Despite resilient aluminum prices this year, shares of CHINAHONGQIAO (01378) have remained under pressure. This is primarily due to negative market sentiment rather than a deterioration in fundamentals, with the current valuation reaching an "excessively pessimistic" level that offers significant upside potential. Consequently, Bank of America has reiterated its "Buy" rating on the stock with a target price of HK$45.
Addressing Capacity Utilization Concerns
The report addresses market concerns about China's primary aluminum capacity utilization rates reaching 105%-110%. The company has clarified that the 103%-104% rate seen in the first half does not represent the full-year trend, with a sustainable range being 99%-101%. The National Development and Reform Commission's three-year plan to upgrade 300-400kA electrolytic cells, which account for 10%-20% of 300kA capacity, will temporarily lower operating rates. Given the precedent of the 2017 industry consolidation, the sector is "unlikely to risk crossing regulatory red lines."
Indonesian and Middle Eastern Supply Fears Overblown
Fears regarding rapid capacity expansion in Indonesia are also considered exaggerated. The bank notes severe infrastructure bottlenecks, with equipment even needing to be sourced from other industries, implying limited actual output and suggesting future supply growth will be gradual. Regarding the Middle East, even before recent conflicts, local aluminum prices there were 10%-13% higher than in China. Reconstruction needs are expected to boost consumption, and restarting capacity takes 6-18 months, making a near-term supply shock unlikely.
Supportive Market Dynamics and Financials
Furthermore, with the Shanghai-London price spread widening and LME inventories at historically low levels (around 310,000-320,000 tonnes), China's aluminum product exports have accelerated significantly since April. Domestic inventories have fallen from a peak of 1.4 million tonnes to 1.2 million tonnes. Long-term demand growth is supported by aluminum's role in the energy transition and emerging industries.
Trading at a forward 2026 price-to-earnings ratio of 6-7x, the market is pricing in excessive pessimism. The company reported a Q1 profit of RMB 7.7-8.0 billion, with Q2 expected to be similar. Current aluminum prices remain firm near RMB 24,000/tonne, with a profit margin of approximately RMB 8,000/tonne, indicating strong earnings visibility. The company has also completed a share buyback exceeding HK$6.5 billion this year, with a dividend payout ratio of 63%-65%, translating to a dividend yield of about 10%. These factors collectively provide solid support for the share price of CHINAHONGQIAO.
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