We reiterate our "Buy" investment rating for China Hongqiao (the "Company"). We will increase ourearnings forecasts in our next company report.
Last night, the Company announced a positive profit alert, with 2024 net profit expected to possiblyincrease by approximately 95%, beating our expectations. The Company made the announcement basedsolely on its preliminary estimates based on information currently available to the Company, including theunaudited management accounts of the Company for the eleven months ended 30 November 2024. Theinformation contained in the announcement is not based on any figures or data which have been audited orreviewed by the Company's auditors.
The strong expected earnings growth is mainly due to: the sales prices of the Company's aluminium alloyproducts and alumina products both increased as compared with the corresponding period in 2023, and the salesvolume of alumina products also increased. At the same time, the procurement prices of the Company's majorraw materials, such as coal and anode carbon blocks, decreased as compared with the corresponding period in2023. Benefiting from such positive factors, the gross profit of the aforesaid products of the Company achieved asignificant increase as compared with the corresponding period in 2023.
Aluminium prices have been rising due to global supply shocks, particularly caused by aluminashortages. Key disruptions include Guinea's bauxite export suspension, refinery shutdowns in Australia, andChina's increasing reliance on imported raw materials. These factors strained the aluminium supply chain whiledemand grew, pushing prices higher. Recent stimulus measures in China further bolstered demand expectations,while environmental and operational issues restricted output. We expect higher aluminium prices to continue into2025.
We expect China Hongqiao's 2025 net profit to continue to benefit from higher aluminium prices. ChinaHongqiao has the largest primary aluminium production capacity in the world and produces about 6 million tons ofprimary aluminium each year. With high self-efficiency ratio of bauxite, alumina, and electricity, the Company hashigher cost control ability than its peers, especially for material costs for producing primary aluminium. Hence, itsnet profit is highly sensitive to changes in aluminium price. We expect that China Hongqiao will benefit more thanits peers from a rise in aluminium price.
Catalysts: Increase in aluminium price; lower coal and anode carbon block prices.
Risks: Decrease in aluminium price; limited production due to electricity supply problem.
