According to the research report released by Minsheng Securities, it maintains a 'recommended' rating for China Hongqiao (01378). The bank pointed out that the upward trend in aluminum prices and significant cost reductions have greatly enhanced the performance flexibility of China Hongqiao, while the transition to green energy will help long-term development. It is expected that the company will achieve a net income attributable to the parent company of 17.796 billion yuan, 20.065 billion yuan, and 21.985 billion yuan in 2024-2026, corresponding to a PE ratio of 5, 4, and 4 times the current price, respectively.

China Hongqiao achieved high growth in its half-year performance in 2024. In the first half of 2024, the company achieved a revenue of 73.59 billion yuan, a year-on-year increase of 12%; and a net income of 10.01 billion yuan, a year-on-year increase of 236.7%, which was higher than the net income forecast (9.51 billion yuan) released by the company in June. The net income attributable to the parent company in the first half of 2024 was 9.15 billion yuan, a year-on-year increase of 272.7%.

Minsheng Securities has listed the future development highlights of China Hongqiao. First, the integration layout of China Hongqiao's bauxite, alumina, and aluminum electrolysis is well-established, with strong material guarantee capabilities. Second, there is a significant reduction in the cost of raw materials, and the company has great performance flexibility. Third, some of the aluminum electrolysis capacity of the company has been transferred to Yunnan, which is conducive to the company's long-term development. Fourth, the company has invested in the Guinea iron ore project, expanding its horizontal iron ore resources.

The main points of the Minsheng Securities report are as follows:

The prices of aluminum electrolysis and alumina have risen, significantly improving the company's profitability.

1) Quantity: In the first half of 2024, the company's electrolytic aluminum production was 3.221 million tons, a year-on-year increase of 5.3%. The proportion of Yunnan's electrolytic aluminum production capacity (1.488 million tons) during the dry season was only 7%. Yunnan's production capacity gradually resumed in March 2024 and was basically fully restored by the end of June. It is estimated that Yunnan's electrolytic aluminum production in Q2 was 0.364 million tons. Shandong's electrolytic aluminum production capacity (4.971 million tons) is expected to operate at full capacity. It is estimated that the company's electrolytic aluminum production in Shandong in Q2 was 1.243 million tons. As for alumina, the company's sales volume was 5.507 million tons in the first half of 2024, a year-on-year increase of 2.4%.

Price and profit: In Q2 2024, the market price of aluminum increased by 1490 yuan/ton compared to the previous quarter, alumina increased by 258 yuan/ton, prebaked anodes increased by 37 yuan/ton, while the price of thermal coal decreased by 53 yuan/ton. Due to entering the wet season in Q2, the electricity cost in Yunnan is estimated to slightly decrease. In Shandong, the electrical utilities for aluminum electrolysis mainly come from self-generated power, with costs significantly affected by the thermal coal market price. We estimate the pre-tax profit for aluminum electrolysis in Shandong in Q2 to be 2782 yuan/ton (excluding upstream alumina profits). Additionally, with the rise in alumina prices, both domestic and overseas alumina sectors have improved profitability. According to SMM data, the average profit per ton of alumina in Q2 reached 875 yuan/ton.

Mid-term dividend: The mid-term dividend for H1 2024 is 0.59 Hong Kong dollars per share (H1 2023: 0.34 Hong Kong dollars per share), with a total dividend of approximately 5.59 billion Hong Kong dollars, representing around 56% of the total.

Future Outlook

1) Completing the integration of the industry chain. The company's compliant aluminum electrolysis capacity is 6.459 million tons, with 4.971 million tons in Shandong, and 1.488 million tons in Yunnan; alumina capacity is 19.5 million tons, with 17.5 million tons domestically and 2 million tons in Indonesia; the company's joint Guinea bauxite project has a capacity of 50 million tons, with the company holding a 22.5% stake, equivalent to 11.25 million tons of equity capacity. The company's layout of bauxite, alumina, and aluminum electrolysis is well integrated, with strong raw material security capabilities.

2) Weakening of thermal coal prices, cost concessions to enhance performance flexibility. In Shandong, the electrical utilities for aluminum electrolysis mainly come from self-generation, with costs significantly influenced by the thermal coal market price. As thermal coal prices decline, by the end of June 2024, the 5500 kcal thermal coal price fell to around 850 yuan/ton. Since 2023, prebaked anodes' prices have weakened. There is a clear cost concession on the raw materials side, providing the company with significant performance flexibility.

3) Partial transfer of aluminum electrolysis capacity to Yunnan, green electricity supporting long-term development. In 2019, the company began to shift aluminum electrolysis capacity to Yunnan, where Yunnan Hongtai New Materials is gradually being put into operation. Yunnan's power mainly comes from hydroelectricity. Under carbon neutrality initiatives, the premium for green aluminum has increased, aiding the company's long-term development.

4) Equity participation in the Guinea iron ore project, horizontally expanding iron ore resources. The company's subsidiaries Weiqiao Aluminum and Winning Logistics each hold a 50% stake in WCH. WCH indirectly owns the rights to develop and produce iron ore from Blocks 1 and 2 of the iron ore mine project in Simandou, Guinea. In the future, Weiqiao Aluminum is expected to enjoy corresponding returns on iron ore investments.