Investment positives
　　We initiate coverage on China Hongqiao Group with an OUTPERFORM rating and a target price of HK$23.62 (based on a P/E valuation), implying 8.0x 2026e P/E.
　　Why an OUTPERFORM rating?
　　China Hongqiao Group (China Hongqiao): An aluminum leader with an integrated presence along the green aluminum value chain. As the world's second largest aluminum and alumina producer, China Hongqiao has expanded its presence to the entire value chain. Its business lines include production and sales of power, bauxite, alumina, primary aluminum, aluminum processing, and recycled aluminum. The firm considers high-quality green development as its strategic goal. China Hongqiao has taken three actions to establish a green ecosystem and implement China’s target of reaching peak carbon emissions and achieving carbon neutrality: 1) Optimizing its energy structure; 2) advancing green energy projects; and 3) developing a circular industry.
　　High self-sufficiency ratio of raw materials; effective cost reduction due to integrated presence.
　　Upstream: China Hongqiao has built a bauxite production base with annual capacity of about 60mnt in the Republic of Guinea. Meanwhile, it has built alumina production capacity of 17.5mnt in Shandong province, China and 2mnt in Indonesia.
　　Midstream: China Hongqiao is optimizing its energy structure to develop into a leading producer of green power-based aluminum1 by relocating its production capacity from northern China to southern China and replicating its success on industrial clusters. The firm plans to relocate about 3mnt of its aluminum production capacity to Yunnan province in two stages, replicating its business model in Shandong province by building an aluminum industrial cluster in Yunnan province. We believe these measures will increase the firm’s exposure to green power-based aluminum to 46%.
　　Downstream: China Hongqiao has expanded into lightweight automotive materials and is building an eco-friendly and recycling business portfolio.
　　We believe the aluminum sector presents investment opportunities amid improving macro expectations. The aluminum industry faces a supply shortage. We think proactive fiscal and monetary policies should improve macro expectations and gradually raise average aluminum prices. We believe the increasing fragility of the global bauxite supply could benefit aluminum producers with a high self-sufficiency ratio in raw materials.
　　Four advantages underscore China Hongqiao’s investment value. We believe the firm has four competitive advantages. First, its profit and valuation have substantial upside potential, with its production capacity to market cap ratio being one of the highest among comparable aluminum companies. Second, the high self- sufficiency of raw materials puts China Hongqiao in a good position to withstand risks amid volatile raw material prices. The firm’s bauxite and alumina self-sufficiency ratios have both exceeded 100%. Third, its dividend payout ratio and dividend yield were as high as 62% and 8.9% in 2024. Fourth, the firm is building a green aluminum value chain by relying on both primary and recycled aluminum. We expect China Hongqiao’s products to have a larger price premium in the future.
　　How do we differ from the market? The market mainly focuses on earnings upside driven by price rises. We believe that the firm's high self- sufficiency ratio in raw materials and transformation towards a green value chain will strengthen its product competitiveness and boost its valuation premium. We also think its high dividend-yield may create similar investment opportunities as bonds, on which we suggest keeping a close eye.
　　Potential catalysts: Higher-than-expected rise in aluminum prices; the company's increasingly prominent advantages in costs of green power- based aluminum amid China’s carbon neutrality policy.
　　Financials and valuation
　　We expect the firm’s 2025 and 2026 EPS to be Rmb2.63 and Rmb2.70, implying a CAGR of 6%. The stock is trading at 6.8x 2025e and 6.5x 2026e P/E. As the firm’s integrated presence makes its earnings highly visible2, we initiate our coverage with an OUTPERFORM rating and a target price of HK$23.62, implying 8.0x 2026e P/E and offering 23% upside.
　　Risks
　　Sharp fluctuations in product prices; faster-than-expected expansion in overseas aluminum production capacity; disappointing demand; geoeconomic disruptions.