Tianfeng Securities released a research report stating that maintaining China's Hongqiao (01378) “buy” rating, considering that alumina prices have remained high since 24Q1 and the combined decline in coal prices (which are beneficial to the company), the company's net profit returned to mother in 24/25 was raised from 121.2/13.78 billion yuan to 151.62/15.552 billion yuan. The bank said that in '24, the supply and demand situation for electrolytic aluminum is expected to remain relatively good as new domestic incremental measures and inventory policies take effect, compounding supply-side constraints.

Tianfeng Securities's main views are as follows:

Revenue rose steadily in 2023, and profit increased significantly

In 2023, the company achieved revenue of 133,624 billion yuan, +1.5% year-on-year; realized net profit of 11.461 billion yuan, +31.7% year-on-year. Among them, 23H2 achieved revenue of 67.890 billion yuan, H1 +3.3% month-on-month; realized net profit of 9.04 billion yuan, +266.5% month-on-month. Revenue has been rising steadily, and profits have increased significantly.

Decrease in the cost of raw materials for electrolytic aluminum and the profit contribution of participating companies led to an increase in net profit to mother

Gross profit: 1) Aluminum alloy: Production and sales volume in 23 was 626.5/5.748 million tons, respectively, +3.7%/+5.0% year-on-year; ton sales price/ton operating cost/ton gross profit was 16465/13602/2863 yuan, respectively. Although the price of aluminum has declined, the fall in the price of pre-baked anodes on the cost side and the drop in coal prices have brought about a significant improvement in the cost of the company's own electricity, and the gross profit per ton has increased significantly. The increase in volume was compounded by the increase in tonnage profit, and the company's aluminum alloy sector achieved gross profit of 16.456 billion yuan, +26.8% over the same period last year. 2) Alumina: The sales volume of alumina products in '23 was 10.374 million tons, +25% over the same period; the sales price per ton operating cost/ton gross profit was 2560/2275/285 yuan, respectively. The alumina sector contributed 2,960 billion yuan in gross profit, -9.5% year-on-year. 3) Aluminum alloy processing products: Production and sales volume in 23 years was 770/580,000 tons; ton sales price/ton operating cost/ton gross profit was 19828/17011/2818 yuan, respectively. The aluminum alloy processing products sector contributed 1,634 billion yuan in gross profit.

Other profit/expense items:

1) The company's administrative expenses in '23 were 4.953 billion yuan, -16.5% year-on-year, mainly due to a decrease in exchange losses included in administrative expenses during the year; 2) Due to the increase in total loans and the increase in average financing costs, the company's financial expenses in '23 were 3.268 billion yuan, +8.2% year-on-year. In the current context of the large gap between China and the US, the company is expected to reduce future financial costs in the low domestic interest rate environment by replacing short-term debt through refinancing. 3) In '23, the company calculated a loss of 805 million yuan in property, plant and equipment. 4) In '23, the company accounted for the net profit of the associated company of 1,193 million yuan, +137.1% year-on-year. The bank determined that it was mainly due to Guinea bauxite contributing a lot to the increase in profit.

Stable and sufficient cash flow to maintain high dividends

In '23, the company achieved a net operating cash flow of 22.402 billion yuan, +193.9% year-on-year, and 6.046 billion yuan for capital expenses. Furthermore, at the end of 2023, the company plans to pay dividends of HK29 cents per share, along with a cumulative dividend of HK63 cents per share in the middle of the year, for a total dividend of about 5.4 billion yuan. The corresponding dividend payment rate is about 47.2%, maintaining a high dividend.