20220530-招银国际-中国宏桥-01378.HK-Market_leader_in_the_aluminum_industry_24页_1mb

Summary of China Hongqiao (1378 HK) Equity Research

Core Content

China Hongqiao (1378 HK) is the world's largest electrolytic aluminum producer and is positioned as a market leader in the aluminum industry. The company is expected to benefit from the global aluminum boom cycle and outperform the industry through a combination of strategic advantages such as cross-regional replacement of production capacity, industrial chain integration, self-provided power plants, and downstream extension. The research recommends maintaining a BUY rating with an updated target price of HK$15.6, representing a 64.5% upside from the current price of HK$9.5.

Main Points

• Market Position: China Hongqiao is the world's largest electrolytic aluminum producer, with a strong position in the industry due to its integrated value chain and operational efficiency.
• Industry Trends: The global aluminum industry is expected to maintain a cyclical upward trend in 2022E, driven by the marginal relaxation of real estate policies and incentives for downstream industries like the automobile sector.
• Performance Outlook:
  • In 1Q22, Shandong Hongqiao reported operating income of RMB32.3bn, an increase of 28.2% YoY.
  • The company is expected to achieve a net profit of RMB17,897mn in 2022E, an increase of 11.3% YoY.
• Valuation: The company is currently trading at 3.7x 2022E P/E, which is considered undervalued with limited downside risk. The target price is adjusted to HK$15.6 based on a 6.2x 2022E P/E multiple.
• Capacity Expansion:
  • The company has an electrolytic aluminum capacity of 6.46mtpa, with 2.03mtpa in the process of relocation to Yunnan.
  • Alumina production capacity stands at 17mtpa, with 15mtpa in Shandong and 2mtpa in Indonesia.
• Cost Advantages:
  • High self-sufficiency rate in alumina (nearly 90% in 2021) and low production costs due to its integrated business model.
  • The company benefits from self-powered operations, which provide a cost edge over outsourcing electricity.
  • Strategic location in Shandong allows for efficient delivery of molten aluminum to downstream processors.
• ESG Focus:
  • China Hongqiao is actively working towards green transformation, increasing the use of renewable energy and reducing reliance on fossil fuels.
  • The company has developed the Yunnan Green Aluminum Innovation Park, emphasizing sustainable energy solutions.

Key Information

• Shareholding Structure:
  • Hongqiao Holdings owns 66.62% of the shares.
  • CITIC Group holds 11.48%.
• Stock Performance:
  • 1-month return: 3.2%
  • 3-month return: -6.0%
  • 6-month return: 34.4%
• Earnings Summary (YE 31 Dec):
  • Revenue (RMB mn): FY20A 86,145; FY21A 114,491; FY22E 121,617; FY23E 118,479; FY24E 122,603
  • Net Income (RMB mn): FY20A 10,496; FY21A 16,073; FY22E 18,997; FY23E 19,737; FY24E 21,427
  • EPS (RMB): FY20A 1.22; FY21A 1.77; FY22E 2.08; FY23E 2.16; FY24E 2.35
  • PE (x): FY20A 6.4; FY21A 4.4; FY22E 3.7; FY23E 3.6; FY24E 3.3
• Market Sentiment:
  • The sector sentiment in capital markets is expected to rebound in 2022E due to persistent global inflation and policy changes.
  • The real estate market is anticipated to show a V-shaped recovery in 2H22E, which will ease the drag on aluminum demand.
• Automotive Industry:
  • The demand for aluminum in the automotive industry is rising due to the trend of lightweight vehicles.
  • China is the largest auto market, with a significant increase in new energy vehicle (NEV) production and penetration rate.
  • The company is well-positioned to benefit from the increased use of aluminum in both traditional and new energy vehicles.

Strategic Initiatives

• Integrated Value Chain:
  • The company has a complete industrial chain covering upstream bauxite resources, midstream alumina production, and downstream aluminum fabrication.
  • It has developed a strong presence in the Guinean bauxite market and has an alumina plant in Indonesia.
• Green Transformation:
  • China Hongqiao is focusing on renewable energy sources and green production methods to align with ESG goals.
  • The relocation of production to Yunnan is expected to enhance its green initiatives and reduce carbon footprint.

Conclusion

China Hongqiao is well-positioned to capitalize on the global aluminum boom cycle, supported by its integrated business model, strategic location, and cost advantages. The company's efforts in green transformation and ESG alignment are expected to attract a broader range of investors. With a favorable valuation and positive outlook for both the real estate and automotive sectors, the company is projected to maintain its leading position in the industry.