Guosheng Securities: Maintains "Buy" Rating on CHINAHONGQIAO (01378) - Shandong Hongqiao's third-quarter performance shows a significant year-on-year increase.

Guosheng Securities released a research report, maintaining a "buy" rating for CHINAHONGQIAO (01378), influenced by the rise in alumina prices in Q3 2024. Therefore, the performance forecast has been cautiously adjusted, with an expected return net profit of 19.8/22.1/22.3 billion yuan for the company in 2024-2026. At the current point in time, actualizing capacity and reducing costs effectively are key competitiveness factors. The company is expected to achieve exponential growth through overseas expansions and empowering the upstream and downstream segments. Additionally, being listed on the Hong Kong stock market, the company has a significant undervaluation advantage. On October 30, 2024, CHINAHONGQIAO disclosed the financial data of its subsidiary Shandong Hongqiao Advanced Materials Co., Ltd. for the third quarter. From January to September 2024, Shandong Hongqiao achieved revenues of 110.07 billion yuan, up by 12% year-on-year; a net profit attributable to shareholders of 15.75 billion yuan, up by 141% year-on-year. The investment income from associated and joint ventures amounted to 620 million yuan, up by 17% year-on-year. Looking at the quarters, Shandong Hongqiao achieved revenues of 34.8/37.3/38 billion yuan in Q1-Q3 2024, with a 14% increase in Q3 year-on-year and a 2% increase quarter-on-quarter. The net profit attributable to shareholders was 4.3/5.5/6 billion yuan, with a 38% increase in Q3 year-on-year and a 9% increase quarter-on-quarter. The bank forecasts a substantial year-on-year increase in the third quarter performance mainly due to the rise in aluminum and alumina prices, as well as the decline in the purchasing prices of prebaked anodes and thermal coal. With the completion of the relocation of the Yunnan aluminum smelting base, the production costs of aluminum smelting are expected to further decrease. Moreover, with a rigid domestic supply and expectations of sustained high aluminum prices due to easing cycles and anticipation of an increase in the proportion of green aluminum related to new energy sources leading to an upward shift in pricing, the "rise in quantity and price" continuously thickens the company's performance elasticity. Guosheng Securities' main points are as follows: The alumina sector's high performance continues to improve, with the advantage of falling raw material prices becoming prominent. 1) Quantity: According to calculations based on the 2024 mid-year report released by CHINAHONGQIAO and the credit rating report issued by Shandong Hongqiao, the 24Q1 production capacity/volume of electrolytic aluminum in Shandong was 497.1/1.24 million tons, and in Yunnan, it was 148.8/0.37 million tons. Since the company has not disclosed any shutdown information, it is reasonable to estimate that the 24Q3 electrolytic aluminum production will be consistent with Q1, totaling 1.61 million tons. Both domestic and Indonesian alumina are expected to operate at full production. 2) Price: According to statistics from Baichuan Yingfu, the average price of domestic electrolytic aluminum in Q3 was 19,561 yuan/ton; the average price of Shandong alumina was 3,922 yuan/ton, an increase of 8% compared to the previous period; the average price of prebaked anodes was 3,938 yuan/ton, a decrease of 5%; and the average price of thermal coal was 706 yuan/ton, a decrease of 1%. 3) Cost-profit: From the cost side, according to data from SMM, the complete cost of electrolytic aluminum in Shandong in Q3 was 16,044 yuan/ton, a decrease of 1% compared to the previous period, while in Yunnan, it was 16,184 yuan/ton, a decrease of 11%. The complete cost of alumina nationwide was 2,860 yuan/ton, an increase of 3%. From the profit side, the average profit of alumina nationwide in Q3 was 1,069 yuan/ton, an increase of 21%. In the future, with the completion of the relocation of the Yunnan electrolytic aluminum base, the external sales of Shandong alumina will gradually increase, leading to a continuous improvement in the profitability of the company's alumina sector. Accelerating the energy transition with a continuous increase in the proportion of green energy sources, the significant advantage of the overall industry chain layout is evident. 1) The Yunnan Wenshan project started construction in November 2019, with a two-phase construction plan and an estimated total investment of 11.2 billion yuan. By the end of March 2024, the first phase had an annual output of 1.074 million tons and the second phase had nearly completed the production of 0.95 million tons. If the power supply is sufficient, it can meet the conditions for production. 2) The Yunnan Honghe project plans to have an annual production capacity of 1.93 million tons of electrolytic aluminum, with a total investment of 12 billion yuan. The project started construction in August 2023, planning to complete the production of 0.96 million tons in the first phase by 2024, and the remaining capacity will be planned according to the electricity supply situation. 3) The Yunnan Hongqiao New Energy Photovoltaic project is a photovoltaic power generation project in Yunnan Province, which is beneficial for increasing the proportion of company's renewable energy sources, optimizing the energy structure, achieving energy efficiency, reducing emissions, and alleviating environmental pressures. The project has a planned installation scale of 4GW, with the 2GW photovoltaic power generation project starting construction in August 2023, and as of the end of March 2024, the project had already invested 791 million yuan.