We believe aluminum (Al) is one of the sectors that is highly sensitive to the launch of the series of forceful pro-market policies in China. This, together with the weakness of dollar as a results of the start of rate-cut cycle in the US and a relatively limited new supply of Al, will likely boost the near-term Al price which will serve as key catalyst of Hongqiao. We revise up our 2024E-26E earnings forecast by 9-12%, largely due to higher price assumption of Al and alumina. We estimate every 1% increase in Al price will boost Hongqiao’s earnings by 4%. Hongqiao is now trading at mid-cycle valuation (7x 2024E P/E) with an attractive yield of 7%. Our new TP of HK$19.6 (previously HK$17.9) is based on an unchanged 9.8x 2024E P/E. Maintain BUY.
　　Limited new supply… China’s aluminum production growth in Aug slowed to 1.3% YoY (vs 5.3%/2.5% in Jun/Jul), with capacity utilisation rate reaching ~96.7%. Overseas, output increased 1% YoY in Aug (vs 1%/1.5% in Jun/Jul), according to IAI. We see limited room for meaningful supply additions given the maximum capacity of 45mt (~60% of global supply) set by the Chinese government. Meanwhile, capacity growth in oversea markets is limited as well.
　　…near-term demand to be supported by policies. We estimate China construction (including property and infrastructure) and automobile account for 16% and 14%, respectively, of the global Al demand. We believe Chinese government’s policies will help stabilise the expectation of the aforementioned demand. Longer-term, we continue to see light weighting trend of automobiles and fast-growing solar power installation as structural growth driver of Al.
　　Favourable price trend. The latest Shanghai Al price (VAT included) rebounded to RMB20,395/t (+3% since early Sep). In 3Q24, Shanghai Al price averaged at RMB19,600/t, up 4% YoY; for alumina, price momentum remained strong with a 35% YoY increase. We forecast Hongqiao’s Al / alumina ASP to increase 5%/34% YoY in 2H24.
　　Upcycle to drive valuation. Over the past decade, Hongqiao traded at an average forward P/E of 6x. The stock normally peaked at 10x (except in 2017) and bottomed out at ~3x during the trough cycles (except 2020 due to the outbreak of COVID-19). Our new TP of HK$19.6 is based on an unchanged 9.8x 2024E P/E, equivalent to 1.5SD above the historical average of 6x. Our above-average assumption is to reflect the potential industry upcycle.
　　Key risks. (1) A slowdown of global economy that affects the Al and alumina prices; (2) sharp increases in input costs such as bauxite, coal and power.