Citigroup has released a research report stating that the share price performance of both China Hongqiao Group Ltd (01378) and CHALCO (ASX: 02600) has significantly underperformed the movement in aluminum prices. This is due to investor concerns over weakening demand against a backdrop of rising energy costs, as well as a shift in capital allocation from the commodities sector towards AI-related technology stocks.
Concurrently, based on recent discussions with investors, Citigroup notes that new market concerns have emerged. These include the accelerated development of projects in Indonesia and worries that China's cap on primary aluminum production capacity might be breached.
Addressing these concerns, Citigroup commented that fears of breaching China's capacity ceiling stem from instances of overproduction by some firms due to high profitability. Although the effective capacity ceiling has been raised from 45.5 million tonnes to 48 million tonnes, the overall cap will not change. The bank understands this is not a widespread practice in China, as most large-scale smelters avoid exceeding their approved production quotas. Overproduction by some smelters is essentially opportunistic and unsustainable in the long term.
Regarding the acceleration of Indonesian projects, Citigroup pointed out that their rapid progress could bring an additional 2.9 million tonnes of aluminum production by 2026-2027. This assessment likely assumes all projects can achieve full production as per the owners' stated plans. However, when forecasting supply, directly using the total project pipeline for calculations often leads to an overestimation of expected supply.
Citigroup indicated that in the current market environment of weak investor sentiment, such concerns provide a rationale for investors to continue shifting away from aluminum stocks towards AI-related tech sectors. Nevertheless, the bank believes these fears about increased supply are overblown. It expects aluminum prices and industry profit margins to remain elevated for a longer period, while strong free cash flow will continue to support dividend payouts and share buybacks. The bank views the current share price weakness as a buying opportunity and maintains its 'Buy' rating on both China Hongqiao Group Ltd and CHALCO.
Citigroup has set a target price of HK$48 for China Hongqiao Group Ltd. This target is based on a 13.0x forward P/E ratio for 2026, aligning with the average for Chinese peers. It corresponds to a forward P/B ratio of 2.7x and a forward P/E ratio of 12.9x for 2026.
For CHALCO, Citigroup's target price is HK$17.08. This is based on a forward P/B ratio of 2.83x for 2026, representing 2.25 standard deviations above the historical average P/B of 1.27x. This premium reflects the expected ROE for 2026-2027, which is forecast to be significantly above the historical average, benefiting from higher aluminum prices. Additionally, Citigroup has set a target price of RMB 7.24 for Aluminum Corporation Of China Limited (ASX: 601600) A-shares. This target is based on a forward P/B ratio of 3.28x for 2026, equivalent to 2 standard deviations above the historical average P/B of 1.86x.
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