Preliminary results miss DB and consensus estimates
Chalco released its preliminary results after market today with NPAT ofRMB380mn, increasing c.85% YoY. Results missed both DB and consensusestimates as the announced NPAT only represents 44% and 76% of DB andconsensus estimates respectively. The company also indicated that PBT isc.RMB1600mn (7.3x higher than the previous year), which is 20% below DBebut slightly higher than consensus estimates.
Lower bottom line on stronger minorities and hedging business in 4Q16
Despite the robust spot aluminium price in 4Q16, we expect Chalco’saluminium segment performance to be relatively muted, due to price hedgingand raw materials price hikes in 4Q (coal and alumina). Alumina ends up beingthe major earnings driver in the fourth quarter, but quite a few profitablealumina plants like Shanxi Huaxing are not 100% owned by Chalco, resultingin larger minorities than we expected. To a lesser extent, a caustic soda pricehike during 4Q may have had more effect on alumina unit cost than weoriginally anticipated.
Challenging fundamentals but uncertainty in “supply side reform”; Hold onvaluation
Chalco’s management has done well on cost control in the past year, in ouropinion. Also, they indicate that the company will try to move into the top 30-40% of the industry cost curve this year (vs. 50% last year) by establishingmore efficient and lower cost capacities in provinces like Inner Mongolia andShanxi, among others. However, with high levels of expected new capacityramp-ups, the fundamentals of the aluminium industry still look challenging.Potential supply side reform nowadays has become the major upside risk afterwhat the government has done to coal, steel and power plants earlier. Yet, wehave little visibility on this aspect given its private dominant nature andrelatively decent demand growth vs. other sectors. Chalco is now trading at1.1x 2017 BVPS, with c.5% ROE, we maintain our Hold rating on Chalco.