A leading enterprise in the field of aluminum recycling. The company focuses on the scrap aluminum reprocessing business and is one of the leading enterprises in the field of aluminum resource recycling in China. The company has overseas business entities such as Yiqiu in Malaysia, AME in the US, and Metalico, and has established an international raw material procurement and product sales system. As of the third quarter report of 2023, Yiqiu (Hong Kong) Limited's shareholding ratio reached 35.64%, making it the controlling shareholder of the company. Judging from the company's revenue and gross profit structure, the vast majority of the company's revenue comes from aluminum ingot sales and scrap trade, accounting for 94.2% in 2022; at the same time, it contributed 85.6% of gross profit.
The space in the recycled aluminum industry is expected to increase by more than three times. According to the different sources of raw materials, aluminum can be divided into primary aluminum and recycled aluminum. Raw aluminum refers to aluminum metal produced through traditional aluminum manufacturing processes such as bauxite mining, alumina refining, and electrolytic aluminum production; recycled aluminum refers to aluminum metal or aluminum alloy obtained by re-melting and refining from scrap aluminum or aluminum-containing waste, and is a recycled metal aluminum. According to Baichuan Yingfu data, China's total production of raw aluminum and recycled aluminum in 2022 is 48.22 million tons. Assuming that China's electrolytic aluminum production stabilizes, if recycled aluminum production increases to 30%, it will need to produce 14.47 million tons of recycled aluminum every year, which still has 76.0% space compared to the 8.22 million tons in 2022; if recycled aluminum production increases to close to the US ratio, or 70%, it will need to produce 33.75 million tons of recycled aluminum every year, which is more than four times the production of 8.22 million tons in 2022.
Malaysia's 1.3 million tons/year aluminum ingot project will strongly increase the company's production capacity. In October 2021, the company announced foreign investment to invest and expand an aluminum alloy ingot project with an annual output of 1.3 million tons in the Tanjung Langsai Industrial Zone in Johor, Malaysia. The company's production base in Malaysia was founded in 1984. It has been rooted in the local area for nearly 40 years, and has accumulated rich experience in construction and operation in the field of recycled aluminum in Malaysia. The current fund-raising site is close to the original production base, which can complement resource advantages and quickly form effective production capacity. In April 2023, the company plans to issue shares to specific targets. The total capital raised will not exceed 1.5 billion yuan (including the number of shares), and the maximum number of shares will be 600 million shares. The net amount after deducting issuance fees will be invested in an aluminum alloy ingot expansion project with an annual output of 1.3 million tons in Malaysia.
The infrastructure construction of the project was completed once, and the equipment was completed in two phases. The first phase was 650,000 tons, the second phase was 650,000 tons. The infrastructure and phase I equipment construction period is expected to be 2 years, and the second phase of equipment construction is expected to be 1 year. Based on the 2023 mid-year report describing the progress of the expansion project, we expect the first phase of 650,000 tons to be implemented in 2024 and contribute part of the production volume, while the second phase of 650,000 tons is expected to be implemented in 2026.
Profit forecast. In terms of price, we judge that aluminum prices have remained stable. In 2023, China: average price: aluminum (A00): The average value of the Yangtze River nonferrous market is 18,700 yuan/ton. We expect the average price of aluminum to be 19,000 yuan/ton in 2024-2025. In terms of production, we expect the first phase of the Malaysian project to contribute in 2024 and the second phase of the project to land in 2026. We expect the company's aluminum alloy ingot production from 2023 to 2025 to be 24.6/28.1/348,000 tons, respectively. In terms of comparable companies, we selected four recycled aluminum production and processing companies, namely Nanshan Aluminum, Mingtai Aluminum, Lizhong Group, and Yinbang Co., Ltd. as comparable companies. Based on the above volume and price assumptions, we expect the company to achieve revenue of 68.5/80.6/10.13 billion yuan in 2023-2025; achieve net profit of 2.1/4.6/63 billion yuan, with year-on-year growth rates of -46.2%, 124.5%, and 36.5% respectively; and achieve EPS of 0.09/0.21/0.29 yuan, respectively. As of the close of January 24, 2024, the company's market value of 5.2 billion corresponds to 2023-2025 PE of 25.1x, 11.2x, and 8.2x, respectively. The 2024-2025 PE was lower than the average of comparable companies, and for the first time, coverage gave it an “gain” rating.
Risk warning: New project construction falls short of expectations; raw material supply-side disturbances lead to rising costs; macroeconomic downside risks.