According to the latest report from CITIC Securities APP, Zhaojin International recently released a research report stating that the aluminum industry is one of the industries highly sensitive to the powerful market support policies introduced by China. In addition, due to the US entering an interest rate cut cycle leading to a weaker US dollar exchange rate, combined with relatively limited new aluminum supply, the institution predicts a short-term rise in aluminum prices, which will become a major catalyst for Chinahongqiao (01378). The institution has raised its profit forecast for Chinahongqiao for 2024-2026, predicting an increase of 9-12%, mainly due to the upward revision of the institution's assumptions for aluminum and alumina prices.

Zhaojin International pointed out in the research report that according to their estimate, for every 1% increase in aluminum prices, it will drive a 4% increase in Chinahongqiao's profits. Currently, the valuation of Chinahongqiao is at a mid-term level (2024 P/E of 7x), with an attractive yield of 7%. The institution has raised Chinahongqiao's target price from the previous 17.9 Hong Kong dollars to 19.6 Hong Kong dollars, based on a 2024 P/E of 9.8x, while maintaining a "buy" rating.

In terms of supply, in August, China's aluminum production growth rate slowed to a year-on-year 1.3% (compared to 5.3% and 2.5% in June and July, respectively), with a capacity utilization rate of around 96.7%. According to IAI statistics, overseas aluminum production in August increased by 1% year-on-year (1% and 1.5% in June and July, respectively). The institution stated that given China's set maximum capacity of 45 million tons (about 60% of the global supply scale), the institution believes that there is limited room for supply increase. At the same time, the growth of overseas market capacity is also relatively limited.

Furthermore, in the short term, demand is also benefiting from policy support. Zhaojin International forecasts that China's construction industry (including real estate and infrastructure) and the automobile industry account for 16% and 14% of global aluminum demand, respectively. The institution believes that the Chinese government's policies will help stabilize the demand expectations in these sectors. From a long-term perspective, the institution continues to be bullish on the trend of lightweight automobiles and the rapid growth of installed solar capacity, which will become structural growth drivers for aluminum demand.

The report points out that the latest Shanghai aluminum price (including value-added tax) has risen to 20,395 yuan per ton, up 3% since early September. In the third quarter of 2024, the average Shanghai aluminum price was 19,600 yuan per ton, a year-on-year increase of 4%; in terms of aluminum oxide price momentum, it remains very strong, with a high year-on-year increase of 35%. Zhaojin International predicts that Chinahongqiao's average selling price (ASP) for aluminum and alumina will rise by 5% and 34% year-on-year, respectively, in the second half of 2024.

In terms of valuation, Zhaojin International pointed out that over the past decade, the average forward P/E ratio of Chinahongqiao has been about 6x, with the stock usually reaching around 10x P/E during industry cycle peaks (except for 2017), falling to about 3x at cycle troughs (except for 2020 affected by the COVID-19 pandemic). Therefore, Zhaojin International's latest target price is 19.6 Hong Kong dollars, based on a forecast 2024 P/E of 9.8x, remaining the same, equivalent to about 1.5 standard deviations higher than the historical average of 6x. The institution stated that the reason for adopting an assumption above the average level is based on the possibility of the aluminum industry entering an upward cycle.