2018 results miss expectation
Chalco announced its 2018 results. Revenue fell 0.4% YoY toRmb180bn, and net profit declined 38% YoY to Rmb870mn（Rmb0.05/sh）， or 81% YoY to Rmb158mn excluding one-offs. In 4Q18,revenue rose 33% YoY or 26% QoQ to Rmb54.5bn, but net profitslumped 1,061% YoY or 198% QoQ to –Rmb626mn, mainly due toRmb2.6bn provision for impairment of assets.
In 2018, China’s aluminum ASP fell 1.6% YoY to Rmb14.2k/t, butalumina ASP rose 2.8% YoY to Rmb2.97k/t. In 4Q18, aluminum ASPfell 8.5% YoY or 3.9% QoQ to Rmb13.9k/t, and alumina ASP dropped11.6% YoY or 0.6% QoQ to Rmb3.07k/t. Chalco’s 2018 aluminumoutput and sales rose 16% YoY and 20% YoY to 4.17mnt and 4.29mnt.
Alumina output and sales volume grew 5.5% YoY and 4.9% YoY to13.5mnt and 7.45mnt. In 2018, provision for impairment of assetsrose Rmb2.45bn YoY to Rmb2.47bn, including Rmb2.25bn provisionfor impairment of inventories, mainly in 4Q18. G&A expense fell17.5% YoY to Rmb2.9bn, and G&A expense ratio fell 0.3ppt in 2018.Operating cash flow declined 1.2% YoY to Rmb13.2bn in 2018.
Trends to watch
Some greenfield and brownfield projects both at home and abroadare scheduled to start production in 2019. Alumina prices facedownside risk. While the aluminum industry faces limited downsidedue to extensive losses, aluminum prices are unlikely to rise in thenear term due to elevated physical aluminum inventories of 1.69mt.
Earnings forecast
We maintain 2019e EPS forecast at Rmb0.13 （adjusted for changesin share capital）， and introduce 2020e EPS forecast at Rmb0.15.
Valuation and recommendation
Chalco-A is trading at 32.1/27.3x 2019/20e P/E, and Chalco-H at 19.6/16.6x. Maintain HOLD rating and target prices for Chalco-A/-H. Toreflect changes in share capital, we adjust TP to Rmb3.8 forChalco-A （29.1/24.7x 2019/20e P/E and 9% downside）， and HK$3.1for Chalco-H （21.0/17.8x 2019/20e P/E and 7% upside）。
Risks
Disappointing aluminum demand; sharp decline in aluminum price.