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Company Analysis - Aluminium Apr 27, 2018 | Published by SMM | 18 Pages
Great Divergence between Two Aluminum Giants _______________________________________ 2
Capacity cuts + cost supports, SMM bullish on aluminium prices ___________________________ 3
Demand is recovering __________________________________________________________________ 3
Rebound of overseas demand mitigates impacts of US tariffs __________________________________ 3
Domestic demand picks up in the peak season ______________________________________________ 4
Limited supply additions, Rusal hits global supply ___________________________________________ 5
Aluminium prices to be supported by costs _________________________________________________ 6
Two negative factors already priced in _____________________________________________________ 7
Comparison of two aluminium majors ________________________________________________ 9
Similarities in Business Structure _________________________________________________________ 9
Difference in Financial Performance _____________________________________________________ 10
China Hongqiao and Chalco’s Advantages _________________________________________________ 13
Capacity: Chalco adds new capacity, Hongqiao Sees Lower CAPEX _____________________________ 13
Cost: Chalco on bauxite, Hongqiao on power ______________________________________________ 14
Hongqiao has shorter accounts receivable days ____________________________________________ 15
Implications for valuations and stock performance __________________________________________ 16
Contact us ______________________________________________________________________ 18
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Great Divergence between Two Aluminum Giants Chalco and China Hongqiao are among the largest producers of aluminum globally, with similar business structure. Yet, a great disparity persists in their financial metrics, which we expect to be reflected in share price performance.
Similarities in Business Structure, Marked Difference in Financial Performance
We see similarities in the business structure of Chalco and China Hongqiao, as both are integrated producers with bauxite mining, alumina refining and aluminium smelting. While the two companies have similar business models and both strive for vertical integration, they have different operational advantages which were reflected in their financial statements. China Hongqiao’s EBITDA margin fell to 20.5% in 2017 from 33.2% in 2016, due to the shutdown of aluminium capacity in 2017. Chalco’s EBITDA margin was 7.9% in 2017, down only slightly from 8.9% in 2016.
Own Advantages: Chalco on bauxite, Hongqiao on power
SMM believes Chalco and Hongqiao have their own advantages. Chalco: 1) New compliant capacity of 1.5 million mt to be added from 2018 to 2020; 2) New capacity enjoying lower energy consumption rate, together with higher self-sufficiency rate of alumina, reducing unit cost. China Hongqiao: 1) lower electricity costs due to higher ratio of captive power; 2) Falling CAPEX and financial expenses.
Capacity cuts + cost supports, SMM bullish on aluminium prices
SMM is bullish on a rebound in aluminium prices, and expects 2018 average SHFE prices to range from 13,500-15,500 yuan/mt. Prices will be supported as overseas demand picks up and domestic demand improves, and limited supply additions in China. Power costs will remain at high levels as industrial consumption of electricity grows and as government regulations on captive power plants intensify. As overseas supplies of alumina shrink and as China’s domestic inventories dwindle, alumina costs are likely to remain at high levels.
SMM Views Chalco Provides Aluminum Exposure with Lower Risks
We prefer Chalco over China Hongqiao, as Chalco has 1.5 million mt new capacity additions in 2018-2020E and is 60% self-sufficient of bauxite as of 2018E. However, Hongqiao may expose to policy impacts such as the supply-side reform and the winter heating season cut, unlikely to add new capacity, as the government decides to regulate the domestic aluminum industry and tackle on the environmental issues. SMM expects Chalco’s net profit in 2018/2019/2020E to be 2.22/2.41/3.58 billion yuan, up -6/9/49% year on year, while China Hongqiao’s net profit in 2018/2019/2020E to be 10.91/12.07/12.88 billion yuan, up 104/11/7% year on year.
SMM runs our base/bull/bear case scenarios based on our price assumptions for aluminum in 2018-20E and provides a possible range for company outlook.
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Capacity cuts + cost supports, SMM bullish on aluminium prices Demand is recovering
SMM expects the consumption of primary aluminium from construction, transportation, and electronics to be 37.65 million mt, 39.85 million mt and 41.65 million mt in 2018, up 6.8%, 5.8% and 4.5% year on year respectively. SMM estimates that demand from construction, transportation, electronics accounted for 34%, 24% and 18% of China’s total consumption of aluminium in 2017.
As overseas demand picks up and domestic demand improves, SMM expects aluminium prices to be well-supported in the traditional peak demand season.
China’s Aluminium Consumption Breakdown China’s Annual Consumption of Aluminium
Source: SMM
Rebound of overseas demand mitigates impacts of US tariffs
SMM expects the downside of the US import tariffs will be mitigated as overseas demand rebounds and as the list of countries that will be affected by the tariffs are likely to be revised.
China’s exports of aluminium products stood at 440,000 mt in January, 370,000 mt in February and 452,000 mt in March, according to China Customs, up 14.3%, 43% and 10.2% year on year respectively, as overseas demand rebounded. China’s total exports of aluminium products were 4.76 million mt in 2015, 4.59 million mt in 2016 and 4.83 million mt in 2017, according to SMM data, accounting for 15.6%, 14.4% and 13.3% of China’s total output. Exports to the US were 760,000 mt, 790,000 mt and 1.03 million mt, accounting for 15.9%, 17.3% and 21.3% of China’s total exports.
0
2,000
4,000
6,000
8,000
10,000
12,000
2012
2013
2014
2015
2016
2017
2018
E
constructure transportpower electronics machinerydurable consumer goods packageother
1,000 mt
0%2%4%6%8%10%12%14%16%
0500
1,0001,5002,0002,5003,0003,5004,0004,500
2013
2014
2015
2016
2017
2018
E
2019
E
2020
Econsumption YoY-RHS
1,000mt
4
China’s Aluminium Export Volume China’s Aluminium Export Volume to the U.S.
Source: SMM
Domestic demand picks up in the peak season
Demand grew in the traditional high season of March and April. SMM calculates China’s aluminium apparent consumption to be 3.01 million mt in January, 2.36 million mt in February, and 2.91 million mt in March. Consumption in January inched up 0.6% on the month but declined 21.6% in February. Consumption in March gained 23.2% on the month. SMM expects the marginal elasticity of demand to increase in the short-term due to the high season.
SMM Estimated Apparent Consumption of Aluminium
Source: SMM
-20%-10%0%10%20%30%40%50%
050
100150200250300350400450500
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep-
17
Nov-
17
Jan-
18
Mar
-18
export volume YoY-RHS
1,000mt
0%10%20%30%40%50%60%70%
0
1,000
2,000
3,000
4,000
5,000
6,000
2013
2014
2015
2016
2017
export volume-LHS YoY-RHS
1,000mt
-30%
-20%
-10%
0%
10%
20%
30%
40%
0
500
1000
1500
2000
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3500
Jan-
15
Mar
-15
May
-15
Jul-1
5
Sep-
15
Nov-
15
Jan-
16
Mar
-16
May
-16
Jul-1
6
Sep-
16
Nov-
16
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep-
17
Nov-
17
Jan-
18
Mar
-18
estimated demand MoM-RHS
1,000mt
5
Limited supply additions, Rusal hits global supply
Limited supply additions in China
SMM expects supply growth in China to be limited as the commissioning of new capacities slows down. SMM forecasts China’s aluminum capacity to be 46.1 million mt, 48.6 million mt, and 50 million mt in 2018, 2019 and 2020 respectively, up 10%, 5% and 3% year on year. Commissioning timelines will also be affected by the routinization of environmental policies and quotas for new capacity. There is also limited upside room to drive up utilisation rates, as the rates are already high. SMM estimates that China’s capacity utilisation for primary aluminium stood at 78% in 2015, 74% in 2016 and 86% in 2017.
China’s Aluminium Capacity China’s Aluminium Capacity Utilization Rate
Source: SMM
Rusal hit global supply US sanctions on Rusal and the LME’s suspension of Rusal metals from its list of approved brands reduced global supplies of aluminium. Rusal produced 3.6 million mt, 3.69 million mt and 3.71 million mt of primary aluminum in 2015, 2016, and 2017, accounting for 5.7%, 5.6% and 5.3% of global supply.
Rusal’s Market Share
Source: SMM
-5%
0%
5%
10%
15%
20%
0
10,000
20,000
30,000
40,000
50,000
60,000
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
capacity YoY-RHS
1,000mt
72%
74%
76%
78%
80%
82%
84%
86%
88%
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
0%
2%
4%
6%
8%
10%
0
1,000
2,000
3,000
4,000
5,000
2012
2013
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2015
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2017
output market share-RHS1,000mt
6
Aluminium prices to be supported by costs
Aluminium prices to be supported by high power, alumina costs
SMM expects power costs to remain at high levels as industrial consumption of electricity grows and as government regulations on captive power plants intensify. As overseas supplies of alumina shrink and as China’s domestic inventories dwindle, alumina costs are also likely to remain at high levels.
SMM calculates the average production cost in China’s aluminium industry to be 14,163 yuan/mt (including taxes) in March based on alumina price of 2,863 yuan/mt, pre-baked anode price of 3,767 yuan/mt and electricity costs of 4,566 yuan/mt, higher than the average aluminum price which was 13,816 yuan/mt.
Average Power Cost of China Aluminium Industry SMM Aluminum Cost Breakdown
Source: SMM
Market-driven capacity cuts of aluminium, prices supported by costs
Average costs in China’s aluminium industry for January and February rose on greater environmental expenses and higher thermal energy costs. Costs stood at 14,863 yuan/mt in January and 14,306 yuan/mt in February, according to an SMM survey, up 8.4% and 8.5% year on year respectively. Gross profit per mt declined to 800 yuan/mt in January and 150 yuan/mt in February, hampering the resumption of high-cost capacity.
China’s running capacity of aluminium for the first quarter of 2018 stood at 34.34 million mt, according to SMM channel checks. About 10.5% of capacity ran at a cost over 14,700 yuan/mt. The average spot price of aluminium in the first quarter stood at 14,146 yuan/mt.
SMM believes that capacity cuts of aluminium drove the metal to be priced based on fundamentals. Prices have fallen and hampered the resumption of production of energy-intensive capacity.
3,4003,6003,8004,0004,2004,4004,6004,800
Jan-
17Fe
b-17
Mar
-17
Apr-1
7M
ay-1
7Ju
n-17
Jul-1
7Au
g-17
Sep-
17Oc
t-17
Nov-
17De
c-17
Jan-
18Fe
b-18
yuan/mt
0%5%10%15%20%25%30%35%
02,0004,0006,0008,000
10,00012,00014,000
Jan-
17
Mar
-17
May
-17
Jul-1
7
Sep-
17
Nov-
17
Jan-
18
other salaryalumina powerprebaked anode YoY-RHS
yuan/mt
7
SMM’s Model of Aluminum Gross Profit SMM Q1 Aluminium Production Cost Curve
Source: SMM
Two negative factors already priced in
SMM believes that high social inventories of primary aluminium and falling prices of alumina accounted for the recent decline of aluminium prices. Alumina provided no cost support as the resumption of alumina production after the winter heating season grew supplies and pressured prices.
China’s primary aluminium inventories saw three consecutive weeks of decline, an indication of improving demand. Social inventories of primary aluminium stood at 2.22 million mt as of April 18, SMM data showed. This was down 0.67% from the previous week and down 3.06% from the record high of 2.29 million mt.
SMM Social Inventory of Aluminium
Source: SMM
Remark: Social Inventory held by traders and downstream users, except aluminium producers’ factory inventory.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
02,0004,0006,0008,000
10,00012,00014,00016,00018,000
Jan-
16
Apr-1
6
Jul-1
6
Oct-1
6
Jan-
17
Apr-1
7
Jul-1
7
Oct-1
7
Jan-
18
gross profit-RHS cost priceyuan/mt
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
0 1,000 2,000 3,000
yuan/mt
-4%-2%0%2%4%6%8%10%
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-17
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-18
inventory WoW-RHS
1,000mt
8
Overseas alumina supply falls, supporting prices Prices of alumina have soared on tight supplies overseas. About 3.2 million mt of overseas supply is likely to be affected by the 50% production cut at Norsk Hydro’s Alunorte refinery. This accounted for 4.6% of China’s alumina consumption at 70.28 million mt in 2017.
SMM Alumina Price FOB Alumina Price
Source: SMM
China’s inventory of alumina at low levels, supports prices China’s inventory of alumina in the first quarter was at relatively low levels. Inventories stood at 49.2 million mt, 63.7 million mt, and 77.5 million mt in January, February, and March respectively, down 58.5% 54.8% and 50.5% year on year. Output of alumina in China was 5.71 million mt and 5.08 million mt in January and February, up 2.3% and down 2.1% year on year respectively.
Growth of alumina output slowed down. Alumina supplies have not increased, given intensified environmental protection policies and the delay in production resumption. China’s Monthly Alumina Output China’s Inventory of Alumina
Source: SMM
2,0002,2002,4002,6002,8003,0003,2003,4003,6003,8004,000
Jan-
17Fe
b-17
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-17
Apr-1
7M
ay-1
7Ju
n-17
Jul-1
7Au
g-17
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c-17
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b-18
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-18
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8
yuan/mt
0100200300400500600700800
Jan-
17Fe
b-17
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-17
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17M
ay-1
7Ju
n-17
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g-17
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c-17
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18Fe
b-18
Mar
-18
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18
dollar/mt
-5%0%5%10%15%20%25%30%
4,6004,8005,0005,2005,4005,6005,8006,0006,200
Jan-
17Fe
b-17
Mar
-17
Apr-1
7M
ay-1
7Ju
n-17
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7Au
g-17
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t-17
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17De
c-17
Jan-
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b-18
Output YoY-RHS
1,000mt
-60%-40%-20%0%20%40%60%80%100%
0200400600800
1,0001,2001,4001,6001,800
Jan-
17Fe
b-17
Mar
-17
Apr-1
7M
ay-1
7Ju
n-17
Jul-1
7Au
g-17
Sep-
17Oc
t-17
Nov-
17De
c-17
Jan-
18Fe
b-18
Mar
-18
inventory MoM-RHS
1,000mt
9
Therefore, SMM is bullish on a rebound in aluminium prices, and expects 2018 average SHFE prices ranges from 13,500-15,500 yuan/mt.
SHFE Aluminium Price and Forecast
Source: SMM
Comparison of two aluminium majors Similarities in Business Structure
We see similarities in the business structure of Chalco and China Hongqiao, as both are integrated producers with bauxite mining, alumina refining and aluminium smelting.
Chalco and China Hongqiao Production Volume 1,000 mt Chalco 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Bauxite 1,726 17,130 17,543 17,930 13,604 17,466 17,466 17,466 17,466 Alumina 1,244 12,143 12,024 13,296 12,027 12,810 12,934 12,934 12,934
Incl: chemical alumina 131 1,717 1,822 1,959 2,479 2,479 2,479 2,479 2,479 Aluminium 422 3,842 3,382 3,308 2,953 3,610 4,085 4,560 4,750
Bauxite self-sufficient rate
51% 49% 55% 55% 47% 60% 60% 60% 60%
Alumina self-sufficient rate
100% 100% 100% 100% 100% 100% 100% 100% 100%
China Hongqiao 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Bauxite 0 0 0 0 0 0 0 0 0 Alumina 161 2,932 4,335 6,805 5,550 11,815 10,819 11,148 11,368
Aluminium 181 2,360 3,131 4,359 5,940 7,544 6,500 6,558 6,687 Bauxite self-sufficient rate
0% 0% 0% 0% 0% 0% 0% 0% 0%
Alumina self-sufficient rate
43% 63% 64% 65% 61% 85% 85% 85% 85%
Source: Company Report, SMM
12,00012,50013,00013,50014,00014,50015,00015,50016,00016,50017,000
Jan-
17Fe
b-17
Mar
-17
Apr-1
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ay-1
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n-17
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g-17
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c-17
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Mar
-18
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ay-1
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c-18
2018 average SHFE prices ranges from 13,500-15,500 yuan/mt
yuan/mt
10
Bauxite: Chalco and China Hongqiao have been actively securing bauxite as China lacks the strategic resource. However, neither of them has achieved 100% bauxite self-sufficiency. Chalco has 15.35 million mt of bauxite capacity and it can reach 53% of self-sufficiency if its mines run at full capacity. Chalco’s bauxite self-sufficiency was 46.9% in 2016. Hongqiao has locked in its bauxite supply by taking a 22.5% stake in a bauxite mine in Guinea. According to SMM research, China Hongqiao is estimated to import about 28 million mt of bauxite from Guinea in 2017.
Alumina: Chalco is 100% self-sufficient in alumina. The company produced 12.81 million mt of alumina in 2017, far more than its own demand. Hongqiao, on the other hand, also actively ramped up its alumina capacity after investing in the Guinean bauxite mine. SMM estimates Hongqiao produced 11.82 million mt of alumina in 2017, up 113% year on year. This brought the self-sufficiency rate up sharply to 85%, from 61% a year ago.
Aluminium: Hongqiao and Chalco’s capacity in compliance reached 6.46 million mt and 3.8 million mt respectively as of end-2017. Hongqiao expanded its capacity during 2012-2017 and ranks the largest aluminum producer in China. The capacity growth, from 2.02 million mt to 6.46 million mt, reflected a CAGR of 26.3%. Meanwhile, Chalco decreased its capacity from 4.33 million mt to 3.8 million mt, showing a CAGR of -2.6%.
Difference in Financial Performance
While the two companies have similar business models and both strive for vertical integration, they have different operational advantages which were reflected in their financial statements. China Hongqiao’s EBITDA margin fell to 20.5% in 2017 from 33.2% in 2016, due to the shutdown of aluminium capacity in 2017. Chalco’s EBITDA margin was 7.9% in 2017, down only slightly from 8.9% in 2016.
Chalco Revenue and EBITDA Margin China Hongqiao Revenue and EBITDA Margin
Source: SMM
-4%-2%0%2%4%6%8%10%12%
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revenue EBITDA margin-RHS
mn yuan
15%
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40%
010,00020,00030,00040,00050,00060,00070,00080,00090,000
100,000
2013
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E
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revenue EBITDA margin-RHS
mn yuan
11
Chalco and China Hongqiao’s EBITDA Margin Chalco and China Hongqiao’s Net Margin
Source: SMM
Chalco Gross Profit China Hongqiao Gross Profit
Source: SMM
Chalco Net Profit China Hongqiao Net Profit
Source: SMM
-10%
0%
10%
20%
30%
40%20
13
2014
2015
2016
2017
2018
E
2019
E
2020
EChalco China Hongqiao
-15%-10%-5%0%5%
10%15%20%25%
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
Chalco China Hongqiao
-100%-50%0%50%100%150%200%250%300%
0
5,000
10,000
15,000
20,000
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
gross profit YoY-RHS
mn yuan
-10%0%10%20%30%40%50%60%70%
0
5,000
10,000
15,000
20,000
25,00020
13
2014
2015
2016
2017
2018
E
2019
E
2020
Egross profit YoY-RHS
mn yuan
-3000%-2500%-2000%-1500%-1000%-500%0%500%
-20,000
-15,000
-10,000
-5,000
0
5,000
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2020
E
Net Earnings YoY-RHS
mn yuan
-60%-40%-20%0%20%40%60%80%100%120%
02,0004,0006,0008,000
10,00012,00014,000
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
Net Earnings YoY-RHS
mn yuan
12
Chalco Operation Data ASP (yuan/mt,VAT) 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Alumina 465 551 709 707 834 732 651 577 567 Aluminium 15,694 14,612 13,551 12,075 12,208 14,435 14,002 14,982 15,582 Unit Cost
(yuan/mt) 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Bauxite self-owned 207 231 247 252 219 250 258 265 273 Bauxite from other
suppliers 309 393 412 383 328 407 370 392 412
Average power cost (yuan/kWh, excl VAT)
0.4597 0.4469 0.4170 0.3386 0.2844 0.3213 0.3309 0.3409 0.3477
Raw Material Consumption (1,000 mt) 2012
2013 2014 2015 2016 2017 2018E 2019E 2020E
Bauxite self-owned 17,262 17,130 17,543 17,930 13,604 17,466 17,466 17,466 17,466 Bauxite from other
suppliers 16,689 17,861 14,105 14,452 15,384 12,153 11,868 11,584 11,501
Power consumption per ton (kWh)
13,929 13,817 13,695 13,526 13,496 13,422 13,349 13,349 13,276
Source: Company Report, SMM
China Hongqiao Operation Data ASP (yuan/mt,VAT) 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Alumina 0 0 0 0 0 0 0 0 0 Aluminium 15,557 14,335 13,441 12,038 12,621 14,435 14,002 14,982 15,582 Unit Cost
(yuan/mt) 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Bauxite from other suppliers
354 394 485 394 398 415 378 400 420
Alumina from Gaoxing
1,829 1,880 1,890 1,885 1,732 1,905 1,915 1,924 1,934
Average power cost (yuan/kWh, excl VAT)
0.2455 0.2335 0.2072 0.1756 0.2141 0.2501 0.2575 0.2652 0.2705
Raw Material Consumption (1,000 mt) 2012
2013 2014 2015 2016 2017 2018E 2019E 2020E
Bauxite from external 6,220 22,399 6,422 15,299 19,410 33,082 29,211 31,215 31,830 Alumina from
Gaoxing 1,987 1,736 2,439 3,664 3,510 2,085 1,909 1,967 2,006
Power consumption per ton (kWh)
13,498 13,504 13,478 13,518 13,401 13,334 13,267 13,254 13,240
Source: Company Report, SMM
13
China Hongqiao and Chalco’s Advantages
SMM believes Chalco and Hongqiao have their own advantages. Chalco: 1) New compliant capacity of 1.5 million mt to be added from 2018 to 2020; 2) New capacity enjoying lower energy consumption rate, together with higher self-sufficiency rate of alumina, reducing unit cost. China Hongqiao: 1) lower electricity costs due to higher ratio of captive power; 2) Falling CAPEX and financial expenses.
Capacity: Chalco adds new capacity, Hongqiao Sees Lower CAPEX
Chalco is expected to add 1.5 million mt of aluminium capacity in compliance during 2018-2020, mostly in 2018. This year, the new projects are: 1) Mongolia Huayun, adding 100,000 mt of capacity; 2) Guangxi Hualei, adding 300,000 mt of capacity; 3) Guizhou Huarun, adding 400,000 mt of capacity. In 2019 and 2020, an addition 700,000 mt of new capacity will be added through the new project Mongolia Hunyun.
China Hongqiao’s CAPEX and financial expenses will decline. The company has no new capacity in 2018-2020 following the government policy in 2017 limiting its capacity by 2.68 million mt. SMM forecasts China Hongqiao’s depreciation costs to be 6.88 billion yuan, 6.27 billion yuan and 5.7 billion yuan, respectively in 2018, 2019 and 2020, and its financial expense ratio to be 3.43%, 3.37% and 3.34%. These declines would mean improving cash flows.
Aluminium Capacity, Chalco v.s. Hongqiao Aluminium Output, Chalco v.s. Hongqiao
Source: SMM
01,0002,0003,0004,0005,0006,0007,0008,000
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
Chalco Hongqiao1,000 mt
01,0002,0003,0004,0005,0006,0007,0008,000
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
Chalco Hongqiao1,000 mt
14
Depreciation Expenses, Chalco v.s. Hongqiao Financial Expense Ratio, Chalco v.s. Hongqiao
Source: SMM
Cost: Chalco on bauxite, Hongqiao on power
SMM views that the two aluminium majors have their own advantages – Hongqiao cut its power costs by building up power plants, while Chalco eyed cost savings by raising bauxite and alumina self-sufficiency. According to SMM forecasts, the production cost (excl. VAT) of Hongqiao would be 10,824 yuan/mt, 11,857 yuan/mt and 12,328 yuan/mt in 2018, 2019 and 2020, respectively. And those for Chalco stand at 9,716 yuan/mt, 10,739 yuan/mt and 10,876 yuan/mt, respectively. SMM believes Chalco is more competitive due to self-sufficient of bauxite.
Bauxite: Chalco is 100% alumina self-sufficient and about 50% bauxite self-sufficient. Hongqiao, which controls Guinea resources, buys bauxite at market prices. Therefore, SMM expects Chalco’s alumina costs to be lower by 31.8%, 33.8% and 35% in 2018, 2019 and 2020, respectively, than Hongqiao.
Power: Hongqiao relies 100% on captive power, whereas Chalco only has about 37%. Power cost (excl. VAT) of Hongqiao and Chalco was 0.2501 yuan/kWh and 0.3213 yuan/kWh in 2017. SMM expects Hongqiao’s power cost to be lower by 0.6%, 0.7% and 0.3% than Chalco in 2018, 2019 and 2020, respectively.
Production Cost of Chalco v.s. Hongqiao Power Cost of Chalco v.s. Hongqiao
Source: SMM
01,0002,0003,0004,0005,0006,0007,0008,0009,000
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
Chalco Hongqiaomn yuan
0%1%2%3%4%5%6%7%8%
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
Chalco Hongqiao
7,000
8,000
9,000
10,000
11,000
12,000
13,000
2016 2017 2018E 2019E 2020E
excl. VAT, yuan/mtChalco Hongqiao
0.0000
0.1000
0.2000
0.3000
0.4000
0.5000
2013 2015 2017 2019E
excl. VAT, yuan/kWhChalco Hongqiao
15
Power Consumption per ton of Chalco v.s. Hongqiao Power Cost per ton of Chalco v.s. Hongqiao
Source: SMM
Hongqiao has shorter accounts receivable days
Hongqiao has more stable accounts receivable and stronger customer stickiness. Hongqiao created a direct sales model by selling in the format of molten aluminium, which cuts transportation and pre-heating cost. The company made the aluminium processing industry cluster nearby its production bases, improving customer’s loyalty. According to SMM analysis, Hongqiao’s accounts receivable days were 5.15, 6.08 and 5.58 in 2015, 2016 and 2017, respectively, compared with Chalco’s 23.97, 19.66 and 23.41 days.
Accounts Receivable of Chalco v.s. Hongqiao Accounts Receivable Days of Chalco v.s. Hongqiao
Source: SMM
12,90013,00013,10013,20013,30013,40013,50013,60013,70013,80013,900
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
kWh/mt Chalco Hongqiao
01,0002,0003,0004,0005,0006,0007,000
2013
2014
2015
2016
2017
2018
E
2019
E
2020
E
excl. VAT, yuan/mt Chalco Hongqiao
02,0004,0006,0008,000
10,00012,00014,00016,00018,000
2013 2015 2017 2019E
Chalco Hongqiao
mn yuan
0
5
10
15
20
25
30
2013 2014 2015 2016 2017
Chalco Hongqiao
day
16
Implications for valuations and stock performance
SMM forecasts the revenue of Chalco in 2018-2020E to be 191.70/203.36/211.01 billion yuan, respectively, with 2.22 billion yuan, 2.41 billion yuan and 3.58 billion yuan of net profit. Basic EPS of Chalco are expected to be 0.08 yuan, 0.10 yuan and 0.17 yuan per share, respectively, and the corresponding P/E ratio would be 58x, 47x and 27x based on the closing price on April 26, 2018. SMM is optimistic about the low cost of bauxite due to 100% self-sufficiency rate in the next three years, and the profits will increase after the new capacity is commissioned.
SMM expects the revenue of China Hongqiao in 2018-2020 to be 81.5 billion yuan, 89.62 billion yuan and 94.88 billion yuan, respectively, and the net profit to be 10.91 billion yuan, 12.07 billion yuan and 12.88 billion yuan. Basic EPS of China Hongqiao are estimated to be 1.54 yuan, 1.67 yuan and 1.81 yuan per share, respectively, and the corresponding P/E ratio would be 5.5, 5.1 and 4.7 as of April 26, 2018. Hongqiao’s valuation is low after a huge asset impairment, but its future profitability will be stable. SMM is bullish on Hongqiao for that it has the largest capacity in China and will benefit from the rise of aluminium price.
Chalco Profit Forecast and Valuation Chalco 2015 2016 2017 2018E 2019E 2020E
Revenue (mn yuan) 123,446 144,066 180,081 191,697 203,357 211,009 Year on year -13% 17% 25% 6% 6% 4%
Net Income (mn yuan) 424 1,255 2,364 2,216 2,412 3,583 Year on year -102% 196% 88% -6% 9% 49%
EPS (yuan per share) 0.01 0.03 0.09 0.08 0.10 0.17 PE 304.8 299.6 55.4 58.0 46.6 27.4
Source: SMM
China Hongqiao Profit Forecast and Valuation Hongqiao 2015 2016 2017 2018E 2019E 2020E
Revenue (mn yuan) 44,110 61,396 91,145 81,498 89,615 94,880 Year on year 22% 39% 48% -11% 10% 6%
Net Income (mn yuan) 3,620 7,200 5,336 10,908 12,067 12,881 Year on year -32% 99% -26% 104% 11% 7%
EPS 0.58 1.01 0.71 1.54 1.67 1.81 PE (9.3) (0.4) 13.3 5.49 5.05 4.66
SMM runs our base/bull/bear case scenarios based on our price assumptions for aluminum in 2018-20E and provides a possible range for company outlook.
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