Citigroup has released a research report stating that recent share price performance of China Hongqiao (01378) and CHALCO (02600) has significantly underperformed the movement of aluminum prices. This is attributed to investor concerns over weakening demand amid rising energy costs and a shift in capital allocation from the commodities sector towards AI-related technology stocks.
Additionally, the report notes new concerns emerging from recent market discussions, including the accelerated development of projects in Indonesia and fears that China's primary aluminum production capacity cap might be breached.
Addressing these concerns, Citigroup suggests that worries about exceeding the capacity cap stem from opportunistic overproduction by some companies due to high profit margins. While the effective capacity ceiling has been raised from 45.5 million tons to 48 million tons, the fundamental cap remains unchanged. The bank believes such overproduction is not widespread in China, as most large-scale smelters avoid operating beyond their approved capacity, and this behavior is unsustainable in the long term.
Regarding the acceleration of Indonesian projects, Citigroup points out that this could potentially add 2.9 million tons of new aluminum production by 2026-2027. However, this projection likely assumes all projects achieve full capacity as planned by their owners. The bank cautions that supply forecasts based directly on announced project pipelines often lead to overestimated expectations.
In the current environment of weak investor sentiment, these concerns provide a rationale for continued rotation away from aluminum stocks towards AI-related tech sectors. Nonetheless, Citigroup believes these fears over increased supply are exaggerated.
The bank anticipates that aluminum prices and industry profit margins will stay elevated for a prolonged period, and strong free cash flow will continue to support shareholder returns via dividends and share buybacks. It views the current stock price weakness as a buying opportunity and maintains its 'Buy' ratings on both China Hongqiao and CHALCO.
Citigroup has set a target price of HK$48 for China Hongqiao. This target is based on a 2026 forecast price-to-earnings (P/E) ratio of 13.0x, aligning with the average for its Chinese peers. It also corresponds to a 2026 forecast price-to-book (P/B) ratio of 2.7x and a P/E of 12.9x.
For CHALCO, the target price is HK$17.08. This is derived from a 2026 forecast P/B of 2.83x, which represents a level 2.25 standard deviations above its historical average P/B of 1.27x. This premium reflects an expected return on equity (ROE) for 2026-2027 that is significantly higher than historical averages, benefiting from elevated aluminum prices.
Furthermore, Citigroup has set a target price of RMB 7.24 for Aluminum Corporation Of China Limited's (601600) A-shares. This is based on a 2026 forecast P/B of 3.28x, equivalent to a level 2 standard deviations above its historical average P/B of 1.86x.
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