Event

According to the semi-annual report released by the company in 2022, the operating income in the first half of 2022 was 3.98 billion yuan, an increase of 0.7% over the same period last year; the net profit was 270 million yuan, down 36.5% from the same period last year; and the non-return net profit was 240 million yuan, down 43.3% from the same period last year. The comments are as follows:

Brief comment

The rapid decline in aluminum price led to a 37% drop in home net profit in the first half of the year compared with the same period last year.

In the first half of 22, the company achieved operating income of 3.98 billion yuan, an increase of 1% over the same period last year; net profit of 270 million yuan, down 37% from the same period last year; and net profit of 240 million yuan, down 43.3% from the same period last year. Based on this, it is estimated that 2022Q2 achieved operating income of 2.02 billion yuan, an increase of 3.1% over the same period last year and 2.6% month-on-month growth The net profit returned to the mother was 120 million yuan, down 45.7% from the same period last year and 18.7% from the previous month. Aluminum prices fell rapidly from 21,000 yuan / ton to 17,000 yuan / ton in the first half of 22, and Q2 aluminum price in 22 years was 266,000 yuan / ton, up 11 percent from the same period last year, down 7 percent from the previous month. At the same time, the company produced 118000 tons of H1 recycled aluminum alloy ingots in 22 years, down 20% from the same period last year. The main reasons are: 1) "recycled cast aluminum alloy raw materials"

With the increasingly stringent implementation of import standards, the import of recycled aluminum raw materials in domestic enterprises is blocked and the shortage is intensified, the company adjusts the production and marketing layout and cancels domestic processing of supplied materials; 2) the aluminum price is low in the first half of the year, the company chooses to repair the production line to ensure that the company can fully release its production capacity when the market turns warm in the later stage. The rapid decline in aluminum prices has led to impairment losses (- 37.89 million yuan) and reduced production due to maintenance.

The bottom of recycled aluminum profit is established, capacity expansion will lead to performance doubling the company's recycled aluminum business profit is mainly contributed by Malaysia capacity base (about 220000 tons of recycled aluminum production), aluminum price has dropped 9.6% to 18,000 yuan / ton since the beginning of 2022, according to the LME aluminum price-US scrap aluminum price spread tracked by our team, it has narrowed to 4500 yuan / ton from a high of 5000 yuan / ton at the beginning of the year. We estimate that the processing cost of Malay recycled aluminum ton is 1200 yuan / ton, the processing gross profit space is reduced from 3800 yuan / ton to 3300 yuan / ton, and the net profit per ton of Malay recycled aluminum in the first half of the year is about 1800 yuan / ton (excluding impairment loss is about 2200 yuan / ton). As Q2 aluminum price has fallen below the industry break-even line, it is expected that there is little room for aluminum price to decline in the future, and is expected to pick up with the slowdown of supply growth and industrial demand. The bottom of the profit of overseas recycled aluminum production capacity has been established, and we believe that the company's Malay capacity will maintain a net profit of more than 2000 yuan / ton in the future. With the expansion of 1.3 million tons of capacity on the ground, the company's performance is expected to double in line with capacity expansion from next year.

In the future, the room for new primary aluminum production capacity is limited, and the demand for aluminum is expected to pick up in the second half of the year. In the first half of 2022, the inflation rate in the United States remains high, and the Federal Reserve's interest rate increases one after another. on the supply side, with the gradual easing of power supply, domestic electrolytic aluminum production capacity in Yunnan, Guangxi, Gansu and other regions resumed production, new production capacity was released, and the marginal domestic electrolytic aluminum production capacity increased. According to Antaike, by July 2022, China had built a production capacity of 44.04 million tons of electrolytic aluminum, of which the operating capacity was 41.32 million tons, an increase of 3.62 million tons over the end of 2021. The utilization rate of production capacity reached 94%, an increase of 5.0% over the same period last year and 8.0% higher than that at the end of 2021. On the demand side, due to the repeated impact of the epidemic, there were varying degrees of work and production shutdowns in many parts of the country, superimposed by the "real estate loan suspension storm." downstream consumption is sluggish. Under the combination of triple factors, aluminum prices have fallen 9.6 per cent since the beginning of the year. At present, the domestic electrolytic aluminum production capacity has approached the red line of 45 million tons, and the new capacity is limited. Superimposed by the recent global power shortage, the primary aluminum production has been reduced and expanded. It is expected that aluminum prices will pick up with the pick-up in demand in the second half of the year.

The Malaysia project is progressing steadily, with a capacity of 650000 tons expected to be put into production in the second half of 2023. In order to make full use of its transnational operation advantages, Malaysia's labor and energy cost advantages and convenient transportation advantages, the company has decided to expand the annual production of 1.3 million tons of aluminum alloy ingots in Malaysia. In the first half of 2022, the project progressed steadily. At present, some civil works have been completed, the relevant production equipment has been put in place one after another, and the equipment and training of procurement, production and sales personnel have also been carried out steadily as planned. It is expected that all infrastructure construction and the release of the first phase of 650000 tons of capacity will be completed in the second half of 2023, and the new capacity is expected to contribute 300000 tons of new production in 2023. The company relies on the disassembly capacity of Metalico in the United States (more than 20 dismantling plants can disassemble and dispose of 100000 vehicles) and AME's global waste procurement network, which can better protect the raw material supply for the future capacity expansion of recycled aluminum in Malaysia.

Energy shortage at home and abroad may lead to a decline in electrolytic aluminum production, and the low energy consumption attribute of recycled aluminum is expected to fully benefit China: affected by extremely high temperature weather, hydropower supply decreases and electricity demand increases greatly, and the tense situation of power supply and demand intensifies. Domestic Sichuan, Chongqing and other places issued "power restriction orders". As the production of electrolytic aluminum consumes more than 13000 degrees of electricity per ton, under the tight situation of power supply. The scale of reduction of electrolytic aluminum production in Sichuan Province has been expanded to nearly 400000 tons, and there is no timetable for resuming production. The original plan to resume production was postponed due to power shortage in Guangxi; taking into account the current situation of production reduction and delay in Sichuan, we lowered our forecast of domestic electrolytic aluminum production from 40.7 million tons to 40.4 million tons in 2022, corresponding to the annual surplus from 500000 tons to 200000 tons, that is, the carry-over inventory at the end of the year is only 1 million tons; abroad: due to the conflict between Russia and Ukraine and other factors, the European region is short of energy. Since the fourth quarter of last year, electrolytic aluminum in Europe has begun to reduce production one after another due to the impact of high electricity prices, with a cumulative reduction of more than 1 million tons by mid-August. At present, the remaining operating capacity is 1.67 million tons, of which about 400000 tons are not identified under the electricity quotation contract, that is, these 400000 tons of electrolytic aluminum production capacity still faces the threat of production reduction under the stubbornly high electricity prices. According to Macquarie Bank, energy currently accounts for about 80 per cent of the cost of electrolytic aluminum production in Europe, with a historical average of 40 per cent. The closure of European smelters will reduce aluminum production capacity by 750000 tons this winter, and additional production cuts will increase the supply shortfall. It is estimated that the gap between global supply and demand of electrolytic aluminum will reach about 800000 tons this year.

The production energy consumption of recycled aluminum is less than 5% of that of electrolytic aluminum, and carbon emissions account for only 2% of electrolytic aluminum; short-term power supply is expected to have little impact on the production of recycled aluminum, and the decline in global electrolytic aluminum supply may lead to a rebound in aluminum prices in the medium term. Long-term recycled aluminum industry benefits from carbon neutralization policy and is expected to usher in rapid development.

Actively layout heat-free integrated die-casting aluminum alloy ingot technology, the added value of the products is expected to greatly improve the company's domestic customers are mainly all kinds of automotive parts die-casting supporting enterprises, such as Ningbo Xusheng, Quanfeng Automobile, etc., accounting for 79%. As the subtle differences in the composition and physical properties of aluminum alloy ingots are closely related to the qualified rate of customer products, the supply relationship between the company and downstream customers is relatively stable, and the customer stickiness is high. The company's automotive aluminum alloy products enjoy a higher processing fee premium. According to the 21 annual report data, the gross profit per ton is 1700 yuan higher than that of mechanical hardware and other products, and the gross profit margin is 6 percentage points higher to 22%. In recent years, with the rapid development of the domestic new energy vehicle industry, in order to meet the technological upgrading needs of downstream customers, the company has set up a heat-free integrated die-casting aluminum alloy ingot research and development project group. and many times with well-known universities, research institutes and industry associations to discuss and exchange views. Different from the mainstream market research of using primary aluminum as the main material of heat-free die-casting aluminum, it is found that the company uses recycled aluminum as raw material to overcome the deformation and surface defects caused by thermal stress in the heat treatment process of large castings. in order to improve the strength and toughness of the raw materials, the company has completed the first batch of batching tests. It is expected that with the volume of heat-free alloy products, the added value of the company's products is expected to be greatly increased.

Investment suggestion

It is estimated that the return net profit of the company from 2022 to 2024 is 6.9,13.8 and 2.13 billion yuan respectively, and the PE of the corresponding share price is 14.3,7.1 and 4.6 times respectively. Taking into account the future growth of the company, the company maintains its "buy" rating.

Considering the high growth of the company in the future and the comparable valuation of the die-casting recycled aluminum company, the 23-year performance is 20 times PE, corresponding to the target market capitalization of 27.6 billion, which is 2.8 times higher than the current price.

Using the PEG valuation method, considering the high growth of the company's CAGR101%, in the next four years, the PEG is only 0.28, and the target PEG1, corresponding to the company's target market capitalization of 35 billion, has 3.6-fold growth space.

Risk hint

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.