Improve quality and efficiency, optimize operations, and gradually clear the effects of impairment

China Aluminum achieved net profit of 6.72 billion yuan in 2023, a sharp increase of 60.2% over the previous year, mainly benefiting from the company's continuous improvement in quality and cost reduction and reduction in the impact of asset calculation impairment. The company's annual asset impairment was 755 million yuan, a significant reduction from the 4.88 billion yuan impairment scale in 2022. Although there was a certain decline in the average price of electrolytic aluminum in 2023, all factors of the company mitigated the impact of the decline in aluminum prices on standard costs. We believe that although the pressure to resume production of electrolytic aluminum in Yunnan may be released in the short term, the medium- to long-term hard capacity restrictions in the electrolytic aluminum industry and the demand for aluminum for green energy will jointly drive the upward trend in aluminum prices. Based on the reduction in aluminum prices in anticipation of the resumption of production, the company's 24-26E net profit was adjusted to 83.7/113.4/12 billion yuan (previous value: 101/129/100 million yuan). Considering the company's leading position in the industry and one of the few companies still increasing in the future, maintaining China Aluminum's A/H “buy” rating, the target price for H shares is HK$5.9 (1.3 x 24-25E average BVPS 4.10 yuan, which is consistent with the average PB value since the company went public; previous value: HK$4.8); target price for A shares is 8.6 yuan (62% premium over H shares, consistent with the A/H premium over the past three years; previous value 7.8 yuan).

Internal repair costs were reduced to withstand market fluctuations, and the overall industrial chain layout expanded steadily. In 2023, the company produced a total of 16.67 million tons of alumina, down 5.5% year on year, but fine alumina production increased 16.3% year on year to 4.99 million tons; produced 6.79 million tons of electrolytic aluminum, a slight decrease of 1.3% year on year. Although the average price of SHFE electrolytic aluminum fell by about 7% year on year during the period, benefiting from declining raw material costs, integrated operating cost advantages, and cost reduction of all factors, the company's profit before tax in the raw aluminum sector still increased 15.6% year over year to 11.243 billion yuan. In terms of key projects, Huasheng Phase II's 2 million ton alumina project is expected to be put into operation by the end of '24; Huayun Phase III's 420,000 ton electrolytic aluminum project (expected to be put into operation with a net increase of 170,000 tons) and China Alcoa Qinghai 500,000 ton project (1H25 is expected to be put into operation, with a net increase of 100,000 tons of production capacity) will still further expand and optimize the energy structure of the entire industry.

Short-term aluminum prices may be pressured by the industry to resume production; medium- to long-term aluminum prices are supported by both supply and demand. We believe that although current demand is recovering and social inventories are nearing an inflection point, supply-side pressure will curb the upward momentum of aluminum prices during the peak season to a certain extent. Thanks to the easing of electricity supply pressure, the Yunnan provincial government has released a small amount of electricity load to resume production of electrolytic aluminum (equivalent to about 520,000 tons). Although it is still in the dry water period, the water level in the southwest region is relatively abundant, and the market's expectations for large-scale resumption of production during the abundant water season are gradually increasing. In the medium to long term, after this round of production is resumed, the industry's production capacity will be close to the ceiling limit of 45 million tons, and supply growth will face mandatory restrictions after 2024. Meanwhile, in the green energy transformation process, the lightweighting of automobiles and the increase in wind and power installations have brought new growth points to the demand for electrolytic aluminum. The increasingly prominent conflict between supply and demand will strongly support the rise in aluminum prices in the medium to long term.

Risk warning: The resumption of production has exceeded expectations; demand growth has fallen short of expectations.