New Stock Preview | Innovative International: Profit Growth Far Exceeds Revenue, Aluminum Electrolysis Prices Fluctuate More than Industry, Could be a Growth "Concern"

Looking back to 2024, thanks to the alleviation of global inflation and the nearing end of interest rate hikes in major developed economies, non-ferrous metals have been making significant progress. Taking alumina as an example, its price performance has been very strong, becoming a highlight in the market. The highest price of the alumina 2412 contract reached 5700 yuan, a sharp increase of 80.6% compared to the closing price of 3156 yuan at the end of last year. CITIC SEC believes that the supply-demand gap for alumina is difficult to substantially alleviate before the second quarter of 2025, and prices will remain strong, driving profits of aluminum enterprises with high self-sufficiency rates to exceed expectations by a large margin. With frequent policy incentives and a strong fundamental situation, this brokerage continues to be optimistic about the investment value of the aluminum industry driven by supply-profit-dividend-valuation in four dimensions. Taking advantage of the industry trends, aluminum producer Xinjiang International Industry Group Limited (hereinafter referred to as "Innovative International") submitted a listing application to the Hong Kong Stock Exchange main board on January 13, with CICC and Huatai International as joint sponsors. Profit growth far exceeds revenue growth, with related parties contributing eighty percent of the revenue as the largest customers. The prospectus shows that Innovative International focuses on the high value-added links in the upstream of the aluminum industry chain, mainly engaged in the production and sales of electrolytic aluminum, alumina, and other related products. As of the last feasible date, the company has a designed production capacity of 788.1 thousand tons/year for electrolytic aluminum and 1,200.0 thousand tons/year for alumina. As of the same date, the company has been approved for an annual capacity of 2980 thousand tons of aluminum hydroxide, of which 1480 thousand tons of capacity has been put into use, and the remaining 1500 thousand tons has started trial production. As of the same date, Innovative International has obtained regulatory approval to convert 6000 thousand tons of aluminum hydroxide into alumina. Assuming all the above capacity is fully utilized, the company's estimated total annual capacity of alumina will be at least 3000 thousand tons. According to CRU's report, based on production in 2023, Innovative International's electrolytic aluminum smelting plant in Holingol, Inner Mongolia is the third largest electrolytic aluminum production base in North China. Since 2012, Innovative International has strategically laid out and deeply cultivated in Holingol, Inner Mongolia and Binzhou, Shandong, which have scarce resource advantages, focusing on business development. As of September 30, 2024, Innovative International has achieved a high level of self-sufficiency in alumina and electricity supply, which is strategically and economically significant for electrolytic aluminum production. In addition, according to the same report, it is expected that in 2024, the electricity cost of electrolytic aluminum smelting enterprises in China accounts for approximately 36% of the total production cost. Utilizing the abundant natural resources in Holingol, Inner Mongolia, Innovative International has established integrated power generation stations and facilities using thermal and green power generation technology to provide stable electricity at low cost. As of the nine months ending September 30, 2024, the company's self-sufficiency rate for electricity was approximately 88%, far above the industry average of about 57% for the same period. Benefiting from the high self-sufficiency rate in electricity and the rise in electrolytic aluminum and alumina prices, Innovative International's profits have achieved remarkable growth, with profit growth far surpassing revenue growth. In the nine months ending September 30, 2022, 2023, and 2024 respectively, the company recorded revenues of 13.49 billion yuan, 13.815 billion yuan, and 10.937 billion yuan, with a year-on-year growth rate of 5.13% for the first nine months of 2024. During the same period, the company achieved profits of approximately 913 million yuan, 1.081 billion yuan, and 1.79 billion yuan, with a year-on-year growth rate of 233.35% for the first nine months of 2024. In terms of products, during the reporting period, electrolytic aluminum was the company's main revenue pillar, contributing revenues of 12.882 billion yuan, 12.502 billion yuan, and 9.521 billion yuan, accounting for 95.5%, 90.5%, and 87.1% of total revenues respectively. Revenue from alumina and other related products was 271 million yuan, 977 million yuan, and 1.095 billion yuan respectively, accounting for 2.0%, 7.1%, and 10.0% of total revenues. It is conceivable that the future trend of electrolytic aluminum prices will continue to be a key factor affecting the company's profits. According to CRU's report, the average annual spot price of electrolytic aluminum on the Shanghai Futures Exchange in 2022, 2023, and 2024 was 19,945 yuan/ton, 18,678 yuan/ton, and 19,950 yuan/ton respectively, while the average annual price of Chinese alumina in CRU was 2,936 yuan/ton, 2,906 yuan/ton, and 4,043 yuan/ton respectively. Focusing on the sales volume and prices of Innovative International's electrolytic aluminum and alumina, it can be seen that the fluctuation in the company's electrolytic aluminum prices is greater than the industry average, while the trend of alumina prices is generally in line with the industry. Specifically, during the reporting period, the company's electrolytic aluminum showed an increase in sales volume with a "U-shaped" price trend. The sales volumes were 733.1 thousand tons, 773 thousand tons, and 563.1 thousand tons respectively, with average selling prices of 17,600 yuan/ton, 12,500 yuan/ton, and 16,900 yuan/ton respectively. During the same period, alumina was in a state of rising sales volume and price. The sales volumes of alumina were 706.3 thousand tons, 1543.7 thousand tons, and 1149.4 thousand tons respectively, with average selling prices of 2513.0 yuan/ton, 2516.6 yuan/ton, and 3141.6 yuan/ton respectively. In short, the company's main product, electrolytic aluminum, has shown more obvious price fluctuations in response to market conditions, casting a shadow of volatility over its operations. Furthermore, the issue of related party transactions by Innovative International is worth noting. During the historical period, the company received income from its largest customer (related parties) of 10.892 billion yuan and 891.4 million yuan, accounting for 78.8% and 81.5% of total income respectively. Behind the contribution of related parties to eighty percent of the revenue is the significant increase in accounts receivable. As of September 30, 2024, the due accounts receivable from related parties amounted to 3.01 billion yuan, with short-term bank loans reaching 4.54 billion yuan. The company's large accounts receivable and short-term loans from related parties are considerable. More importantly, in the first three quarters of 2024, the company's operating cash flow reached 2.69 billion, with cash on hand of 150 million, which is insufficient to cover the company's short-term bank loans. Therefore, the company's liquidity crisis deserves attention. With an alumina self-sufficiency rate of 89%, Innovative International is expected to benefit from the rising price of aluminum.The reform dividends of supply-side reform in electrolytic aluminum have been realized, and the electrolytic aluminum industry has entered a period of high prosperity, with industry profits and cash flows generally on the rise. Whether the aluminum price can continue to maintain a strong trend in the future is particularly important for the growth prospects of Chinalco.Firstly, under the combined influence of factors such as the cap on electrolytic aluminum production capacity in our country and tight overseas power supply, the supply elasticity of electrolytic aluminum is limited. Although the decrease in new real estate construction area will lead to insufficient aluminum demand in the future, and events such as "China cancelling aluminum export tax rebates" have brought some downward pressure on aluminum prices, the incremental demand from downstream new energy vehicles and emerging fields such as photovoltaics will supplement the demand, and the global electrolytic aluminum market will maintain a tight supply-demand balance. In short, the cap on electrolytic aluminum production capacity suppresses its supply elasticity, while the incremental demand from downstream new energy and other fields leads to a tight supply-demand situation in the industry in the short to medium term, and aluminum prices continue to remain strong. Secondly, the cost disturbance of electrolytic aluminum is gradually stabilizing, and industry profit recovery is expected. Generally speaking, for every ton of electrolytic aluminum, it requires the consumption of 1.93-1.98 tons of alumina, 0.45-0.5 tons of anodes, and 13,500 kwh of electricity. Alumina and electricity costs account for around 30-40% each, while anode carbon costs account for around 15%, totaling more than 80%. Specifically, the loose supply-demand situation of thermal coal and the continuous low operation of anode carbon prices are positive factors that are expected to continue for the production cost of electrolytic aluminum in 2024 and in the short to medium term, but these positive factors are outweighed by the negative impact of the significant increase in alumina prices. The overall production cost of electrolytic aluminum will rise, and it is expected that the profit trend of electrolytic aluminum enterprises in 2024 will be linked to the level of alumina self-sufficiency. Focusing on Innovation International itself, the company's alumina refining production volumes were approximately 706.2 thousand tons, 1546.1 thousand tons, and 1150.0 thousand tons respectively. As of the nine months ended September 30, 2024, the alumina self-sufficiency rate reached around 89%. With a continuously high alumina self-sufficiency rate and power self-sufficiency rate, the profitability of Innovation International is expected to further improve. In conclusion, thanks to the industry upswing, the profit elasticity of Innovation International has been released, with profit growth far exceeding revenue growth during the reporting period. However, the growth of receivables from related parties and short-term borrowings has raised concerns about its liquidity. Looking ahead, the fermentation of positive factors may be worth looking forward to for the growth momentum of Innovation International.