Restore coverage and give a buy rating. Against the backdrop of tight global aluminum supply (China's control of aluminum production capacity and unstable bauxite supply) but rising demand (electric vehicle lightweighting+ PV growth + stable construction demand after China's real estate policy changes), we predict that the price of electrolytic aluminum/alumina will rise 4.5%/10% in 2024, while remaining high in 2025. We believe that Hongqiao (with a global market share of about 9% based on electrolytic aluminum production in 2023) will benefit from a significant increase in unit profit, mainly due to the company's vertical integration model of owning overseas bauxite shares, own power plants, and a high proportion of aluminum aquatic products. We expect Hongqiao's profit growth in 2024/25 to be 61%/5%, respectively (higher than Bloomberg's 6%/4% forecast). We expect that for every 1% increase in the price of electrolytic aluminum, Hongqiao's profit will increase by 4%. Despite a sharp rise in stock prices since the beginning of this year, Hongqiao is still at a mid-cycle valuation (<6 times the 2024 price-earnings ratio) and is at a significant discount compared to its global peers. The current price is equivalent to a yield of > 7%, and the valuation is attractive. Our target price of HK$17.9 is based on 8.5 times the 2024 price-earnings ratio (1 standard deviation higher than the historical average).

The production capacity of the industry is strictly controlled. Since supply-side reforms began in 2017, China (which accounts for about 60% of global aluminum supply) has limited aluminum production capacity to about 45 million tons. The industry's capacity utilization rate reached a ten-year high of ~ 97% in September of last year, and rose to 96% in May of this year. In May of this year, the State Council issued the “2024-2025 Energy Conservation and Carbon Reduction Action Plan” (link), which reaffirms strict implementation of the replacement of electrolytic aluminum production capacity. Under the current high utilization rate, this policy means that there is very limited room for increase in China's aluminum production in the next few years.

However, there is room for growth on the demand side. The automotive industry accounts for about a quarter of aluminum demand in China and the rest of the world. We expect the weight reduction trend to drive demand for automotive aluminum to grow faster than the overall demand for aluminum. On the photovoltaic side, we predict that the rapid increase in installed capacity will drive the share of total demand for aluminum used in PV modules from 2.1%/3.3% in 2022/23 to 4.1%/4.5% in 2024/25, making it increasingly important in the aluminum mix.

Global aluminum supply and demand is expected to become scarce starting in 2024. We forecast global aluminum demand to grow by 3.2%/2.2% in 2024/25, faster than our forecast for supply growth (2.3%/1.7%). We expect global aluminum supply and demand in 2024-25 to move from remaining in 2023 to a shortage.

Main risks: (1) the global economic slowdown affects the prices of aluminum and alumina; (2) the cost of bauxite, coal, and electricity prices has risen sharply.