On the back of (1) almost full utilisation rate of aluminium capacity in China alongwith slow capacity ramp-up in overseas, (2) resilient end-demand such as EV,power and electronics, and (3) relatively stable raw materials costs, Hongqiaois at sweet spot and is set for further re-rating. We revise up our 2025E-27Eearnings forecasts by 4-5%, largely due to higher aluminium price fuelled byfavourable supply/demand profile. We revise up our TP to HK$39 (from HK$27),based on 12x P/E (previously 8.6x) which is derived from 2SD above thehistorical average. We expect Hongqiao’s capability to generate strong freecash flow will comfortably support its dividend payout ratio of 60%, and bring thebalance sheet to close to net cash position by 2026E. Despite the recent shareprice rally, the current price still offers an attractive yield of ~6%. Maintain BUY.
Almost full capacity utilisation in China. China (~60% of globalaluminium supply) introduced a cap on the aluminium capacity at ~45mtsince the launch of supply-side reform back in 2017. The industry utilisationrate hit a decade-high of 99% in Sep 2025 and stood at 98.6% in Oct. Inoverseas, given the time needed for new capacity and ramp-up (e.g. Indonesia), we expect the overall supply growth to be limited over thecoming 3-6 months.
We expect global deficit starting from 2026E. We forecast the globalaluminium demand to grow by 2.1% / 1.7% in 2025E/26E, versus our supplygrowth projection of 1.7%/1.3%. We expect the global balance to turn fromsurplus in 2025E to deficit in 2026E.
Would the “10x P/E ceiling” be broken this time? Over the past decade,Hongqiao peaked at 10x forward P/E (except 2017) for several times. WhileHongqiao is now trading at ~10x 2026E P/E, we see potential for furtherupside as: (1) the near-term industry demand/supply is highly favourablethat could further boost sentiment; (2) the substantial enhancement ofbalance sheet (close to net cash by end-2026E from net debt to equity ratioof 24% by end-2024) will serve as a risk-reduction valuation driver.
Earnings sensitivity. We estimate every 1% increase in aluminium pricewill boost Hongqiao’s earnings by 3%, while a 1% decrease in coal price willincrease earnings by 0.4%.
Key risks: (1) unexpected removal of capacity cap in China; (2) slowdownof global economy; (3) sharp increase in input costs such as bauxite.