Expect higher ASP following China’s stimulus

中国宏桥(01378)\r

We believe aluminum (Al) is one of the sectors that is highly sensitive to thelaunch of the series of forceful pro-market policies in China. This, together withthe weakness of dollar as a results of the start of rate-cut cycle in the US and arelatively limited new supply of Al, will likely boost the near-term Al price whichwill serve as key catalyst of Hongqiao. We revise up our 2024E-26E earningsforecast by 9-12%, largely due to higher price assumption of Al and alumina.We estimate every 1% increase in Al price will boost Hongqiao’s earnings by4%. Hongqiao is now trading at mid-cycle valuation (7x 2024E P/E) with anattractive yield of 7%. Our new TP of HK$19.6 (previously HK$17.9) is basedon an unchanged 9.8x 2024E P/E. Maintain BUY.\r

Limited new supply… China’s aluminum production growth in Aug slowedto 1.3% YoY (vs 5.3%/2.5% in Jun/Jul), with capacity utilisation ratereaching ~96.7%. Overseas, output increased 1% YoY in Aug (vs 1%/1.5%in Jun/Jul), according to IAI. We see limited room for meaningful supplyadditions given the maximum capacity of 45mt (~60% of global supply) setby the Chinese government. Meanwhile, capacity growth in overseamarkets is limited as well.\r

…near-term demand to be supported by policies. We estimate Chinaconstruction (including property and infrastructure) and automobile accountfor 16% and 14%, respectively, of the global Al demand. We believeChinese government’s policies will help stabilise the expectation of theaforementioned demand. Longer-term, we continue to see light weightingtrend of automobiles and fast-growing solar power installation as structuralgrowth driver of Al.\r

Favourable price trend. The latest Shanghai Al price (VAT included)rebounded to RMB20,395/t (+3% since early Sep). In 3Q24, Shanghai Alprice averaged at RMB19,600/t, up 4% YoY; for alumina, price momentumremained strong with a 35% YoY increase. We forecast Hongqiao’s Al /alumina ASP to increase 5%/34% YoY in 2H24.\r

Upcycle to drive valuation. Over the past decade, Hongqiao traded at anaverage forward P/E of 6x. The stock normally peaked at 10x (except in2017) and bottomed out at ~3x during the trough cycles (except 2020 dueto the outbreak of COVID-19). Our new TP of HK$19.6 is based on anunchanged 9.8x 2024E P/E, equivalent to 1.5SD above the historicalaverage of 6x. Our above-average assumption is to reflect the potentialindustry upcycle.\r

Key risks. (1) A slowdown of global economy that affects the Al and aluminaprices; (2) sharp increases in input costs such as bauxite, coal and power.