20230208-招银国际-中国宏桥-01378.HK-Expect_a_profit_turnaround_in_2023E_3页_787kb

China Hongqiao (1378 HK) Company Update Summary

Core Content Overview

China Hongqiao (CHQ) announced a FY22 profit warning, indicating a bottom-line decline of approximately 40% YoY, which aligns with market expectations. This decline was primarily driven by rising raw material costs and FX losses due to the RMB's depreciation. However, the report anticipates a profit turnaround in 2023E, fueled by marginal cost improvements and a recovery in the non-ferrous metal sector valuation as the Fed's rate hike cycle concludes.

Main Points

• Profit Outlook:

  • CHQ's FY22 net profit dropped to RMB9,746 million, a 40.4% YoY decline.
  • The report expects a recovery in 2023E with net profit forecasted at RMB13,768 million, representing a 39.7% increase from FY22.
  • The company maintains a BUY rating, with an adjusted target price of HK$13.3 (from HK$13.8), reflecting a 55.5% upside from the current price of HK$8.6.

• Industry Recovery Factors:

  • Global aluminum inventory is at a low level, providing room for replenishment in 2023E.
  • Post-COVID recovery is expected to support domestic aluminum demand.
  • Material cost pressures are anticipated to ease, contributing to margin improvement.
  • The end of the Fed's rate hike cycle in mid-2023E is expected to improve sector sentiment.

• Production Capacity Expansion:

  • The Wenshan production base Phase 1 was fully operational in 2022.
  • Phase 2 is expected to come online in 2023E, improving the electricity cost structure.
  • The company's fully utilized Indonesia alumina production facility is positioned to capture growth in Southeast Asia.

• ESG and Investor Attention:

  • CHQ is gaining more attention from overseas investors due to its improved ESG profile.

Key Financial Metrics

Financial Highlights

• Gross Profit Margin: Improved from 17.3% in FY22E to 19.4% in FY23E and 19.5% in FY24E.
• Operating Margin: Increased from 13.7% in FY22E to 17.5% in FY23E and 18.1% in FY24E.
• Net Margin: Rose from 8.1% in FY22E to 11.1% in FY23E and 11.7% in FY24E.
• Effective Tax Rate: Stabilized at 25.0% from FY23E to FY24E.

Cash Flow and Balance Sheet

• Net Cash from Operations: Decreased in FY22E to RMB13,756 million but is expected to recover to RMB22,112 million in FY23E and RMB23,308 million in FY24E.
• Net Change in Cash: Negative in FY22E (-RMB10,758 million), but positive in FY23E (RMB4,191 million) and FY24E (RMB7,094 million).
• Cash at End of Year: RMB45,465 million in FY20A, decreased to RMB37,919 million in FY22E, and is expected to rise to RMB49,203 million in FY24E.
• Total Net Assets: Increased from RMB76,802 million in FY20A to RMB112,637 million in FY24E.
• Shareholder's Equity: Rose from RMB71,196 million in FY20A to RMB99,516 million in FY24E.

Shareholding Structure

• Hongqiao Holdings: 66.62%
• CITIC Group: 12.71%

Share Performance

Analyst Information

• Analyst: Jack Bai, CFA and Megan Xia
• Contact: Jack Bai - (852) 3900 0835 | jackbai@cmbi.com.hk
• Megan Xia - (852) 9299 4355 | meganxia@cmbi.com.hk

CMBIGM Ratings

• BUY: Stock with potential return of over 15% over next 12 months.
• HOLD: Stock with potential return of +15% to -10%.
• SELL: Stock with potential loss of over 10%.
• NOT RATED: Stock not rated.

Disclaimer

This report is for informational purposes only and does not constitute investment advice. It is not suitable for all investors and may not reflect the views of the analyst's employer or affiliates. CMBIGM does not assume responsibility for any loss or damage arising from reliance on this report. Investors are advised to consult a professional financial advisor before making investment decisions.