1H23 results in line with our expectations

Nanshan Aluminum announced its 1H23 results: The firm's revenue fell 19.04% YoY to about Rmb14.50bn, net profit attributable to shareholders dropped 28.08% YoY to about Rmb1.31bn, and recurring net profit declined 28.90% YoY to about Rmb1.28bn, in line with our expectations. In 2Q23, the firm's revenue fell 15.32% YoY but rose 12.17% QoQ to about Rmb7.67bn, net profit attributable to shareholders dropped 28.06% YoY but rose 53.03% QoQ to Rmb794mn.

Trends to watch

Sales volume of high-end products to keep rising; such products to account for growing share in profit. The firm focuses on developing high value-added products such as auto sheets, aviation sheets, and automotive battery foils. The gross profit of high-end products accounted for 29% of the firm's total gross profit from aluminum products in 1H23, up 8ppt YoY. Looking ahead, we expect the expansion and ramp-up of the firm's production capacity for automotive aluminum sheet products to accelerate. The firm expects its production capacity for such products to be 0.4mnt/year in 2024 and it plans to increase the production capacity to 0.7mnt/year in the long term. According to the firm, demand for automotive aluminum sheets is growing rapidly and technological barriers to entry for such products are high.

As the first large-scale supplier of interior and exterior aluminum sheets for passenger vehicles in China, the firm currently has 0.2mnt/year of production capacity in operation and it expects its 0.2mnt/year newly built production capacity to be put into operation in 2024. In addition, based on market demand, we think the firm could convert 0.3mnt/year of its existing aluminum can material production capacity into automotive aluminum sheet production capacity. This could increase its total production capacity for automotive aluminum sheets to 0.7mnt/year.

Meanwhile, the global aviation industry is recovering, and we think domestic mass production of large airplanes will boost demand for aluminum materials used in aviation. The firm is the only domestic firm to supply aviation material to both domestic and world-renowned aircraft manufacturers such as Boeing, Airbus, and COMAC. As overseas aviation industries recover and domestic mass production of large airplanes accelerates, we expect the firm to continue ramping up its 50,000t production capacity for aviation aluminum sheets. We expect the proportion of high-end products in the firm's total profits to rise further.

In addition, production capacity of battery foils continues to increase and targets the high-end market. The firm has built a 21,000t production line, and it has become a core supplier to well-known clients such as CATL and China Aviation Lithium Battery (CALB). Looking ahead, the firm aims to develop high-performance automotive battery foils and targets the high- end market.

Shifting focus to deep processing; stepping up efforts to establish an integrated presence overseas. In the domestic market, the firm strategically abandoned high-cost electrolytic aluminum production capacity upstream to further focus on downstream deep processing. In 1H23, the firm transferred its electrolytic aluminum quota of 336,000t. The firm has 1.70mnt of alumina production capacity and 480,000t of electrolytic aluminum capacity. In the overseas market, the firm commenced operation of its 2mnt/year alumina production capacity at an Indonesian industrial park in October 2022. The firm plans to also build a 0.25mnt/year electrolytic aluminum project and a 0.26mnt/year carbon project to expand its presence in downstream segments of the industry value chain and improve its integrated presence in the industry value chain. The firm expects the construction of these projects to be completed in 2026.

Financials and valuation

We maintain our 2023-2024 earnings forecast unchanged. The stock is trading at 9.3x 2023e and 9.0x 2024e P/E. We maintain an OUTPERFORM rating and keep our target price at Rmb4.19, implying 12.7x 2023e and 12.3x 2024e P/E, offering 36.5% upside.

Risks

Sharp fluctuations in aluminum price; progress of projects disappoints; recovery of demand in downstream industries falls short of expectations.