New Stock Outlook | Shandong Nanshan Aluminium International: Aluminum oxide manufacturer facing significant customer dependence, announces pre-IPO dividend of $260 million.

Listed A-share company Shandong Nanshan Aluminium (600219.SH) has taken an important step towards the split of Shandong Nanshan Aluminium International Holdings Limited (hereinafter referred to as "Shandong Nanshan Aluminium International") to list on the Hong Kong stock exchange. According to the Hong Kong Stock Exchange's announcement on September 26, Huatai International is the sole sponsor. Southeast Asian alumina manufacturer The prospectus shows that Shandong Nanshan Aluminium International is a Southeast Asian alumina manufacturer dedicated to strengthening its market position in the region. Since 2017, the company's main focus has been on developing Indonesia's abundant bauxite and coal resources. According to a Frost & Sullivan report, by the end of 2023, Indonesia and Vietnam are the main alumina-producing countries in Southeast Asia. Shandong Nanshan Aluminium International is one of the top three alumina producers in Southeast Asia. The completion of the second-phase alumina production project has increased the company's designed annual alumina production capacity to 2 million tons, ranking the company at the top in Indonesia and Southeast Asia in terms of designed annual production capacity by 2023. To complement its strategy of further expanding its market share in Southeast Asia, Shandong Nanshan Aluminium International has started construction of a new alumina production project to add alumina production facilities in the first half of 2024. The designed annual alumina production capacity is 2 million tons. The company's metallurgical-grade alumina is an essential raw material for producing electrolytic aluminum. Due to its critical role in meeting the strict requirements of high-performance aluminum products in the Southeast Asian market, the demand for it is strong. Following the successful completion of the first-phase alumina production project and the second-phase alumina production project (with a total designed annual alumina production capacity of 2 million tons), the company is planning to further expand its production capacity. Rush to declare dividends of $260 million It is noted that since 2021, Shandong Nanshan Aluminium International's alumina product sales have been on the rise, from 472,000 tons in 2021 to 1.902 million tons in 2023. In the first half of 2024, alumina sales reached 1.094 million tons. The average selling price of alumina reached $387 per ton in the first half of 2024, reaching a high since 2021. In this context, Shandong Nanshan Aluminium International's performance has been stable growth. The company's revenue for the years 2021, 2022, 2023, and the first half of 2024 was approximately $173 million, $467 million, $678 million, and $423 million respectively. During the same period, the company's net profit was approximately $39.71 million, $96.092 million, $174 million, and $159 million respectively. Based on the good performance, Shandong Nanshan Aluminium International made a rush to declare dividends before submitting its application. The prospectus shows that based on a resolution passed by the directors on September 22, 2024, based on the company's financial position as of June 30, 2024 (including the amount of share premium), Shandong Nanshan Aluminium International declared a dividend of $260 million. As of September 17, 2024, the controlling shareholder of Shandong Nanshan Aluminium International held approximately 70.69% of the company's shares, with about 70.69 million shares. This means that more than $180 million of the $260 million dividend will go to the controlling shareholder. It is worth noting that as of the first half of 2024, Shandong Nanshan Aluminium International had cash and cash equivalents of $386 million, and the dividend of $260 million represents 67.4% of cash and cash equivalents. This to some extent indicates the high confidence of Shandong Nanshan Aluminium International in the successful listing and fundraising. The prospectus shows that Shandong Nanshan Aluminium International plans to use part of the funds raised from the listing for general operations. However, as investors, it is important to assess whether Shandong Nanshan Aluminium International will continue to have a stable "blood-making" ability in the long run. Reliance on major customers to be resolved According to a Frost & Sullivan report, the global demand for aluminum primarily comes from its application in the production of electrolytic aluminum. From 2019 to 2023, global production of electrolytic aluminum increased from 63.2 million tons to 70.7 million tons, with a CAGR of 2.9%. Looking ahead, with the continuous increase in electrolytic aluminum production capacity, it is expected that global production of electrolytic aluminum will further increase to 77.4 million tons by 2028, with a lower CAGR of 1.7% from 2024. Frost & Sullivan pointed out that with the maturation of the Southeast Asian supply chain, the expansion of downstream industries, and continued government support, it is expected that more and more electrolytic aluminum companies will expand their production operations to Southeast Asia. By 2028, the production of electrolytic aluminum in Southeast Asia and Indonesia is expected to increase to 4.348 million tons and 2.773 million tons respectively, with a CAGR of 28.0% and 50.6% from 2024. Therefore, the future business development of Shandong Nanshan Aluminium International may rely more on the Southeast Asian market. In this process, it is crucial to focus on whether the company can further optimize its customer structure. It is understood that Shandong Nanshan Aluminium International's customers include downstream manufacturers and global commodity markets.Yishang, the former processes the company's alumina into electrolytic aluminium, while the latter resells the company's products to downstream aluminium or aluminium product manufacturers or other traders. Shandong Nanshan Aluminium's largest international customer, Press Metal group, accounted for 73.3%, 53.3%, 47.0%, and 49.8% of the company's revenue in the fiscal years 2021, 2022, 2023, and the first half of 2024, respectively.The prospectus shows that Press Metal is the largest comprehensive aluminum company in Southeast Asia, with an annual demand for alumina exceeding 2 million tons. In addition, Press Metal is also an associate of Shandong Nanshan Aluminium International. As of September 17, 2024, Press Metal holds approximately 22.589 million shares of Shandong Nanshan Aluminium International, with a shareholding ratio of 25.59%. Due to business growth and high customer concentration, there has been a rapid increase in trade receivables for Shandong Nanshan Aluminium International. From 2021 to 2023, the company's trade receivables increased from $15.128 million to $63.708 million; in the first half of 2024, trade receivables reached $45.329 million. Shandong Nanshan Aluminium International stated in the prospectus that due to the company's short business history, its relationships with major customers are relatively short-term, ranging from one to three years. The company cannot guarantee the retention of major customers or any other key customers, or maintain stable relationships with customers or agents. If there are any significant delays, reductions, or cancellations in purchase orders from the company's major customers, it could significantly reduce the company's sales. In any of the above scenarios, the company's operational performance may be significantly adversely affected.