Net profit increased sharply year over year, optimistic about medium- to long-term aluminum fundamentals

China Aluminum announced a pre-increase in its 2023 results. It is expected to achieve net profit of 6.3 billion to 7.3 billion yuan (median value of 6.8 billion yuan) for the whole year, in line with Huatai's forecast (6.56 billion yuan), and an increase of 50%-74% (median value of 62.2%) over the previous year. Although there was a certain decline in the average price of electrolytic aluminum throughout 2023, the sharp decline in costs drove the industry's profits to improve quarterly, benefiting from the company's significant year-on-year increase in performance. Furthermore, the company's continuous deepening of cost reduction and efficiency and asset optimization work has also contributed to the company's performance enhancement. We believe that the fundamentals of the electrolytic aluminum industry will face a continuous tightening trend under the influence of multiple factors such as industry capacity ceiling restrictions, low social inventories, and the continued growth of aluminum used in photovoltaics and new energy vehicles. Considering the high certainty of China Aluminum's A/H “buy” rating, the target price for H shares is HK$4.8 (1.28 x 23E BVPS $3.40, which is consistent with the average PB since the company went public); the target price for A shares is 7.8 yuan (80% premium over H shares, consistent with the A/H premium since listing). 2023-25E EPS is 0.38/0.59/0.75 yuan.

Key projects are yet to be launched, and leading companies still have potential to expand

China Alcoa 4Q23 is expected to achieve net profit of about 95-1.95 billion yuan (vs. 3Q23 1.94 billion yuan). Judging from the quarterly profit performance of the industry, we believe that the main business should be roughly flat month-on-month, but R&D expenses and asset impairment expenses need to be disclosed in the annual report. According to SMM statistics, the profit of the electrolytic aluminum industry declined slightly month-on-month in 4Q23, but the profit of the alumina industry increased slightly. In terms of key project construction, the company's Guangxi Huasheng Phase II 2 million-ton alumina project is progressing smoothly and is expected to be put into operation by the end of 2024. The company's Huayun Phase III 420,000 ton electrolytic aluminum project (2H24 is expected to be put into operation, with a net increase of 170,000 tons of production capacity) and China Alcoa's 500,000 ton pressure reduction project in Qinghai (1H25 is expected to be put into operation, a net increase of 100,000 tons of production capacity) will still further expand the company's production capacity as the entire industry is close to ceiling limits.

Industry capacity restrictions are compounded by new demand, and the profit center of the 2024 industry is expected to move slightly upward. In the short term, we believe that the fundamentals of electrolytic aluminum will remain weak in the off-season, and aluminum prices may mainly follow changes in macro sentiment. The domestic central bank announced a reduction in deposit reserves last week to give a certain boost to domestic market sentiment. The pace at which the Federal Reserve cuts interest rates will still be the main factor dominating the commodity market. Looking at medium- to long-term fundamentals, as domestic electrolytic aluminum production capacity basically hits the production ceiling, the risk of potential interference with electrolytic aluminum production during the dry water period in the southwest region, continued low social inventories, and the combined influence of demand for aluminum used in photovoltaics and electric vehicles under the development trend of new energy sources, we believe that supply and demand in the electrolytic aluminum industry will continue to tighten and usher in a more continuous upward cycle than in the past. In 2024/2025, we expect the average price of electrolytic aluminum in China to be 19,500/20,000 yuan/ton.

Risk warning: The progress of the project fell short of expectations, and the extent and frequency of the Fed's interest rate cuts fell short of market expectations.