same period, reaching RMB12,613mn in 2022E.
  • Earnings per share (EPS) is expected to grow from RMB1.08 in 2020E to RMB1.42 in 2022E.

• Valuation:

  • Based on a 5-year historical forward PE of 7.15x, the target price (TP) is set at HK$11.37, representing a 41.9% upside from the current price of HK$8.01.
  • The TP reflects the expected re-rating due to strong aluminum prices.

• Risks:

  • Aluminum price decline due to economic downturn.
  • Government policy changes, including cross subsidy and carbon emission charges.
  • Debt repayment pressure in 2021E.

Key Information

• Company Overview:

  • Established in 1994, listed on the HKEX in 2011.
  • Controlled by Hongqiao Holdings (68.44%), with CITIC Group holding 9.88%.
  • Diversified product portfolio including bauxite, alumina, aluminum alloys, and fabrication products.

• Earnings Summary:

  • Revenue (RMB mn): FY18A 90,195; FY19A 84,179; FY20E 87,362; FY21E 96,745; FY22E 103,994.
  • Net Income (RMB mn): FY18A 5,407; FY19A 6,095; FY20E 9,269; FY21E 11,713; FY22E 12,613.
  • EPS (RMB): FY18A 0.62; FY19A 0.71; FY20E 1.08; FY21E 1.32; FY22E 1.42.
  • EPS CAGR: 7.7% in 2020E, 22.3% in 2021E, and 7.7% in 2022E.
  • Consensus EPS: FY20E 0.96; FY21E 1.14; FY22E 1.29.
  • P/S (x): 10.3; 9.1; 6.0; 4.9; 4.5.
  • P/E (x): 0.93; 0.87; 0.81; 0.73; 0.66.
  • P/B (x): 3.00; 4.24; 6.50; 8.48; 9.38.
  • ROE: 9.0%; 9.6%; 13.6%; 14.9%; 14.7%.
  • Net Gearing (%): 52.8%; 56.5%; 43.4%; 26.2%; 16.3%.

• Target Price and Rating:

  • Target Price: HK$11.37.
  • Rating: BUY.
  • Upside: 41.9% from current price.

• Business Structure:

  • CHQ operates in four major product categories: aluminum products, aluminum fabrication, alumina, and steam.
  • Aluminum products account for 73.5% of total sales in 2019.
  • Molten aluminum alloy is the primary sales method, contributing 70.5% of total sales in 2019.

• Capacity and Inventory:

  • Total aluminum capacity in China reached 42.15mtpa by end-2020, with 39.35mtpa in operation.
  • Inventory levels are currently below the 5-year average, indicating a tight supply-demand balance.
  • Inventory is expected to increase by 40-50mn tonnes in 2021E, leading to a 1% demand increase.

• Strategies:

  • Integration of aluminum and electricity: Boosts cost efficiency and production capacity.
  • Vertical and global integration: Enhances supply chain security and cost optimization.
  • Green and high-end development: Focuses on relocation and new high-end fabrication businesses.

Conclusion

CHQ is well-positioned to benefit from the improving supply-demand outlook in the aluminum industry, driven by economic recovery, real estate completions, and the rise of NEVs. The company's cost leadership and integrated supply chain provide a competitive edge, and its financial health and strategic adjustments have helped it recover from past challenges. With a target price of HK$11.37, the research recommends a BUY rating, anticipating a re-rating driven by high aluminum prices and improved financial performance. However, risks such as price decline, government policies, and carbon emission charges should be considered.