Incidents:
On April 19, 2024, China Hongqiao released its 2023 annual report. In 2023, the company achieved operating income of $133.624 billion, up 1.46% year on year; realized net profit to mother of $11.461 billion, up 31.70% year on year; basic earnings per share were $1.21, and the company plans to distribute cash dividends of HK$0.29 per share.
Revenue growth comes from increased sales
In 2023, the company sold 6.33 million tons of electrolytic aluminum, up 4% year on year, and sold 10.374 million tons of aluminum oxide, up 25% year on year. Looking at product sales prices, in 2023, the average price of the company's aluminum alloy products was 16,464 yuan/ton (excluding tax), a year-on-year decrease of 6.4%; the average price of aluminum alloy processed products was 19834 yuan/ton (excluding tax), a year-on-year decrease of 9.2%; the average price of alumina products was 2,560 yuan/ton (excluding tax), a year-on-year decrease of 0.8%.
The increase in profit is due to a decrease in the cost of electrolytic aluminum and a fall in management expenses. As the coal and anodes required for the company's electrolytic aluminum production needed to be outsourced, the drop in raw material prices in 2023 helped the company's gross margin recover. In 2023, the company's gross profit margin of aluminum alloy products was 17.4%, an increase of 3.9 percentage points over the previous year. Looking at the expense ratio, in 2023, the company's sales expenses ratio was 0.57%, up 0.12 percentage points from the previous year, the financial expenses ratio was 2.45%, up 0.16 percentage points from the previous year, and the management expenses ratio was 3.71%, down 0.80 percentage points from the previous year. In 2023, the company's net sales margin was 9.35%, an increase of 1.90 percentage points over the previous year.
Prices have risen, costs have decreased, and production is more flexible in 2024 Q1. The average price of the company's main products, electrolytic aluminum, was 1,9047 yuan/ton (tax included), and the average price of alumina was 3,349 yuan/ton (tax included), up 1.8%/14.7% from the average price in 2023. The company's main costs are the average anode price of 3,905 yuan/ton (tax included) and the average price of thermal coal is 903 yuan/ton (tax included), down 16.6%/6.5% from the average price in 2023. On March 15, 2024, after the company bought back Shandong Hongqiao shares held by strategic investors, the shareholding ratio increased from 94.52% to 98.56%. Since Shandong Hongqiao is the company's main operator of electrolytic aluminum and alumina, repurchasing shares is beneficial to increasing equity production.
Profit Forecasts, Valuations, and Ratings
We expect the company's revenue for 2024-2026 to be 1290/1301/131.2 billion yuan, respectively, with year-on-year growth rates of -3.4%/1%, and net profit to mother of 167/171/17.4 billion yuan respectively, with year-on-year growth rates of 45%/3%/1%, respectively, and earnings per share of 1.76/1.81/1.83 yuan respectively. Referring to comparable company valuations, we gave the company 8.7 times PE in 2024, with a target price of HK$16.88 (reference exchange rate is HKD/RMB 0.91), maintaining a “buy” rating.
Risk warning: aluminum product prices fall; raw material costs increase; production falls short of expectations; exchange rate fluctuations.