Incident: On June 13, 2024, China's Hongqiao issued a positive profit forecast. Net profit for the first half of 2024 is expected to increase by about 220% compared with the same period last year. The company achieved net profit of about 2,972 billion yuan in the first half of 2023, and is expected to achieve net profit of 9.51 billion yuan in the first half of 2024. According to the company announcement, Shandong Hongqiao, a subsidiary of China Hongqiao, achieved net profit of 4.34 billion yuan in the first quarter and is expected to achieve net profit of 5.17 billion yuan in the second quarter.
Prices of electrolytic aluminum and alumina continued to rise, and profits expanded by tons. Over the past 24 years, the prices of the company's two main products, electrolytic aluminum and alumina, have risen markedly. The average price of 24Q1 and Q2 electrolytic aluminum was 1,9047 yuan/ton and 20,584 yuan/ton, respectively; the average price of alumina was 3,325 yuan/ton and 3,564 yuan/ton, respectively. At the same time, the purchase prices of the main raw materials coal, anode carbon blocks, etc. have declined. In 24Q1 and Q2, the average price of thermal coal pit in Shanxi was 749 yuan/ton and 700 yuan/ton, respectively; the average price of pre-baked anodes was 4,534 yuan/ton and 4,597 yuan/ton, respectively (average price of 4,858 yuan/ton in 23Q4).
According to our estimates, the net profit per ton of the 24Q1 and Q2 electrolytic aluminum industry was 1,658 yuan/ton and 2502 yuan/ton, respectively; the net profit per ton of the 24Q1 and Q2 alumina industry was 356 yuan/ton and 558 yuan/ton, respectively. The profits of the company's two main businesses have expanded markedly.
Production resumed in Yunnan in the second quarter, and production continued to be released. According to Baichuan, part of the company's production capacity in Yunnan was cut by 100,000 tons in November '23, and production resumed in March '24. Production resumed in April. Currently, Yunnan has a production capacity of 1.5 million tons. It is estimated that the release of 100,000 tons of production capacity in Yunnan will increase the company's electrolytic aluminum production in the second quarter by 10,000 tons compared to the first quarter.
The market has underestimated both ends of the aluminum industry chain, and the boom in the industrial chain may spiral upward.
1) Electrolytic aluminum: On the supply side, the power supply conflict of domestic electrolytic aluminum is not only about hydropower, but also depends on wind and solar energy storage. Electricity supply is naturally “vulnerable”; further, in the process of energy system transformation and new energy construction, traditional energy seriously reduces capital expenses and raw material disputes, which will eventually lead to a shortage of petroleum coke, another raw material for the production of electrolytic aluminum — a by-product of petroleum refining and chemical production. The medium- to long-term impact on global electrolytic aluminum production will be more profound. On the demand side, against the backdrop of domestic building security and countercyclical adjustment continuing to gain strength, the drag on traditional demand will slow down. Demand for new energy sources (NEVs, photovoltaics, etc.) will drive a trend rebound in demand for electrolytic aluminum, and the overall impact is showing. Demand for aluminum electrolyte, the green metal, cannot be overly pessimistic — the average annual demand growth rate is likely to remain 2-3%. The structure of electrolytic aluminum itself is undergoing profound changes, and its “resource-like” properties will gradually become apparent.
2) Alumina: Although the pattern of oversupply and demand continues, alumina production may be constrained by bottlenecks on the raw material side. China's bauxite supply is weak. It is more than 70% dependent on imports, and the concentration is high, 70% of which comes from Guinea.
Once an emergency affecting supply occurs in Guinea (such as the fuel tank explosion at the end of '23), disturbances in the supply of raw materials will be very obvious, which will affect alumina production and price fluctuations. More importantly, the price of alumina usually follows the rise of electrolytic aluminum. Historically, the price ratio between alumina and electrolytic aluminum has been relatively stable. It is in the range of 12% to 24%, and is in the 15% to 20% range most of the time. In the upward cycle of electrolytic aluminum, the price of alumina usually follows the rise.
Furthermore, although the alumina industry is in a state of excess all year round, due to its relatively flexible start-up and shutdown, supply can be controlled by shutting down production capacity at any time when the industry's profit level declines in stages, so losses are usually small and the duration is short at the bottom of the industry. The market may have underestimated the extent to which alumina benefits from the cycle of rising prices for electrolytic aluminum.
Profit forecast and investment advice: We maintain our 2024/2025/2026 aluminum price assumption of 2.1/2.3/25,000 yuan/ton, and raised the 2024/2025/2026 alumina price assumption to 3500/3500/3750 yuan/ton (previous value 2973/3450/3750 yuan/ton). The company's net profit for 2024/2025/2026 is 210/248/29.9 billion yuan (previous value: 190/217/25.2 billion yuan), and corresponding PE is 5.1 billion yuan, respectively /4.3/3.6 times, maintaining the company's “buy” rating.
Risk warning: There is a risk that commodity prices will fluctuate, project construction will fall short of expectations, and public information used in research reports will not be updated in a timely manner.