We maintain China Hongqiao’s "Buy" investment rating and increase the target price to HK$15.20. We increase China Hongqiao’s (the "Company") 2024, 2025 and 2026 EPS forecasts by 32.6%, 5.7% and 9.0% to RMB2.360, RMB2.035 and RMB2.202, respectively. Our new target price of HK$15.20 is based on 6.0x and 7.0x 2024 and 2025 PER, respectively.
The Company expects its 2024 net profit to possibly increase by approximately 95%, beating our previous expectations. Earlier this month, the Company announced a positive profit alert for 2024. The strong expected earnings growth is mainly due to: the sales prices of the Company’s aluminium alloy products and alumina products both increased as compared with the corresponding period in 2023, and the sales volume of alumina products also increased. At the same time, the procurement prices of the Company’s major raw materials, such as coal and anode carbon blocks, decreased as compared with the corresponding period in 2023. Benefiting from such positive factors, the gross profit of the aforesaid products of the Company achieved a significant increase as compared with the corresponding period in 2023.
Aluminium prices have been rising due to global supply shocks, particularly caused by alumina shortages. Key disruptions include Guinea's bauxite export suspension, refinery shutdowns in Australia, and China's increasing reliance on imported raw materials. These factors strained the aluminium supply chain while demand 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 into 2025.
We expect China Hongqiao’s 2025 net profit to continue to benefit from higher aluminium prices. China Hongqiao has the largest primary aluminium production capacity in the world and produces about 6 million tons of primary aluminium each year. With high self-efficiency ratio of bauxite, alumina, and electricity, the Company has higher cost control ability than its peers, especially for material costs for producing primary aluminium. Hence, its net profit is highly sensitive to changes in aluminium price. We expect that China Hongqiao will benefit more than its peers from a rise in aluminium price.
Catalysts: 1) Rise in aluminum price; 2) more stimulus policies in China.
Risks: 1) Rise in coal price; 2) China’s aluminum demand may miss expectations; 3) overseas projects risk.