The restructuring has already been reversed. The company has been deeply involved in the aluminum industry chain for many years. In 2019, due to reasons such as the company's efforts in high-end aluminum processing but a long return on investment cycle, compounded by the relocation of electrolytic aluminum production capacity in Henan, etc., the company was subject to a delisting risk warning. In 2021, after restructuring, the balance and liability structure was optimized, and operating conditions improved. By the end of 2022, the company's ROE (dilution) had increased to 8.7%, the highest level in nearly 10 years.

Electrolytic aluminum equity production capacity continues to increase, and aluminum processing capacity is steadily being built. The company has an electrolytic aluminum production capacity of 750,000 tons, including 500,000 tons of “green hydropower aluminum” production capacity in Guangyuan, Sichuan, and 250,000 tons of “thermal power aluminum” production capacity in Gongyi, Henan. Among them, the company enjoyed equity production capacity of about 501,900 tons. In addition, the company completed the acquisition of 25% of Zhongfu Aluminum's shares in December this year, and the company's equity production capacity increased to 630,000 tons. At the same time, the company's aluminum processing projects are also continuing to advance, and aluminum processing production capacity will eventually increase to 690,000 tons. In terms of recycled aluminum, the company has planned a 500,000 ton project to help the company form a “green hydroelectric aluminum” + “recycled aluminum” dual low-carbon layout. Among them, the UBC alloy liquid project with an annual output of 150,000 tons is undergoing equipment installation.

The three supporting industries are producing in an orderly manner. In terms of coal, the company has a coal production capacity of 2.25 million tons. After going through a shutdown and rectification, production capacity of 1.2 million tons has now resumed, and another 450,000 tons are being prepared to resume production. In terms of electricity, the company has 3 thermal power units with a total installed capacity of 900,000 kilowatts, which can not only meet the production of electrolytic aluminum in the Gongyi region, but also earn revenue through export sales. In terms of carbon, the company has an annual production capacity of 180,000 tons of carbon. It mainly provides anode carbon blocks for production in the Gongyi region. Currently, the company is investing in two phases to build a post-calcined coke project with an annual output of 300,000 tons.

There are profound changes on both the supply and demand sides, and the “resource-like” attributes of electrolytic aluminum will gradually become apparent. Based on cycle recovery, and more importantly, industrial structural transformation, both the supply and demand sides of electrolytic aluminum are undergoing profound changes:

1) On the supply side, the domestic power supply conflict for electrolytic aluminum is not hydropower, but rather that the electricity supply may still face major challenges; unfortunately, during the transformation of the energy system and the construction of new energy sources, traditional energy sources seriously reduce capital expenditure and raw material competition, which will eventually lead to a shortage of petroleum coke, another raw material for the production of electrolytic aluminum, which will have a more profound impact on global electrolytic aluminum production in the medium to long term.

2) On the demand side, traditional demand will slow down in the context of domestic building security and countercyclical adjustment. Demand for new energy sources (NEVs, photovoltaics, etc.) will drive a trend rebound in demand for electrolytic aluminum. The overall impact is constantly showing, with an average annual demand growth rate of about 2-3%.

We judge that the electrolytic aluminum industry chain is booming or showing a spiral rise. As prices are reshaped, the “resource-like” attributes of the electrolytic aluminum industry will also be re-understood.

Profit forecast and investment rating: Assuming that the price of electrolytic aluminum in 23-25 is 1.88/2.30/2.5 million yuan/ton, the company is expected to achieve operating income of 177/212/22.9 billion yuan in 2023/2024/2025, with net profit of 11/20/23 billion yuan, corresponding EPS of 0.28/0.51/0.57. The current PE corresponding to the stock price is 12.1/6.7/6.0 times, respectively. The valuation for 24 and 25 is lower than the industry average. The initial rating gives the company a “buy” rating.

Risk warning: Commodity price fluctuations, project construction falling short of expectations, risk of deviations in industry scale estimates, and risks of untimely updates to public data used in research reports.