Decent OP numbers in 3Q17 but investment losses
Chalco released 3Q17 results on Friday night, reporting NPAT of RMB604m,realizing 24% and 25% of DBe and consensus, respectively. We note that thecompany incurred investment losses of about RMB470m in the third quarter,mainly from hedging and investments in some local power plants and coal mines. Management expects these losses to narrow in 4Q17, as it sees no furthersignificant loss in coal mines investment, and the company is currently doingminimum hedging, although there is uncertainty in the power business. If we stripout the investment losses, Chalco's operation was quite decent, reaching NPATof almost RMB1b in 3Q17 alone.
Positive outlook for 4Q17; self-mined bauxite and new capacity help withearnings
During the earnings call last Friday, management expressed its positive view onaluminum and alumina prices in 4Q17, citing supply shortages and rising rawmaterials prices caused by heating season production cuts as the main drivers.
Furthermore, environmental inspections at Shanxi and Henan Province （bothmajor bauxite producers in China） have limited the supply of domestic bauxite,leading to an alumina price hike together with strong coal and soda prices. Chalcocurrently has a 50% self-sufficiency rate for bauxite with about 800mt resourcesglobally, and thus faces less pressure. More particularly, Chalco's alumina unitcost increased by only about RMB30/t （or 1.4%） QoQ in 3Q17. As at the end ofSeptember, Chalco's operating smelting capacity had reached 4mt, with ongoingcapacity ramping up; management expects 4.5-4.6mt aluminium output nextyear, indicating 1mt volume increase yoy.
Valuation and risks
We base our HKD6.9 target price on 2017E PB multiple of 2.2x, which is +1standard deviation from Chalco's average since its listing in 2001. We believe thismultiple is fair as Chalco's ROE is improving from break-even last year to 12%-plus in 2018 （a record high post the 2007 super-cycle）。 We maintain our positiveoutlook on China's supply side reform, and view Chalco as a direct beneficiarywith its 2mt upcoming capacity in 2017-18 and no smelters affected by heatingseason cuts. We maintain Buy on Chalco. Risks include weaker implementationof China supply-side reforms and higher production costs.