The Zhitong Finance App learned that Guolian Securities released an industry research report saying that looking ahead to 2024, domestic aluminum prices may be under pressure due to the supply and demand pattern. Affected by the tight supply of upstream domestic bauxite, the price of alumina may rise, and there may be a process of redistribution in the industrial chain. Furthermore, the bank believes that the valuation of the electrolytic aluminum sector is expected to increase, mainly based on the core of electrolytic aluminum being upstream mining resources and midstream energy, and that the valuation of resource products should be higher than that of the manufacturing industry. As the capital expenditure of electrolytic aluminum companies is reduced, the dividend ratio is in place to increase, which will help the sector's valuation increase. The bank focuses on recommending China Hongqiao (01378) and China Aluminum (02600).
The report's main points are as follows:
China's new production capacity is limited, and overseas project construction is slow
The world's new production capacity mainly comes from China. Due to production capacity ceilings, domestic production capacity is locked at 45.43 million tons. Based on the historical maximum production volume in October 2023, the capacity utilization rate is 98.6%, and there is limited room for further improvement. In 2023, China's electrolytic aluminum production is 41.59 million tons. The bank expects China's electrolytic aluminum production to be 4294/43.18 million tons in 2024-25. The addition of electrolytic aluminum overseas is concentrated in the Middle East and Indonesia. There are no clear plans to start production in the Middle East project. Indonesia is constrained by electricity supply problems, and the construction progress of the project is slow.
The contribution of cars and photovoltaics is increasing, and there is uncertainty about real estate
The bank anticipates that in 2024-25, China will produce 11.5/ 13 million new energy vehicles, and domestic demand for automotive aluminum will increase by 50/540,000 tons; the bank expects China to add 235/250 GW of installed capacity in 2024-25, and domestic demand for aluminum for photovoltaics will increase by 160/130,000 tons. Recently, there have been frequent national policies supporting real estate, and there is a possibility that demand for aluminum used in construction will improve.
Electrolytic aluminum surplus widens, and profits shift upstream
The bank believes that the domestic electrolytic aluminum supply and demand pattern in 2024-25 is not as good as in 2023, and domestic aluminum prices may be weaker than overseas aluminum prices. After considering import factors, the total domestic supply is estimated to be 4344/43.68 million tons in 2024-25, with a total demand of 4248/42.33 million tons, and an excess of 96/1.35 million tons in the domestic market. In the context of the increase in electrolytic aluminum production, the decline in domestic bauxite production has led to a slowdown in the growth rate of domestic alumina production, and a decrease in the number of imports, leading to a rise in alumina prices, and the profit of the electrolytic aluminum industry may shift from midstream to upstream.
Dividend rates are expected to increase, and industry valuations may be revalued
It is difficult to add additional production capacity for electrolytic aluminum, and capital expenditure has dropped drastically. In 2021-22, electrolytic aluminum companies experienced large operating cash inflows, large financing cash outflows, and reduced capital expenditure, and conditions were in place to increase the dividend ratio. Electrolytic aluminum has historically been recognized as being two high and one surplus, and the market uses cement and glass as a reference for sector valuation. At present, the industry's capacity utilization rate has reached 98%. The core of the industrial chain is upstream bauxite resources and midstream energy. It is not a manufacturing industry. The bank believes that the valuation of electrolytic aluminum should be based on color.
A different view from the market
1) The bank believes that domestic electrolytic aluminum surpluses may expand in 2024-25, mainly due to a slowdown in the growth rate of new domestic PV installations and a sharp decline in new real estate starts in 2021-22, which will put pressure on real estate completion in 2024-25. At the same time, the high level of operation between Shanghai and Renmin will increase imported aluminum ingots, increasing domestic excess pressure.
2) The bank believes that there is a possibility that alumina prices will continue to rise, mainly based on the fact that the upstream of alumina is bauxite, and domestic bauxite production will be affected by safety and environmental protection industrial policies. Once upstream bauxite is tightened, there is actually no excess alumina situation, and uncertainty about supply in overseas markets will also increase dependence on domestic mines.
3) The bank believes that the valuation of the electrolytic aluminum sector is expected to increase, mainly based on the core of electrolytic aluminum being upstream mining resources and midstream energy, and the valuation of resource products should be higher than that of the manufacturing industry. The current market valuation of cement and glass values electrolytic aluminum, which is far lower than the valuation of resources such as copper, zinc, and tin in the non-ferrous industry. As the capital expenditure of electrolytic aluminum companies decreases, the dividend ratio has the conditions to increase, which will help increase the sector's valuation.
Investment advice: Focus on recommending China Hongqiao (01378) and China Aluminum (02600)
Hongqiao, China (01378): For the first time, coverage was given a “buy” rating. The estimated net profit for 2023-25 is 100.64/114.49/119.91 billion yuan. As profits continued to improve and financing channels diversified, the company's debt ratio declined year by year. The company's balance ratio in 2022 was 48.15%, down 16.42 percentage points from 2018. While reducing the debt ratio, the company is increasing its dividend efforts. The company's dividend payment ratio for 2021-2022 was above 50%, and the dividend rate for 2022 was 6.92%. In the future, as the company's profit continues to improve, the company's dividend payment ratio is expected to remain high, driving up the company's valuation.
China Aluminum (02600): For the first time, coverage was given a “buy” rating. The estimated net profit for 2023-25 is 65.08/78.00/9.221 billion yuan, respectively. According to the data disclosed in the company's 2023 rating report, the company's alumina manufacturing costs in 2022 ranked 45%-50% of the country. Due to the company's high bauxite self-sufficiency rate, the company is expected to benefit from the profit elasticity brought about by rising alumina prices.