3Q results beat consensus but fell short of DBe on higher power cost
Chalco released its 3Q16 results with NPAT of RMB50mn, representing anincrease of 31% QoQ and achieving 118% of consensus estimates for FY16.However, the bottom line only achieved 6% of our FY16 earnings estimatebecause of the 5% QoQ increase in unit cost of aluminium as a result ofincreased electricity prices. Additionally, a higher effective tax rate as well as ahigher-than-expected minority interest subdued earnings. We expect thecompany will perform sequentially better in 4Q16, due to higher metal pricesand also because power maintenance has ended. Hold on valuation.
Unit cost rises on rising coal price and power plant maintenance in 3Q
The average aluminium price for the quarter increased 3% QoQ and 6% YoY.Despite revenue increasing by 44% QoQ, gross profit decreased by 5% QoQ asgross margin fell 2.7ppt relative to Q2. The unit cost of alumina wasRMB1770/t, a slightly decrease vs. 1H16, but the aluminium unit costincreased significantly from RMB10,080/t to RMB10,600/t. Chalco’s electricitycost during 1H16 reached historical low levels, but because of rising coalprices and maintenance in Q3, the company’s self-produced electricity costincreased to 0.32/kwh from 0.24/kwh in 1H16. The power self-sufficiency ratiodropped 5ppt to 32% during the reporting period due to maintenance activities.Overall, its average electricity cost increased to 0.31/kwh in 3Q16 andmanagement indicated that the net effect from coal was c.RMB60/t.
Stronger 4Q; maintaining Hold on valuation
We mainly attribute the recent aluminium/alumina price spike to the gamechange in logistics and rising coal price. We expect the local premium tonarrow gradually and thus bring down the spot price to a reasonable level,around RMB12500/t. The overall demand:supply remains healthy thanks todecent demand, well-controlled output and ingots inventory still at low levels.From a cost perspective, we expect a flattish power cost QoQ as maintenanceactivities have come to an end, but the thermal coal price is still rising. Overall,we expect a better 4Q sequentially on stronger aluminium and alumina prices.The company is currently trading at 0.9x PB and we maintain our Hold ratingon valuation. Risks include higher/lower metal prices and unit costs.