CITIC Construction Investment released a research report stating that maintaining China's Hongqiao (01378) “buy” rating, the company's net profit from 2024-2026 is estimated to be 16.4 billion yuan, 18.7 billion yuan, and 19.3 billion yuan, with EPS of 1.73, 1.97, and 2.04 yuan per share. In 2023, the company achieved operating income of 133.6 billion yuan, +1.46% year on year; realized net profit of 12.5 billion yuan, +27.4% year on year; realized net profit of 11.5 billion yuan, +31.7% year on year. The company achieved net profit of 9.0 billion yuan to mother at 23H2, +267% month-on-month and +952% year-on-year, with significant month-on-month recovery, and performance exceeded expectations.
The main views of CITIC Construction Investment are as follows:
Cost reduction led to single-ton gross profit restoration of electrolytic aluminum, combined with reduced expenses such as management expenses. The company's 23H2 profit increased sharply year-on-month, and the performance exceeded expectations
The price of aluminum fell slightly in 23 years (the average price of aluminum in the previous period was 18,473 yuan/ton, -6.9% year on year), but the price of coal on the cost side and the pre-baked anode fell significantly (the average price of port Q5500 thermal coal was 965 yuan/ton, -24.0%; the pre-baked anode was 6,287 yuan/ton, -23.2% YoY). The company's production capacity is mainly located in Shandong, and the proportion of its own electricity is high. Pre-baked anodes are most beneficial in this context. The company's gross profit of 23 tons of aluminum reached 2,863 yuan/ton, a year-on-year increase of 492 yuan/ton (+20.8%). In particular, the gross profit of 23H2 tons of aluminum reached 4,265 yuan/ton, +2,853 yuan/ton (+202%). At the same time, the company's administrative expenses in '23 were 4.95 billion yuan, -16.5% year-on-year, mainly due to a decrease in exchange losses included in administrative expenses during the year, of which 23H2 administrative expenses decreased by 660 million yuan month-on-month.
By product, the company's revenue of electrolytic aluminum was 94.6 billion yuan in '23; gross profit margin of 17.4%, +3.9 pct, production and sales volume of 627/5.75 million tons, +3.7%/5.0% year on year, average price of electrolytic aluminum was 16,465 yuan/ton; alumina revenue of 26.6 billion yuan, gross profit margin of 11.1%, sales of 10.37 million tons, +25%, average price of aluminum alloy processed products; revenue of processed aluminum alloy products was 11.5 billion yuan, gross profit margin of 14.2%, production and sales volume of 77.58 million yuan, average price of aluminum alloy processed products 19828 yuan/ton.
Electrolytic aluminum production capacity is close to peak, new energy consumption is diluting real estate pricing weight, and the gap between supply and demand is gradually widening
The growth rate of domestic production is slowing, and the pace of overseas production capacity is slow. Domestic production capacity of electrolytic aluminum peaked at 43 million tons in 2023, and the operating rate of production capacity was as high as 96%. The production capacity of electrolytic aluminum is infinitely close to the “ceiling” of 45 million tons. At the same time, the Yunnan area, which has an operating capacity of 5.8 million tons, experienced a 20-40% reduction in production every dry period, reducing future production growth to 1 to 2%. Domestic production is expected to be 42.87 million tons and 43.2 million tons in 2024 and 2025. The main plans for new overseas electrolytic aluminum production capacity are based in Indonesia, Vietnam, Iran and other places with outstanding resources and energy endowments. The planned quantity that can be implemented in the long term exceeds 5 million tons, and the production capacity is over 10 million tons. However, the project encountered a series of problems such as insufficient electricity support, high investment costs, and slow construction progress. As a result, almost no new overseas projects were put into operation in 2024, and 500,000 tons were invested in 2025.
The weight of real estate pricing in consumption has been diluted by new energy sources. From 2000 to 2020, the compound growth rate of China's electrolytic aluminum production reached 13.4%. As a variety dominated by domestic sales, such a high growth rate benefited from economic development, especially the urbanization process. At one point, the proportion of aluminum used in real estate was close to 30%, then gradually transitioned to 25%. However, after the rapid rise of aluminum used in NEVs and photovoltaics in 2021 and a drop of more than 15% in real estate completion in 2022, the downstream aluminum consumption structure in 2023 has been optimized to 22% for transportation, 21% for power electronics, 20% for construction, 10% for packaging, 10% for exports, 8% for durable goods, 7% for equipment, and 2% for others. The share of real estate has declined, and the weight in aluminum pricing has also been diluted.
Real estate completion is declining. Without changing the domestic electrolytic aluminum gap of 1 million tons, it is difficult to stop the upward trend in aluminum prices. In 2023, China produced 41.74 million tons of electrolytic aluminum and consumed 43.2 million tons. The 1.46 million ton gap was filled by 1.39 million tons of imports and 70,000 tons of inventory. Real estate declined by 14% and 20% in 2024 and 2025, respectively. Since transportation and power electronics are still developing rapidly, it is not difficult for domestic aluminum consumption to grow by 2%-3%. Under this growth rate, the domestic electrolytic aluminum gap in 2024 and 2025 was 1.14 million tons and 1.7 million tons, respectively. From January to February 2024, domestic production of electrolytic aluminum was 6.84 million tons, with net imports of 470,000 tons, with a cumulative year-on-year increase of 16.1%, exceeding expectations, and a steady rise in aluminum prices from 18,500 yuan/ton to 19,500 yuan/ton.
The company's debt ratio continues to decline, cash flow has improved dramatically, the current dividend ratio is outstanding, and capacity replacement and relocation are progressing in an orderly manner
The company's 23-year dividend was approximately $5.45 billion, corresponding to the annual average dividend rate of 47.6%. At HK$0.63 per share for the whole year, it corresponds to the latest dividend rate of 8.5%. The company's overall balance ratio basically showed a downward trend year by year after reaching a peak of 68.9% in 2016, and fell to 47.0% at the end of '23. The company's net cash flow from operating activities in '23 was 22.4 billion yuan, of which 23H2 reached 15.3 billion yuan, +116% month-on-month. The significant improvement in cash flow will help guarantee future dividend capacity. If the annual net profit is 16 billion yuan and the dividend rate is 50%, the company's dividend ratio is as high as 10.6%.
The company has a total production capacity of 6.46 million tons of electrolytic aluminum, mainly located in Shandong. It has transferred 1.5 million tons to Wenshan, Yunnan, and the rest is yet to be determined; in addition, early plans are to relocate 1.93 million tons of production capacity to Honghe, Yunnan. The project has already been listed as a demonstration project for a local green and low-carbon demonstration industrial park. After the overall relocation of the above projects is completed, Hongqiao will transfer a total of 3.96 million tons of production capacity to Yunnan (accounting for about 2/3 of the total production capacity). Capacity replacement will help the company increase the proportion of aluminum in hydropower, optimize the energy structure, and meet the general trend of carbon neutrality and development. At the same time, it will cooperate with the local government to build a green aluminum innovation industrial park and develop the integration of hydropower and aluminum materials. Considering that Yunnan's hydropower supply is vulnerable to weather fluctuations, the company's production capacity replacement will proceed in an orderly manner.