Zhitong Finance learned that on April 9, Citi held a group meeting with China's Hongqiao (01378). Citi released a research report, gave China Hongqiao a target price of HK$11.5 and listed it as a “preferred stock”. Citi believes that while supply is still tight, aluminum profit margins may remain high in China for a longer period of time due to strong demand for photovoltaic installations and new energy vehicles. The further rise in aluminum prices is also related to the manufacturing inventory replenishment cycle, which is likely to begin in FY2024.
Citi said that in terms of aluminum production, China's Hongqiao's 2024 aluminum production guideline is 6.2 million to 6.3 million tons, compared to 6.27 million tons in 2023; China's Hongqiao will prioritize maximum aluminum production, with a target capacity utilization rate of over 97%.
Second, with regard to the shortage of electricity supply in Yunnan, Citi believes that since China's Hongqiao directly supplies liquid aluminum to local downstream enterprises, the power restrictions in Yunnan have little impact on Hongqiao. The economic transportation radius of liquid aluminum is about 30km. Downstream customers can only cooperate with reliable aluminum manufacturers to accept liquid aluminum. Currently, the operating rate of aluminum production capacity in Hongqiao, China in Yunnan is 92% to 93%.
Regarding the relocation of production capacity to Yunnan, Citibank wrote that the remaining Wenshan relocation project targets 530,000 tons/year production capacity to be completed in the second half of 2023. The schedule for the Honghe Relocation Project's 1.93 million tons/year capacity will depend on electricity supply and electricity prices. China's Hongqiao plans to build a photovoltaic power generation project in Yunnan to ensure the electricity supply for aluminum production capacity, with an annual capital expenditure of 1 billion to 2 billion yuan.
In terms of aluminum costs, due to rising electricity prices and falling coal prices during the dry season, aluminum production costs in Yunnan are currently similar to those in Shandong. As far as electricity prices are concerned, electricity prices in Yunnan are about 0.43 yuan/hour in 2023, and slightly raised to about 0.45 yuan/hour in 2024, all including VAT. The price of self-brought electricity is about 0.4 yuan/hour, and the price of electricity purchased in Shandong is 0.42-0.43 yuan/hour, all without VAT.
Furthermore, thanks to the integrated business model, alumina production costs in Hongqiao, China are lower than those of its peers; alumina costs increased year-on-year in 2023, mainly due to bauxite costs in US dollars.