Matters:
Nanshan Aluminum released its semi-annual report on August 25. In the first half of the year, it achieved operating income of about 14.501 billion yuan, a year-on-year decrease of 19.04%; net profit of 1,313 billion yuan, a year-on-year decrease of 28.08%; and basic earnings per share of 0.11 yuan.
Commentary:
The decline in the prices of thermal coal and pre-baked anodes has led to an expansion in the profit of electrolytic aluminum. Nanshan Aluminum's electrolytic aluminum has a complete power supply of its own electricity, and the cost is largely dependent on thermal coal. After entering the second quarter, the upstream coal price of electrolytic aluminum continued to fall, and the cost of self-owned electric smelters continued to fall. According to Wande data, the average price of Bohai Rim thermal coal (Q5500K) in Q2 in 2023 was 726 yuan/ton, down 0.93% from the previous month and 1.22% from the previous year; in terms of pre-baked anodes, the industry supply was relaxed, and the price of anode began to fall unilaterally from the beginning of the year. In 2023, the average price of the pre-baked anode market was 4955 yuan/ton, down 21.94% from the previous year, down 33.16% from the previous year.
The decline in the price of thermal coal and anodes has led to an expansion of profits in the electrolytic aluminum sector.
Firmly implement the high-end development strategy, and the proportion of high-end products has further increased. The company is an aluminum deep processing enterprise with a full industry chain, focusing on developing high-value-added products represented by automobile plates, aviation boards, and power battery foils. The sales volume of 23H1 high-end products accounted for about 14% of the company's total sales of aluminum products, an increase of about 1 percentage point over the same period last year; the gross profit of high-end products accounted for about 29% of the company's total gross profit of aluminum products, an increase of about 8 percentage points over the same period last year. Taking advantage of the “lightweight automobile” policy, the company took the lead in laying out the new energy market and expanding the productivity of aluminum sheets and strips. Currently, it has a production capacity of 200,000 tons of automobile plates and 200,000 tons of production capacity under construction. In the future, with the release of production capacity for high-end products, the profit share of the company's high-end products is expected to further increase.
The green transformation continues to advance. Under the influence of policies such as resource conservation, energy saving and emission reduction, and environmental protection, the company funded the establishment of Longkou Nanshan Renewable Resources Co., Ltd., which is mainly engaged in the processing and treatment of metal waste and debris. After the project is completed, it can achieve energy saving, emission reduction and clean production in the industrial chain, bringing about an upgrade in the company's production capacity structure. In the first half of 2023, some of the company's equipment has already entered trial production. Furthermore, from December 2022 to March 2023, the company transferred 336,000 tons of electrolytic aluminum production capacity. In the future, it will mainly rely on recycled aluminum to provide raw material guarantees, taking a step towards a green transformation.
China's electrolytic aluminum production capacity is getting closer to the production ceiling set by supply-side reforms, and there is obvious flexibility in the economic recovery process. Recently, the Yunnan region has actively resumed production. According to SMM statistics, as of August 8, the domestic electrolytic aluminum production capacity was about 45.19 million tons (including some that have been built and not put into production and not withdrawn from production capacity), and the domestic electrolytic aluminum operating production capacity has grown to around 42.16 million tons, a record high. The operating rate has reached 93.3%, and is getting closer to the ceiling of electrolytic aluminum production capacity. If downstream demand picks up in the third and fourth quarter, the elasticity of electrolytic aluminum is expected to show.
Investment suggestions: In the context of limited domestic electrolytic aluminum production capacity, Nanshan Aluminum is undergoing green aluminum transformation on the one hand and high-end product transformation on the other. At the same time, Indonesia's alumina and electrolytic aluminum projects contribute to continued growth. We are optimistic about the growth of the company's performance. Considering the economic recovery situation, the actual increase in aluminum prices fell short of expectations. The company is expected to achieve net profit of 29.29/33.63/3,769 billion yuan in 2023-2025 (previous value of 38.40/45.69/50.049 billion yuan). Due to Nanshan Aluminum's transformation to high-end, the cyclical performance is expected to decline. Reference comparable companies gave Nanshan Aluminum 12 times PE in 2024. The reasonable market value is 40.4 billion yuan, and the corresponding stock price is 3.45 yuan. There is 10% space compared to the current “recommended” rating.
Risk warning: (1) the domestic economic recovery fell short of expectations; (2) there was a clear recession overseas; (3) the release of industry supply exceeding expectations.