Event

Due to the needs of business development, Yiqiu Resources wholly-owned subsidiary Ye Chiu Non-Ferrous Metal (M) Sdn. Bhd. (YCTL) plans to invest and expand a project with an annual production capacity of 1.3 million tons of aluminum alloy ingots in Danrong Langsai Industrial Zone, Johor, Malaysia. The estimated investment amount of the project is about 4 billion RMB, which has been examined and approved by the company's board of directors on October 22.

Brief comment

Expand 1.3 million tons of Malay production capacity to create a global recycled aluminum leader

Fully considering the cost advantages of manpower, energy and convenient transportation in Malaysia, the company decided to carry out the aluminum alloy ingot expansion project in Malaysia. The total investment of the project is expected to be 4 billion yuan. YCTL, a wholly-owned subsidiary, is responsible for the construction and operation. It is proposed to build an annual production line of 1.3 million tons of aluminum alloy ingots on the company's existing land. The infrastructure of the project will be completed at one time. The equipment will be completed in two phases (650000 tons in the first phase and 650000 tons in the second phase). There is no specific expected production time for the time being. The funding sources of the project include, but are not limited to, the company's own funds, bank loans and other financing. The company's recycled aluminum production capacity and aluminum alloy ingot production and sales are expected to continue to rise in the future.

The price difference between overseas waste aluminum and refined aluminum is much higher than that of China, and the advantage of the company's production base in Malaysia is prominent. since 2017, China has gradually tightened its solid waste import policy, and China's recycled aluminum raw materials are tight. At present, the price difference between waste aluminum and refined aluminum is about 2300 yuan / ton, and the price difference between overseas waste aluminum and refined aluminum is about 4500 yuan / ton, and the overseas price difference is more flexible. The gross profit of the company's recycled aluminum tons in 2020 is 2178 yuan / ton, and it is estimated that the company's H1 recycled aluminum ton gross profit will be about 3400 yuan / ton in 2021. As the company has a recycled aluminum production base in Malaysia, it fully enjoys the high-precision waste price difference overseas. Profitability far exceeds the domestic industry average.

If the carbon emission per ton of recycled aluminum is less than 1 ton, it will become an important marginal increment to supplement the global aluminum supply. The global output of recycled aluminum accounts for about 26% of the aluminum supply, and the output of recycled aluminum in China accounts for about 17% of the aluminum supply. The production of recycled aluminum products has the characteristics of lower energy consumption and less environmental pollution than the original aluminum production. According to the energy consumption disclosed in the company's prospectus, the company uses 117.9 cubic meters of gas per ton of recycled aluminum, 5.1kg of fuel oil and 72.5kWh per ton of electricity; calculated according to the carbon dioxide emission coefficient related to the carbon emissions trading network, the carbon emissions per ton of recycled aluminum produced by the company is 0.33t, which is much lower than that of 12 tons of raw aluminum production. China's 14th five-year Plan proposes to take "carbon neutralization and carbon peak" as the main target of the national pollution prevention and control battle, and the output of recycled aluminum accounts for 30%. The recycled aluminum industry is in line with the development direction of new industries actively advocated and encouraged by the state. The company's main products are various types of aluminum alloy ingots, which are important basic materials necessary for national economic construction and the production of consumer goods. As China and other countries around the world attach importance to the issue of carbon neutralization, electrolytic aluminum production as a high energy-consuming field capacity expansion is limited, it is expected that there will be a shortage of raw aluminum supply in the future, recycled aluminum will become an important supplement to the global aluminum supply.

Aluminum alloy ingot business: wholly-owned subsidiary YCTL plans to invest in the expansion of 1.3 million tons of aluminum alloy ingot project, which will greatly increase the future production capacity of the company's aluminum alloy ingot business through global procurement of various waste aluminum resources, after sorting, processing, smelting and other processes at two production bases in Suzhou and Malaysia to produce recycled aluminum alloy products, which are mainly sold to China, Japan and Southeast Asia. The company's operating income of aluminum alloy ingots was 3.85 billion yuan (89%) in 2014 and decreased to 3.7 billion yuan (66%) in 2010. the average annual compound growth rate was-1%. The gross profit of aluminum alloy ingots was 200 million yuan (accounting for 99%) in 2014 and increased to 710 million yuan (78%) in 2020, with an average annual compound growth rate of 23%. In October 2021, the company plans to invest in a new project to expand 1.3 million tons of aluminum alloy ingots, and it is expected that the production capacity of recycled aluminum will increase greatly in the future.

The company now plans a total capacity of 1.944 million tons of aluminum alloy ingots, of which 644000 tons of aluminum alloy ingots are in production and 1.3 million tons of aluminum alloy ingots are planned to be built. Of the 644000 tons of production capacity: 1) the production capacity of Suzhou Taicang production base is 374000 tons; 2) the original production capacity of the production base of Malaysia Yiqiu Company is 51000 tons; and 3) the expansion project of recycled aluminum alloy ingots of Malaysia Yiqiu Company has a production capacity of 218800 tons. The project was put into production at the end of 2015, mainly to meet the needs of Southeast Asia. The planned production capacity of 1.3 million tons is a wholly-owned subsidiary YCTL to invest in the expansion of 1.3 million tons of aluminum alloy ingots. The infrastructure of the project will be completed at one time, and the equipment will be completed in two phases, with 650000 tons in the first phase and 650000 tons in the second phase.

Profitability has improved steadily, with gross profit margin rising to 19% in 2020, and future growth in volume and price will drive performance growth. The output of aluminum alloy ingots reached 293000 tons in 2014 and increased to 311000 tons in 2020, with an average annual compound growth rate of 1%. The sales volume of aluminum alloy ingots reached 290000 tons in 2014 and increased to 325000 tons in 2020, with an average annual compound growth rate of 2%. In 2020, the utilization rate of aluminum alloy ingot capacity of the company is 48%, and the production and marketing rate is 104%. The selling price of aluminum alloy ingots was 13,000 yuan / ton in 2014, falling to 11,000 yuan / ton in 2020, with an average annual compound growth rate of-3%. Gross profit of aluminum alloy ingots was 702 yuan / ton in 2014 and increased to 2178 yuan / ton in 2020, with an average annual compound growth rate of 21%.

Scrap trading business: the acquisition of Metalico company to obtain upstream profits, asset turnover and profitability greatly improve the company's scrap trading business through the recovery of various industrial and household scrap, the use of equipment to separate metal and other recyclable waste, the products are an important source of raw materials for the downstream metal industry, the company has more than 20 waste processing plants, radiating most of the eastern United States It is one of the top 20 metal recycling enterprises in the United States, with customers radiating from the United States, China, Southeast Asia, India and other countries. The profit of waste trade business has grown rapidly in recent years. The company's operating income from waste trade increased from 720 million yuan (19%) in 2016 to 1.48 billion yuan (26%) in 2020. The average annual compound growth rate was 20%. The gross profit of waste trade in 2016 was 40 million yuan (14%), and increased to 140 million yuan (16%) in 2020, with an average annual compound growth rate of 35%.

After the acquisition of Metalico in 2016, the company's business extended upward into the US scrap metal recycling market, making profits in the upper reaches of the industrial chain, reducing the loss of intermediate links, and greatly improving asset turnover and overall profitability. The company's waste trade business output increased from 215000 tons in 2016 to 514000 tons in 2020, with an average annual compound growth rate of 24%. The sales volume of waste trade business increased from 219000 tons in 2016 to 495000 tons in 2020, with an average annual compound growth rate of 23%. The price of the company's waste trade ton was 3292 yuan / ton in 2016, and dropped to 2982 yuan / ton in 2020, with an average annual compound growth rate of-2%. The gross profit of the company's waste trade ton in 2016 increased to 292 yuan / ton in 2020, with an average annual compound growth rate of 10%. It is expected that the waste trade business will maintain steady growth in the future.

Investment suggestion

It is estimated that the company's return net profit from 2021 to 2023 will be 9.4,11.2 and 2.1 billion yuan respectively, and the corresponding share price PE will be 11.4,9.5 and 5.1 times respectively. Taking into account the company's industry status and future growth, the company will maintain its "buy" rating.

Risk analysis

Repeated outbreaks have led to reduced risks in the import of recycled aluminum raw materials; liquidity tightening risks in aluminum prices; risks in overseas projects affected by local environmental policies; and lower-than-expected risks in the commissioning of new projects.