The company is an excellent domestic manufacturer of aluminum products. The company was founded in 1994, and the actual controllers are the Zhang family. The company has a complete upstream and downstream integrated industrial chain. It is one of the largest enterprises in the entire industry chain integrating thermoelectricity, mining, aluminum oxide, liquid aluminum alloy, aluminum alloy ingots, aluminum alloy casting and rolling products, aluminum busbars, high-precision aluminum sheet and foil, and new materials. As of March 2024, the company's Guinea project has steadily maintained an annual bauxite production capacity of about 50 million tons/year, a total alumina production capacity of 19.5 million tons/year (with an alumina production capacity of 17.5 million tons/year in China and 2 million tons/year in Indonesia), a total electrolytic aluminum production capacity of 6.46 million tons/year, and an aluminum alloy deep processing capacity of 1.17 million tons/year.

The integrated leader in the aluminum industry chain is expected to enjoy high profit flexibility. After years of hard work, the company has basically formed an operating pattern for the entire upstream and downstream industrial chain of electrolytic aluminum, with remarkable economies of scale. The company's upstream raw material self-sufficiency rate is high, and cost flexibility is slowing down: the company's current self-sufficiency rate of alumina is 100%, and the advantages of integration are outstanding. The mining of the bauxite project in Guinea guarantees the company's supply of bauxite raw materials. At the same time, the company is also developing Australian bauxite supply and diversified ore supply channels to further guarantee the stability of the company's raw materials. The company's electrolytic aluminum profits are stable, and the energy structure has improved significantly: by the end of 2023, the company's total electrolytic aluminum production capacity was 6.46 million tons/year. The total production capacity in Shandong is currently 4.43 million tons/year, and the main project for the production capacity of 2.03 million tons/year in Yunnan has been completed. In addition, the company still has 1.93 million tons/year of electrolytic aluminum production capacity to be relocated to Honghe Prefecture, Yunnan Province. When all the relocation of the project is completed, the company will transfer a total production capacity of 3.96 million tons/year to Yunnan, accounting for 61.3% of the total production capacity. Since the price of hydropower in Yunnan is lower than the price of thermal power in Shandong, the increase in the share of electrolytic aluminum production capacity in Yunnan is expected to reduce the overall electricity cost of the company's total production capacity. The company's recycled aluminum and automotive lightweighting projects are expected to help low-carbon development: by the end of September 2023, the company had an aluminum processing capacity of 1.17 million tons/year. Furthermore, after the completion of the company's Zhongde Hongshun recycling technology industry projects, it will produce 500,000 tons of recycled aluminum per year and recycle 100,000 end-of-life motor vehicles per year. The subsidiary's investment in recycled aluminum production capacity may further optimize the company's energy structure and increase product premiums.

The company's dividend ratio remains high: Since its listing in 2011, the company has implemented dividends 13 times, achieving cumulative net profit of 96.156 billion yuan, cumulative cash dividends of 27.383 billion yuan, and an average dividend payment rate of 28.48%. The company's average dividend payment ratio is at the top of the industry. The operation is steady, the performance has maintained steady growth, and the dividend ratio remains at a high level, with a strong margin of safety.

Subsidiaries are investing, and the company's value may be revalued: the subsidiary introduced strategic investors in December 2023, and investors subscribed 4.705% of Shandong Hongtuo New Capital's shares in consideration of RMB 2,962.6 billion. Referring to the subsidiary's equity consideration, the market value of Shandong Hongtuo's shares held by the company is about 56.7 billion yuan. Considering that the company's lightweight materials base and the Bohai Science and Technology Innovation City Industrial Park project are under construction, the company's value is expected to be revalued.

Aluminum prices may continue to maintain an upward trend in the medium to long term. The supply side is affected by the domestic production capacity ceiling. New production capacity is limited, and there is no significant increase in the new production capacity of overseas electrolytic aluminum. Combined with factors such as “double carbon,” dual control of energy consumption, and insufficient regional power supply, the elasticity of raw aluminum supply may gradually weaken. Traditional demand is expected to improve marginally, driven by a policy of steady growth and expansion of domestic demand, and the amount of aluminum used in NEVs and photovoltaics in the new energy sector may contribute to new increases. In the context of global green and low-carbon development, we believe that demand for electrolytic aluminum is still resilient. We expect global raw aluminum demand to grow at an average annual rate of about 1.65% from 2023 to 2025. The gap between supply and demand may widen in the medium to long term, and aluminum prices may continue to maintain an upward trend in the medium to long term.

Profit forecasting and investment ratings. We expect the company's EPS in 2024-2026 to be 1.70, 1.94, and 1.95 yuan/share, respectively, and the PE corresponding to the current stock price will be 6.42x, 5.61, and 5.60x, respectively. The company's valuation is low in the industry's relative valuation. Considering that the optimization of the company's electrolytic aluminum energy structure is expected to reduce electricity costs, the integration of the industrial chain is expected to fully benefit from the increase in profits in the aluminum industry chain, cover it for the first time, and give the company a “buy” rating.

Risk factors: Business risks: Production capacity in Yunnan falls short of expectations, disturbances in the bauxite strike in Guinea, etc. Policy risks: Electricity levels exceeded expectations during the dry water period in Yunnan; the ceiling on electrolytic aluminum production capacity was liberalized; monetary and fiscal policies were tightened. Market risk: The decline in real estate demand exceeded expectations, leading to a decline in demand for electrolytic aluminum that exceeded expectations; overseas production of electrolytic aluminum exceeded expectations, and supply grew more than expected. Investment and financing risk: The introduction of strategic investors fell short of expectations.