Chalco reverse roadshow in Inner Mongolia and Shanxi
Chalco held its reverse roadshow in Inner Mongolia and Shanxi last week.During the trip, we visited its flagship smelter Baotou Aluminium and refineryShanxi Huaxing. Chalco CFO Mr. Zhang and mgmt from Baotou Aluminiumand Shanxi Huaxing joined the meeting, and below are our key takeaways.
Cost control on track
Management earlier this year mentioned its unit cost target to be aroundRMB10000/t for aluminium and RMB1800 for alumina (both VAT inclusive).According to CFO Mr. Zhang, the company is close to the target now, thanksto aggressive cost-reduction initiatives it applied and lower raw material costsin 1H16. Meanwhile, it has pretty much done with direct power purchasenegotiation, with externally average power tariff at RMB0.28/kwh. Thus, hebelieves there is no difficulty to achieve the target, but also expects limitedfurther reductions from this level.
Inner Mongolia and Shanxi is the focus in the future
Baotou Aluminum, with 550kt capacity currently, is among the top 10 smeltersin China in terms of cost competitiveness, in a conservative way, according tomanagement. Its self-generated power cost is only around RMB0.12/kwh withutilization hours of 8500hrs+ (vs. grid electricity cost at RMB0.35/kwh). Thenewly ramped-up Shanxi Huaxing refinery achieved unit cost of c.RMB1500/t(VAT exclusive) in 1H16, and management indicates it can achieve unit cost ofRMB1400/t in the second half of the year. With the strategic advantage inInner Mongolia and Shanxi (abundant bauxite, coal resources and moreattractive transportation cost now), management expects more capacities inthose areas to replace the cost-inefficient ones.
Becoming more cost competitive but pressure in metal price; maintain Hold
Chalco has become more cost competitive, thanks to the intensive costreduction initiatives in the past few years. We thus expect it to turn positive atoperational level this year. However, growing cost competition (i.e., evenflatter cash curve) and recent decent spread will likely result in weakeraluminium price in 2H16. Our target price of HKD2.7 is based on 0.9x PB –historical average PB since 2013 and 2016 DBe BVPS. Chalco is currentlytrading at 0.8x 2016DBe BVPS. We believe it is fairly valued and thus maintainour Hold rating. Risks: better-/worse-than-expected cost control anduncertainty in restarts.