20220329-招银国际-中国宏桥-01378.HK-Attractive_valuation_with_high_dividend_yield_7页_990kb

China Hongqiao (1378 HK) Company Update Summary

Core Content

China Hongqiao (CHQ) reported its FY21 full-year results, showcasing strong performance with a 33% YoY revenue increase to RMB114.5bn and a 53% YoY net profit increase to RMB16.1bn. The company declared a final dividend of HK$0.6 per share, achieving a record 50% payout ratio. The current dividend yield is 12.1%, which is considered very attractive in the current market environment.

CMB International Global Markets (CMBIGM) has resumed coverage on CHQ with a BUY rating, setting a target price of HK$15.3, which implies a 43.7% upside from the current price of HK$10.6. The company is expected to benefit from the post-COVID-19 recovery, proactive macro policies, and limited new capacity release in 2022E. The LME aluminum price increased by 28% YTD, and domestic aluminum prices are expected to remain high due to slow production resumption and energy restrictions in China.

Main Points

• Strong FY21 Performance: CHQ delivered a 26.6% gross profit margin, up 4.1ppt YoY, driven by rising aluminum prices and sustainable cost advantages.
• Cost Management: The S&D expense ratio remained stable at 0.5%, while the administrative expense ratio increased by 0.28ppt to 4.99% due to increased maintenance and R&D expenses.
• Debt Reduction: CHQ reduced its debt ratio by 6.8ppt to 50.9%, leading to a 19.5% YoY drop in financial expenses to RMB3.6mn.
• High Dividend Yield: The current dividend yield is 12.1%, and the company is expected to maintain a high payout strategy.
• Positive Outlook for 2022E: Aluminum prices are expected to remain high, and CHQ is well-positioned to benefit from this environment.
• Growth Projections: The company is forecasted to achieve a net profit of RMB19.3bn in 2022E, a 19.7% YoY increase. The P/E ratio for 2022E is 4.1x, with limited downside risk.
• Strategic Expansion: CHQ continues to expand its production capacity and cost advantages, including the second phase of the alumina project in Indonesia and inter-location capacity replacement to leverage electricity price advantages in Yunnan.
• Recycling and Auto Sector: The Phase I project with Chiho Group is expected to ramp up in 2022E, with 50,000 vehicles recycling and 200,000 tons of recycled aluminum.
• Financial Health: CHQ reported a net cash inflow of RMB28.7bn in 2021, the largest since 2018, and has issued RMB2.0bn in domestic bonds with lower interest rates, improving its financial position.

Key Financial Metrics

• Revenue:
  • FY20A: RMB86,145mn
  • FY21A: RMB114,491mn
  • FY22E: RMB117,054mn
  • FY23E: RMB118,479mn
  • FY24E: RMB120,747mn
• Net Income:
  • FY20A: RMB10,496mn
  • FY21A: RMB16,073mn
  • FY22E: RMB19,254mn
  • FY23E: RMB20,590mn
  • FY24E: RMB22,669mn
• EPS:
  • FY20A: RMB1.22
  • FY21A: RMB1.77
  • FY22E: RMB2.11
  • FY23E: RMB2.26
  • FY24E: RMB2.49
• P/E Ratio:
  • FY20A: 7.2x
  • FY21A: 4.9x
  • FY22E: 4.1x
  • FY23E: 3.9x
  • FY24E: 3.5x
• Dividend Yield:
  • FY20A: 6.12%
  • FY21A: 9.9%
  • FY22E: 12.1%
  • FY23E: 12.9%
  • FY24E: 14.2%
• ROE:
  • FY20A: 15.2%
  • FY21A: 19.9%
  • FY22E: 20.8%
  • FY23E: 19.8%
  • FY24E: 19.5%

Strategic Advantages

• Aluminum Price Environment: CHQ is expected to benefit from high aluminum prices in 2022E due to global and domestic inflation.
• Cost Advantages: The company continues to leverage cost-effective production and electricity price advantages.
• Debt Management: CHQ has reduced its debt ratio and financial expenses, improving its operating cash flow and financial flexibility.
• Expansion Projects: The second phase of the alumina project and Phase I joint venture are expected to enhance production capacity and profitability.
• Recycling Sector: CHQ is expected to gain first-mover advantage in the automotive recycling and recycled aluminum sectors.

Market Position and Performance

• Market Cap: HK$98,280mn
• Shareholding Structure:
  • Hongqiao Holdings: 66.62%
  • CITIC Group: 11.48%
• Share Performance:
  • 1-month: -2.2%
  • 3-months: 27.5%
  • 6-months: 8.7%
• 12-Month Price Performance: Indicates a positive trend with upside potential.

Analyst Ratings and Key Assumptions

• Ratings: BUY
• Target Price: HK$15.3
• Upside Potential: +43.7%
• Key Assumptions:
  • Aluminum prices are expected to remain high.
  • CHQ will continue to maintain its high payout strategy.
  • The resource sector is expected to outperform in the early Fed tightening cycle.

Risk and Disclaimer

• The report is not tailored to individual investors.
• Past performance does not guarantee future results.
• Market conditions may differ from the forecasts.
• Investors are advised to consult professional financial advisors for personal investment decisions.

Summary

China Hongqiao (CHQ) is showing strong financial performance and strategic expansion, supported by rising aluminum prices and cost advantages. The company is expected to maintain a high dividend yield and outperform in the resource sector. With a BUY rating and a target price of HK$15.3, the stock is seen as attractive in the current volatile market. CHQ is well-positioned to benefit from the high price environment and continue its growth trajectory.