China Hongqiao Group - Superior cost advantage from an integrated value chain
- Upgrade to BUY, TP raised to HKD13.9, based on 1.1x FY25F P/B against 19.5% ROE in FY25F
- World's top player with 8% of global capacity, equipped with an integrated value chain with secured overseas bauxite supply
- Earnings to remain elevated from FY24-26F on strong aluminium prices due to supply constraints and cost advantages from cheap hydropower
- Trading attractively at 0.9x forward P/BV and 4.8x forward P/E, with a high dividend yield of c.10%
World's leading aluminium manufacturer. China Hongqiao is the world's leading aluminium manufacturer covering the entire value chain from bauxite to aluminium recycling. The group has the globally largest aluminium capacity (6.46mn tons/year), taking up 14% and 8% of China’s aluminium capacity and global capacity, respectively. Its diverse product portfolio includes alumina, hot liquid aluminium alloy, aluminium alloy ingots, rolled cast aluminium alloy products, aluminium busbar, high-precision aluminium plates with foil, etc.
Stable cost advantage from integrated industrial chain. The company constructed an integrated upstream to downstream industrial chain to ensure raw materials cost stability and optimized the energy structure to decrease energy cost. The company’s unremitting efforts have contributed to a stable cost advantage, and it was able to maintain a higher profit margin when alumina prices increased sharply.
Secured upstream material supply channels in the overseas. Hongqiao has built an integrated industry chain, as it proactively integrated its overseas bauxite supply from Guinea, Indonesia, and Australia. It owns a 22.5% share in SMB, which could produce over 50mn tonnes of bauxite each year in Guinea and fulfill the raw material requirement of the company. The company has alumina capacity of 17.5mn tonnes in Shandong and 2mn tonnes in Indonesia. The bauxite used for alumina capacity in Indonesia is locally procured.
Aluminium capacity relocation to optimize power structure. In order to decrease power cost and meet clean energy requirements by replacing thermal power to hydropower, Hongqiao plans to relocate part of its aluminium capacity of 6.46mn tonnes in Shandong to Yunnan. By now, 2.03mn tonnes of aluminium capacity has been successfully moved to Yunnan, and 1.5mn tonnes of which are fully operational. Moreover, the company plans to build several clean energy power stations, such as photovoltaic power, to form a green power supply with the co-existence of various energy sources, and to meet government requirements for clean energy.
Successful optimization of debt structure. The group continued to carry out efficient capital management to optimize the capital structure and improve the efficiency of capital utilization. The bonds and notes issued received a gratifying market recognition and high subscription, which could help to reduce effective interest rates in the long term. By 1H24, the interest coverage ratio improved to 13.23x from 7.21x in 1H23.
We expect c.23% earnings CAGR for FY23-26 on strong price momentum and cost advantages.
1. Sales volume: We expect the group’s aluminum and alumina products sales volume to increase under the current capacity constraints through improving production efficiency and capacity utilization. We expect the sales volume of aluminium fabrication products to increase by c.10% CAGR by 2026 driven by the strong demand from NEV lightweighting spare parts.
2. ASP: We expect the company’s ASP of aluminum products to increase by 5%, 3%, 2% p.a. during FY24-26F based on strong aluminum price momentum. The company’s unremitting R&D and capital expenditures on secondary aluminium, lightweighting, integrated die casting, etc will help to exploit more potential downstream for high ASP aluminum alloy products.
3. GPM: We expect the company’s GPM of aluminium and alumina products to remain high, given our positive outlook on metal prices (Our aluminum price forecasts during 24-26F is USD2450/2550/2650 per ton) and the company’s cost advantages from its integrated value chain, especially from low-cost bauxite resources. The company also has rich stock for coal to mitigate impact from potential power cost increase.
4. Revenue structure: Revenue from China contributed to c.94% of total revenue of the group in 1H24, while we expect a diversifying revenue structure especially from India and ASEAN backed by strong capital construction demand. The group’s revenue from India increased by 71% y/y in 1H24.
Upgrade to BUY and raise TP to HKD13.9 on c.23% earnings CAGR by 2026, attractive valuation and high dividend yield. We revised up the company’s EPS to Rmb2.09/2.19 for FY24-25F by 79% and 58% respectively incorporating higher aluminum price assumptions, and added EPS forecasts for FY26F at Rmb2.27, which translates into attributable earnings growth CAGR of c.23% during FY23-26F. The company is attractively traded at 0.9x forward P/BV and 4.8x forward P/E, and has a high dividend yield of c.10%. Upgrade to BUY with TP of HKD13.9 (vs. HKD10 previously), derived from FY25F BVPS of HKD12.66 and assigned P/BV of 1.1x (in line with peers’ average), against 19.5% ROE in FY25F.
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1. | DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, or their subsidiaries and/or other affiliates have a proprietary position in Aluminum Corp of China Ltd (2600 HK) recommended in this report as of 24 Sep 2024. |
2. | Compensation for investment banking services: |
3. | DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for China Hongqiao Group Ltd (1378 HK) and Aluminum Corp of China Ltd (2600 HK) in the past 12 months, as of 31 Aug 2024. |
4. | Disclosure of previous investment recommendation produced: |
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