China Hongqiao (01378) released a strong value signal: The subsidiary’s profit increased significantly quarter on quarter, and the certainty of growth was strengthened

China Hongqiao (01378) released a strong value signal: The subsidiary’s profit increased significantly quarter on quarter, and the certainty of growth was strengthened

 

An announcement from China Hongqiao (01378) revealed the key clue of the company’s performance turnaround.

 

ZhiTong Finance APP noted that recently, China Hongqiao disclosed the financial data of its subsidiary, Shandong Hongqiao New Materials Co., Ltd. (hereinafter referred to as “Shandong Hongqiao”) for nine months as of September 30. The announcement shows that in the first nine months of this year, Shandong Hongqiao achieved a revenue of 97.866 billion Yuan (in RMB, the same below) and a net profit of 6.525 billion Yuan.

 

Shandong Hongqiao is the core business entity of China Hongqiao. Through the financial data of Shandong Hongqiao, we can basically get a glimpse of the performance trend of China Hongqiao.

 

And this newly released Q3 report undoubtedly confirms from the side that the performance of China Hongqiao has ushered in a V-shaped turnaround. Looking back at the performance of Shandong Hongqiao this year, the company’s revenue in Q1, Q2 and Q3 was 32.774 billion Yuan, 31.698 billion Yuan and 33.394 billion Yuan respectively, and its net profit in the same period was 595 million Yuan, 1.612 billion Yuan and 4.318 billion Yuan respectively. Among them, the net profit of Shandong Hongqiao in Q3 increased by 226.2% compared with the same period of last year, and the quarter-on-quarter growth rate also reached 167.9%, with a rapid growth trend.
 

 

Shandong Hongqiao’s profit performance is getting better and better, which has already been traced. Taking the data of electrolytic aluminum industry in September as an example, the average spot price of A00 aluminum in the Changjiang Nonferrous Market was 19,543 Yuan/ton, with a year-on-year increase of 5.7% and a month-on-month increase of 4.7%; The average full cost including tax of the industry was 16,061 Yuan/ton, slightly higher by 50 Yuan/ton than 16,011 Yuan/ton in August, up by 0.31% from the previous month and down by 8.4% from the same period last year. Thanks to the increase of aluminum price significantly higher than that of alumina and coal, the profit per ton of aluminum in that month further expanded to 3,482 Yuan/ton, with a year-on-year increase of 260.5% and a month-on-month increase of 31.4%.

 

 

Aluminum prices continue to rise, and the pressure of superimposed costs is reduced. It can be seen that the electrolytic aluminum industry has entered a recovery cycle. As a leader in the industry, China Hongqiao’s performance elasticity has always been outstanding, so it is no wonder that its subsidiary had superior performance in Q3.

 

Combined with the current situation of supply and demand of electrolytic aluminum, the current strong market of electrolytic aluminum is expected to continue, and all kinds of signs indicate that aluminum prices may once again usher in a long bull trend.

 

First of all, from the supply side, at present, the domestic electrolytic aluminum production capacity is close to the limit, and the resumption of production by overlapping overseas production capacity is slow, so the growth rate of electrolytic aluminum supply is expected to continue to shrink.

 

The data shows that the current domestic built electrolytic aluminum production capacity has reached 44.611 million tons, which is close to the limit of domestic designated electrolytic aluminum production capacity. In terms of new production capacity, the domestic new capacity in 2023 is about 1,434,500 tons. After deducting the transfer capacity, the actual net new capacity is about 884,500 tons. Looking forward to 2024, after deducting the design capacity and transfer capacity, it is estimated that the annual net new capacity will be about 1.26 million tons.

 

From overseas point of view, since 2021, due to the rising energy prices, from 2021 to March 2023, the cumulative overseas production capacity of electrolytic aluminum was reduced to 2.158 million tons. At present, the price of natural gas in Europe has fallen sharply from a high level, but it is still at a high level, and the enthusiasm of electrolytic aluminum plants to resume production is not high. As of August this year, the overseas resumed production capacity was only 1,067,500 tons. While the new overseas production capacity is mainly concentrated in Asia. It is estimated that 6.605 million tons of new electrolytic aluminum production capacity will be built in 2022 to 2025, and the scale of incremental production capacity is limited.

 

 

In terms of changes on the demand side, according to the data of 2022, the global demand for primary aluminum is 69.2911 million tons, of which the domestic demand is 40.5479 million tons, accounting for 58.5% of the global consumption. Furthermore, construction real estate is the biggest link of primary aluminum consumption, accounting for about 29%. At present, with the continuous optimization of real estate policies in various places, the demand for real estate is expected to pick up, and the subsequent demand for aluminum for real estate is also expected to improve marginally. In addition, the rapid growth of aluminum for automobile lightweight, photovoltaic plate and ultra-high voltage construction has also had a positive impact on boosting the demand for electrolytic aluminum.

 

To sum up, the gap between supply and demand of electrolytic aluminum in the world is expected to continue to expand, given that the new capacity of electrolytic aluminum in the world is smaller and the demand level is more flexible. In other words, in the medium and long term, the upward movement of electrolytic aluminum price operation center will become a high probability event.

 

Looking back at China Hongqiao, the growth elasticity of China Hongqiao, as a global aluminum leader, is even more worth looking forward to because the industry has a long-term positive foundation at this stage obviously.

 

As far as its business structure is concerned, China Hongqiao’s business covers bauxite, electric power, alumina, electrolytic aluminum and aluminum alloy processing, etc., and has formed a full coverage supply chain integrating upstream and downstream.

 

Thanks to this, China Hongqiao has a better cost control ability than the industry. For example, China Hongqiao has opened an ocean-going combined transport channel for bauxite, with high transportation efficiency and outstanding cost advantages. For another example, relying on cheap imported minerals and steam from the group’s own power plant, the company’s alumina production has a great cost advantage. Moreover, China Hongqiao has also set up a regional independent power grid, which makes its electricity consumption cost lower than the industry average.

 

It is worth mentioning that in order to better assume social responsibilities and reduce carbon emissions, China Hongqiao is also promoting capacity replacement in an orderly manner and increasing the proportion of cleaner hydroelectric aluminum. It is reported that the company’s current main hydroelectric aluminum projects include Yunnan Wenshan project and Honghe project, and the scale of hydroelectric aluminum will be close to 4 million tons after all the projects are put into production. In addition, hydroelectric aluminum has more advantages at the cost end, and the subsequent expansion of hydroelectric aluminum will also help the company increase profits.

 

With both the “east wind” of industry recovery outside and its own outstanding resource endowment as well as growth flexibility inside, it can be expected that China Hongqiao will become the acknowledged leader in the new round of electrolytic aluminum cycle, and the growth prospect of the company is obviously worthy of investors’ optimistic expectation.