According to the Futu Finance app, Xingye Securities released a research report stating that the aluminum sector is expected to see increased profitability in the first half of 2024, with rising aluminum prices driving profit growth and significant year-on-year growth in the performance of electrolytic aluminum enterprises, as well as a recovery in the performance of aluminum processing enterprises. In Q2 2024, the aluminum premium narrowed due to expectations of overseas inventory replenishment, leading to an increase in aluminum exports and offsetting the decline in aluminum used in the real estate sector, driven by growth in new energy and electrical utilities. Looking ahead, there is an expectation of improved demand in the strong season of September and October, with stable supply, and the possibility of another upward movement in aluminum prices, with improved profitability for electrolytic aluminum. In the long term, with limited increase in electrolytic aluminum production capacity, demand is expected to steadily increase due to structural upgrades, and related companies are expected to maintain high profitability.

In the first half of 2024, the profitability of the aluminum sector increased year on year, with a significant increase in growth rate in Q2 2024. Since March 2024, aluminum prices have continued to rise, and the profitability of the industry has rebounded to a high level. As a result, the performance of listed companies in the aluminum sector in the first half of 2024 has improved compared to the same period last year, with significant growth in both year-on-year and quarter-on-quarter growth rates. In the first half of 2024, the year-on-year changes in operating income and net income attributable to the parent company of aluminum companies were 0.0% and +46.7% respectively, and the quarter-on-quarter changes were +6.0% and +84.3% respectively, with quarter-on-quarter changes of +20.2% and +66.5% respectively.

In the first half of 2024, the rise in aluminum prices drove profit growth, with substantial year-on-year growth in the performance of electrolytic aluminum companies, especially in Q2 2024. In the first half of 2024, the electrolytic aluminum production volumes of Aluminum Corporation of China, Yunnan Aluminium, Shenhuo Group, and Tianshan Aluminum Group were 363/1.35/0.75/0.59 million tons respectively, with year-on-year changes of +18.63%, +38.7%, +3.2%, and +1.3% respectively. Due to the early resumption of production in Yunnan at the beginning of the year, the production volumes of Aluminum Corporation of China, Yunnan Aluminium, and Shenhuo Group have all increased. In the first half of 2024, the estimated gross profits per ton of electrolytic aluminum (net profits per ton for Aluminum Corporation of China) for Aluminum Corporation of China, Yunnan Aluminium, Shenhuo Group, and Tianshan Aluminum Group were 2116/2786/4058/3682 yuan, with year-on-year changes of +850/+9/+236/+630 yuan.

Benefiting from the rise in aluminum prices, the profitability per ton of electrolytic aluminum companies has increased, with China Aluminum Corporation experiencing the largest increase, mainly due to its self-sufficiency in 100% alumina and high self-sufficiency in bauxite, which allows it to fully benefit from the rise in aluminum prices against the backdrop of rising prices of bauxite and alumina in the first half of the year. In addition, Tianshan Aluminum Group theoretically achieves 100% self-sufficiency in alumina, but since alumina is sold separately, the increased profitability is reflected in its alumina products rather than in the consolidated calculation.

In the first half of 2024, the performance of aluminum processing companies improved, with some improvement in Q2 2024. Processing fees gradually stabilized in the first half of 2024, and in Q2 2024, the aluminum premium narrowed due to expectations of overseas inventory replenishment, leading to an increase in aluminum exports and offsetting the decline in aluminum used in the real estate sector. Therefore, the performance of aluminum processing companies improved in the first half of 2024. From Q2 2024, benefiting from the growth in traditional peak season demand, the performance of most aluminum processing companies improved quarter-on-quarter. At the same time, due to higher growth in external demand and narrowing of the aluminum premium, companies with a higher proportion of export business, such as Mingtai Aluminum and Jiangsu Dingsheng New Material, benefited more.

Investment advice: With the continued increase in sector profitability, we are bullish on the valuation recovery of electrolytic aluminum. Looking ahead, there is an expectation of improved demand in the strong season of September and October, with stable supply, and the possibility of another upward movement in aluminum prices, with improved profitability for electrolytic aluminum. At the same time, the tight supply of upstream bauxite, coupled with low inventory levels of alumina, and the strong spot prices of alumina, will continue to benefit aluminum companies that have integrated the aluminum industry chain. In the long term, with limited increase in electrolytic aluminum production capacity, structural upgrades will drive steady demand growth, and related companies are expected to maintain high profitability. Additionally, as balance sheets continue to be repaired, aluminum companies have the potential to increase dividend payouts. We recommend paying attention to Aluminum Corporation of China (601600.SH), Tianshan Aluminum Group (002532.SZ), Yunnan Aluminium (000807.SZ), Shenhuo Group (000933.SZ), and Shandong Nanshan Aluminium (600219.SH).

Risk Warning: Lower-than-expected domestic economic recovery, uncertainty in the global macroeconomic environment, and the Fed's interest rate hike exceeding expectations.