3Q18 results in line with expectation
Chalco’s 1-3Q18 revenue fell 10% YoY to Rmb126bn; its attributablenet profit rose 11% YoY to Rmb1.5bn or Rmb0.10/sh, while recurringattributable net profit declined 40% YoY to Rmb760mn. 3Q18revenue dropped 11% YoY to Rmb43.3bn （-4.6% QoQ）， andattributable net profit rose 6.8% YoY to Rmb641mn （+19% QoQ） withnon-recurring P&L at Rmb12.2mn. 3Q18 earnings improved QoQthanks to rising alumina prices.
Comment: 1） 3Q18 domestic average alumina prices rose 10.5% YoYto Rmb3,080/t （+5.5% QoQ）， while domestic average aluminumprices fell 6.5% YoY to Rmb14k/t （-0.6% QoQ）。 3Q18 blended grossmargin climbed 0.4ppt YoY to 9.4% （+1.3ppt QoQ）。 2） 3Q18 salesexpense grew 33% YoY to Rmb760mn （+56% QoQ）。 3） 1-3Q18investment income increased Rmb450mn YoY, while fair value gainsgrew Rmb140mn YoY. 4） 1-3Q18 OCF improved 6.2% YoY to Rmb9bn;5） 1-3Q18 effective tax rate rose 8.1ppt YoY to 25.7%.
Trends to watch
Weak near-term momentum for aluminum prices. Domesticaluminum inventory stayed high at 1.5mn tonnes, weighing on nearterm prices. We suggest watching production suspension in winter.
Domestic alumina to enjoy price support. We expect overseasalumina supply to remain tight in the near term due to productionsuspension at Hydro. We see price support for alumina in domesticmarket, given environmental production suspension.
Earnings forecast
We raise 2018 EPS forecast 9% to Rmb0.13, and keep 2019 forecastRmb0.15 unchanged.
Valuation and recommendation
Chalco-H is trading at 18.2/16.5x 2018/19e P/E, while Chalco-A istrading at 27.2/24.6x 2018/19e P/E. Maintain HOLD for Chalco-H/Awith TP at HK$3.5 （21.2/19.2x 2018/19e P/E） and Rmb4.3 （31.9/28.8x2018/19e P/E）， implying 17/17% upside room.
Risks
Disappointing demand or prices of aluminum and alumina.