First Shanghai has initiated coverage on China Hongqiao Group with a "Buy" rating and a target price of HK$16.8.

FIRST SHANGHAI has released a research report covering CHINAHONGQIAO (01378) for the first time and has given it a "buy" rating. It is predicted that the company will achieve operating revenues of 150.3/153.2/154.3 billion yuan respectively in 2024-2026, with net profits attributable to shareholders of 20.9/22.7/23.6 billion yuan respectively, representing an increase of 82% from the previous year. The target price is HK$16.8. The main points of FIRST SHANGHAI are as follows: Industry in a high growth phase, significant increase in performance: The company's subsidiary Shandong Hongqiao achieved revenues of 110.1 billion yuan in the first three quarters, an increase of 12.5% year-on-year, and achieved net profits attributable to shareholders of 15.8 billion yuan, an increase of 141% year-on-year. In Q3, Shandong Hongqiao achieved revenues of 38 billion yuan, an increase of 13.9% year-on-year, and achieved net profits of 5.96 billion yuan, an increase of 38% year-on-year and 9.4% quarter-on-quarter from 54.5 billion yuan in Q2. The increase in operating income is mainly due to the rise in prices of electrolytic aluminum and alumina. The average spot price of domestic electrolytic aluminum in Q3 was 19,550 yuan/ton, reaching a high level of volatility. The average ex-factory price of alumina in Shandong in Q3 was 3,920 yuan/ton, an increase of 37.3% year-on-year and 7.9% quarter-on-quarter; the average ex-factory price in Q1-Q3 was 3,611 yuan/ton, an increase of 25.3% year-on-year. Raw material prices are running at a low level, leading to a decrease in operating costs: Coal prices and prebaked anode prices on the cost side have fallen, with Q3 Qinhuangdao Port closing price for Q5500 thermal coal at 848 yuan/ton, a decrease of 2% year-on-year, with an average price of 866 yuan/ton in Q1-Q3, a decrease of 11% year-on-year. The price of prebaked anodes in East China in Q3 was 4,168 yuan/ton, a decrease of 20% year-on-year, with an average price of 4,227 yuan/ton in Q1-Q3, a decrease of 22% year-on-year. The decline in raw material prices has reduced the company's operating costs, thereby increasing profits. Establishing an integrated layout in the industry chain: The company insists on building an integrated industry chain to ensure a stable supply. The company's joint venture with Guinea's bauxite mine project has an annual production capacity of 50 million tons, with an alumina production capacity of 19.5 million tons (17.5 million tons in Shandong + 2 million tons in Indonesia), a self-sufficiency rate of 156%, and an electrolytic aluminum production capacity of 6.46 million tons (4.46 million tons in Shandong + 2 million tons in Yunnan). The integrated layout provides a clear competitive advantage in the industry.