According to the financial app Zhiliao, Open source Securities released a research report with a "buy" rating on China Hongqiao (01378) for the first time. It is expected that the company will achieve revenues of 144.10, 146.74, and 149.05 billion yuan in 2024-2026, with year-on-year changes of +5.8%, +1.8%, and +1.6%, and net income of 19.53, 19.57, and 19.58 billion yuan attributable to the parent company, with year-on-year changes of +70.4%, +0.2%, and +0.02%, and EPS of 2.06, 2.07, and 2.07 yuan per share, respectively.

The company has an electrolytic aluminum production capacity of 6.46 million tons per year, while upwardly laying out raw materials to reduce risk exposure, and downwardly layouting aluminum processing and venturing into lightweight materials to increase product added value, boosting overall anti-volatility ability. In addition, the company's biggest risk exposure is prebaked anodes and low coal prices. Compared with its peers, the bank believes that, in addition to benefiting from the profitability brought by the high prosperity of the aluminum industry, the company can also enjoy the further expansion of profit space brought by the downward trend of raw material prices.

The bank pointed out that the current rise in the company's stock price is due to the resonance of rising aluminum and alumina prices and the low operation of main externally purchased raw materials such as coal and prebaked anodes, which resonates with both price increase and cost reduction. Against the backdrop of high aluminum and alumina prices and low coal and prebaked anode prices, it is expected that the duration and magnitude of this round of market will be longer and higher.

The major viewpoints of Open source Securities are as follows:

Stable costs + high prosperity in the aluminum industry, leading to the rise of electrolytic aluminum dragon head

The company has an electrolytic aluminum production capacity of 6.46 million tons per year, a well-deserved leader in the electrolytic aluminum industry. While upwardly laying out raw materials to reduce risk exposure and downstream layouting aluminum processing and venturing into lightweight materials to increase product added value, its strategic plan is clear. In addition, the company's biggest risk exposure is prebaked anodes and low coal prices. Compared with its peers, the company can not only enjoy the increased profitability brought by the high prosperity of the aluminum industry but also the expanded profit space brought by the downward trend of raw material prices. The bank expects the company to achieve revenues of 144.10, 146.74, and 149.05 billion yuan in 2024-2026, with year-on-year changes of +5.8%, +1.8%, and +1.6%, and net income of 19.53, 19.57, and 19.58 billion yuan attributable to the parent company, with year-on-year changes of +70.4%, +0.2%, and +0.02%, and EPS of 2.06, 2.07, and 2.07 yuan per share, respectively. The corresponding PE ratios for the closing prices of June 11, 2024, are 5.8, 5.8, and 5.8 times.

Integrating the aluminum industry chain, adjusting the energy structure to comply with the dual carbon era

The company has established an upstream and downstream integrated layout of the industrial chain with electrolytic aluminum as the core, with an electrolytic aluminum production capacity of 6.46 million tons per year. (1) Upstream layout: the company has a stake in SMB to lay out bauxite production capacity in Guinea, while laying out bauxite procurement channels in Australia, supporting Shandong alumina production capacity. In addition, the company has laid out integrated bauxite-alumina production capacity in Indonesia, with an overall alumina self-sufficiency rate of over 100%. (2) Downstream layout: the company has laid out 1.17 million tons of aluminum processing in Binzhou, Shandong, and is dedicated to researching and developing lightweight materials to enhance overall anti-volatility ability. (3) Industry supporting: Previously, the company's electrolytic aluminum production capacity was concentrated in Shandong, mainly based on coal-based power, In order to comply with the dual carbon era, the company plans to relocate some production capacity to Yunnan, adjust the energy structure, and when the relocation project is fully implemented, the electrolytic aluminum production capacity in Yunnan will reach 3.96 million tons per year, accounting for 61.3% of the total.

Leading dividend payout ratio compared to peers, demonstrating long-term investment value of the company

Since its listing in 2011, the company has accumulated a net profit of 102.562 billion yuan, with a dividend payout ratio as high as 37.4%, and a dividend yield of 9.86% in 2023, leading its peers, highlighting its investment value for the medium and long-term.