CHQ’s FY20 earnings was stronger than our estimates on better-than-expected effective tax rate. Looking ahead in 2021E, we think CHQ’s fundamentals are solidified as 1) debt repayment is on track; 2) share placement removed short-term overhang for further dilution; and 3) aluminum price stays strong for limited supply. We lift our FY21/22E aluminum ASP by 7.7%/6.7%, which boost earnings projection by 19.1%/13.0%. We think aluminum ASP still has upside given that current price is still 6.8% higher than our assumption in 2021E. We lift TP by 31.9% to HK$15.00. Reiterate BUY.
- FY20 results beat on effective tax rate. CHQ posted FY20 results with net profit of RMB10.5bn in early Mar. The earnings increased by 72.2% YoY, significantly higher than positive profit alert guidance (RMB9bn). CHQ’s FY20 results was largely in line with our previous projections with surprise came from effective tax rate. The ratio declined 8.6ppt to 17.8% due to compensable losses linked to historical assets provision in 2017-19. CHQ declared HK50 cents final dividends for FY20. Aggregating with interim dividend of HK15 cents, CHQ increased full year dividend payout to 44%.
- On track to debt repayment schedule. CHQ made disclosures in details for its debt repayment updates. The Company had fully repaid mature debt in Jan and Feb. By end-2020, CHQ had more than RMB45.4bn cash on hand and sufficient line of credit. We believe CHQ is on track to its debt repayment schedule.
- Share placement to enhance market confidence and to boost liquidity. CHQ made another share placement on 11 Mar for 243mn share with net proceed of HK$2.32bn. Together with previous fund raising through placement and CB issuance, CHQ had raised more than HK$6.6bn. We are positive on those fund raising activities, since 1) successful fund raising implied strong market interest on CHQ; and 2) it helps resolved market concerns for trading turnover.
- Fundamentals support aluminum price to stand high. In Mar, we are more confident on aluminum price due to tightened supply release on the back of aluminum capacity control in Inner Mongolia. The capacity control is driven by central government’s intensifying requirements for carbon intensity reduction, while Inner Mongolia failed its KPIs in 2019. Looking forward, in view of increasing national requirements for carbon peaking by 2030 in China, we think new captive power plant based aluminum capacity expansion will be limited, while CHQ’s hydro-power based capacity may gain some edges. We lift our aluminum ASP outlook by 5.7%/6.7% in 2021/22E to RMB16,000/tonne.
- Secondary aluminum business to contribute future capacity growth. CHQ formed JV with Scholz Recycling Group for developing secondary aluminum business in Shandong in Sep 2020. The JV plans to have long term annual capacity to process 50k units end-of-life vehicles and to produce 500k tonnes green aluminum. The JV kicked off construction in Feb 2021, and plans to have phase capacity to commence operation in 2022. We think the JV will boost CHQ’s secondary aluminum business, and contribute aluminum sales volume growth in the near future.
- Revise earnings up by 23.3%/27.3% in 2021/22E. We trim our product output assumptions by 9.9%/11.8% in 2021/22E on revised aluminum and aluminum fabrication mix. Based on our updated ASP outlook, however, we lift CHQ’s earnings outlook by 19.1%/13.0% in 2021/22E to RMB13.95/14.25bn. Our earnings model is highly sensitive to aluminum price and coal price (see Fig. 4). We estimate 1) every 1% increase in aluminum price will bring c.3.6% earnings growth at current level; and 2) every 1% coal price decline will bring c.1.2% net profit growth. Aluminum price is now 6.8% higher than ASP assumption.
- Reiterate BUY. CHQ’s share price had reached our TP of HK$11.37 since initiation in early Feb. We think strong market commodity sentiment and good performing aluminum price are the key reasons driving re-rating. In view of strong earnings outlook and solid fundamentals of supply-demand balance, we lift our target multiple slightly to above 5-yr average at 8.0x forward PER. Our new TP for CHQ is HK$15.00 per share. Trading at 6.2x PER with potential dividend yield of 6.8% in 2021E, we still find CHQ’s valuation very attractive. Reiterate BUY.
- Risks: 1) unfavorable carbon trading update; 2) aluminum price decline on economy slow down.
