Citigroup has issued a research note, stating that due to investor concerns over weakening demand amid rising energy costs and a shift in capital allocation from the commodities sector to AI-related technology stocks, the share price performance of both China Hongqiao (01378) and Aluminum Corporation of China (02600) has significantly underperformed the underlying aluminum price trend. Concurrently, based on recent investor discussions, the market has developed new concerns, including the accelerated construction of projects in Indonesia and worries that China's cap on primary aluminum production capacity might be breached.
Addressing these market concerns, Citigroup indicated that fears about breaching China's aluminum capacity cap stem from some producers exceeding output limits due to high profitability levels. While the effective national capacity ceiling has been raised from 45.5 million tons to 48 million tons, the ultimate cap will not change. The bank understands this overproduction is not a widespread phenomenon in China, as most large-scale smelters avoid producing beyond their approved quotas. The overproduction by some smelters is essentially opportunistic and unsustainable in the long run.
Regarding the acceleration of Indonesian projects, Citigroup noted that their faster progress could bring an additional 2.9 million tons of aluminum production online by 2026-2027. This projection, however, likely assumes all projects achieve full capacity as declared by their owners. When forecasting supply, directly calculating based on total project pipeline size often leads to an overestimation of future supply.
Citigroup pointed out that in the current weak investor sentiment environment, such concerns provide justification for investors to continue shifting funds from aluminum stocks to AI-related tech sectors. However, the bank believes these fears about supply increases are overly magnified. It anticipates aluminum prices and industry profit margins will remain elevated for a more extended period, while strong free cash flow will continue to support shareholder dividends and stock buybacks. The bank views the current weak share prices as a buying opportunity, maintaining its 'Buy' ratings on both China Hongqiao and Aluminum Corporation of China.
Citigroup's target price for China Hongqiao is 48 Hong Kong dollars. This target is based on a forward 2026 price-to-earnings (P/E) ratio of 13.0x, aligning with the average for its Chinese peers. This target price implies a forward 2026 price-to-book (P/B) ratio of 2.7x and a forward 2026 P/E ratio of 12.9x.
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