China Hongqiao Group Co., Ltd.（CHQ）is the largest aluminum producer in the world. The Company established costs leadership and formed integrated global supply chain covering bauxite, alumina, aluminum and fabrication products. CHQ met some obstacles due to short selling report and capacity cut in 2017. We think the Company had made proper response and regained market recognition. Looking forward in 2021E, we expect CHQ to embrace re-rating opportunity on the back of economy recovery and well performing aluminum price. We initiate BUY on CHQ with a TP of HK$11.37.
- Improving aluminum supply-demand outlook. We are optimistic on supply-demand outlook of the aluminum industry, in view of 1) global economy recovering from the pandemic; 2) real estate completion at accelerating rate in China; 3) lightweight automotive development to speed up with increasing NEV penetration rate; and 4) orderly release of new capacity, we expect China aluminum average spot price to increase 6.5% YoY to RMB15,138/tonne in 2021E and stay high in 2022E. Our assumptions indicate industry upcycle pricing.
- Costs leadership. On the back of captive power plant and global integrated supply chain, CHQ had established significant cost advantages. We estimate the CHQ’s comprehensive aluminum costs is RMB1,500-1,600/tonne lower than capacity weighted average in China.
- Come out of the quagmire. CHQ met a few obstacles from 2017 due to series impacts brought by short selling report and government enforced aluminum capacity cut. We think the Company had made proper responses and regained market recognition. In 2021E, we expect short term market focus would be CHQ’s debt payment. We believe CHQ has sufficient financial resources to bridge over debt repayment peak. We believe CHQ had fully come out of the quagmire.
- Earnings CAGR to reach 16.7% in 2020-22E. We estimate CHQ’s overall revenue to have mild growth in 2020-22E with a 3-year revenue CAGR of 7%. On the back of high aluminum ASP, we estimate aluminum products GPM to be 23.2/24.8%/24.3% in 2020-22E. Following Company’s positive profit alert, we estimate 2020E net profit to reach RMB9,269mn. We expect net profit to increase to RMB11,713mn/12,613mn respectively in 2021/22E. Our earnings projection reflects a net profit CAGR of 16.9% in 2020-22E.
- Initiate BUY with TP of HK$11.37. Based on 5-yr historical 7.15x forward PE, we derive CHQ’s TP at HK$11.37 per share. We expect the Company to embrace a rerating opportunity driven by high standing aluminum price.
- Risks: Aluminum price decline; government to enforce cross subsidy and surcharges and potential charges for carbon emissions.
