How did CHINAHONGQIAO (01378) become a "model student"?

This year, the Hong Kong stock market has warmed up, with consumer stocks such as tea drinks receiving a lot of attention. Some companies' stock prices have doubled, deviating from their fundamentals, leading to speculation from the outside. People who are bullish on the consumer industry mostly see the large market space, strong brand power, and some even see the light asset characteristics brought by franchising. However, when looking the other way, growth certainty may not necessarily be found in the visible areas that most people see, but rather in niche industries with high barriers to entry. Recently, several news stories have caught the attention of the public. On May 26, the mineral-rich country of Guinea in West Africa announced the revocation of exploration permits for 129 mining companies within the country, having sporadically revoked permits for some companies before. And earlier, the Indonesian Bauxite Mining Association revealed that Chinese companies operating alumina plants in Indonesia have generally not followed government guidance on purchasing prices, leading to most companies suspending operations. These two news stories involve many Chinese mining companies, but there is one company that stands out as an exception amidst the restrictionsCHINAHONGQIAO (01378). Its operating companies in the bauxite mining business in Guinea, Bokai Mining Company and Winning Alliance Port Company, are still operating normally, while its joint venture company PT Well Harvest Winning in Indonesia is one of the few companies close to the Indonesian mineral benchmark prices, operating compliantly and normally. This exemption clearly reflects CHINAHONGQIAO's industry barriers. What's even more surprising is that the industry involving metal minerals like aluminum is often perceived as having high capital intensity, low profitability, and no high value. However, looking at CHINAHONGQIAO, their net profit soared by 95% last year, with dividends exceeding 10% for two consecutive years, and their stock price has increased more than sixfold in the past five years, completely overturning the outside world's impression of this sector. Based on this performance, CHINAHONGQIAO is undoubtedly a "role model." Its ability to excel in the aluminum industry lies in its transformation of the industry supply chain. 01 Industry-Leading Role Model: Laying a solid foundation for the aluminum industry It's easy to see things in retrospect, but it's difficult to make decisions in advance. Ten years ago, when most aluminum companies were still discussing the issue of overcapacity, CHINAHONGQIAO made a forward-thinking decision by investing in bauxite mining in Guinea. At that time, the outside world was not very enthusiastic about this decision: was it necessary to mine overseas? Time is the best proof. Today, when China's reliance on bauxite from abroad is as high as 70%, and when more and more companies are worrying about stable raw material supply, people are starting to realize how important Hongqiao's seemingly ordinary decision was. Domestic bauxite resources are insufficient and of low grade, unable to compare with Guinea's one-third of the world's bauxite reserves and the low difficulty of open-pit mining. Without bauxite, the "bauxite-alumina-aluminum-electrolytic aluminum-aluminum processing products" industry chain is fundamentally stuck. Through the joint efforts of multiple parties in three countries, CHINAHONGQIAO has established a deep cooperative relationship with the Guinea government, and this compliant and "model student" behavior has been best validated in recent weeks. Amid the Guinea government's large-scale mining cleanup, where hundreds of mining companies have been affected, forced to cease production or rectify, CHINAHONGQIAO's joint venture Winning Alliance has remained completely unaffected and continues to operate normally. The differential treatment behind this is the result of Hongqiao's persistence in compliant operations and establishing trust with the local government over the years. (In Guinea Republic, Official Website of the President) A similar story is unfolding in Indonesia. The Chairman of the Indonesian Bauxite Mining Association, Ronald Sulistyanto, inadvertently gave the best advertising for CHINAHONGQIAO. He revealed that among Chinese-owned alumina plants, only 15-20 out of 69 mines are still in operation due to price issues, with many miners suspending operations due to inability to obtain reasonable prices. But one company stands out as an exceptionthe only one close to the HPM government-set price is the WHW alumina plant jointly owned by Hongqiao Group, which gives individual companies some room for negotiation. (PT Well Harvest Winning Official Website) This recognized "model student" status allows Hongqiao to secure scarce supply guarantees in fierce market competition. While other companies are tensely managing their relationships with local miners to lower procurement costs, Hongqiao has won long-term partners through fair pricing. Since establishing a solid bauxite supply guarantee, CHINAHONGQIAO has continued to deepen its industry chain, from Guinea to Indonesia, from bauxite mining to 100% self-sufficiency in alumina, and then to the world's largest 6.46 million tons of electrolytic aluminum production capacity and downstream processing, ultimately constructing a complete "bauxite-alumina-aluminum-recycled aluminum" value loop. The strategic value of controlling 37% of global bauxite capacity is particularly precious amidst the global supply chain tensions today. This full-industry advantage has been fully reflected in the performance of 2024: Revenue of 156.17 billion RMB, a year-on-year increase of 16.9%; Net profit of 22.37 billion RMB, a whopping 95.2% year-on-year increase; Gross margin increased to 27%. Entering 2025, this strong performance continues: subsidiary Shandong Hongqiao reported a net profit of 6.357 billion RMB in Q1, a year-on-year increase of 46.46%, and Yunnan's electrolytic aluminum cost saw a sudden 19% drop compared to the previous period. Behind each number lies the manifestation of the synergy of the full industry chain. 02 Cost Control "Top Performer": A textbook-worthy answer to cost reduction and efficiency improvement If the full industry chain layout showcases CHINAHONGQIAO's strategic vision, then their performance in cost control can be considered a textbook example in the industry. Amidst the "dual carbon" goal, where the industry generally faces cost pressures, CHINAHONGQIAO's cost performance stands out: electrolytic aluminum is fully cost-controlled at less than 2,000 RMB/ton, with a profit of over 3,000 RMB per ton of aluminum. In 2024, CHINAHONGQIAO's net sales margin reached15.72%, far surpassing the industry median of 4.35%.In a market environment where aluminum prices fluctuate greatly, the ability to control costs often determines the life and death of a company. Due to the existence of a ceiling on domestic electrolytic aluminum production capacity, there is a limit to expanding incrementally to reduce costs. Therefore, cost control needs to be approached from every link in the industry chain. Hongqiao's outstanding cost performance is also attributed to its meticulous management at every level. For example, in electrolytic aluminum production, either self-supplied coal-powered electricity or switching to hydropower in Yunnan is required. With the advantage of the entire industry chain in aluminum oxide cost, Hongqiao's control over details such as electricity costs and prebaked anode costs is very effective, resulting in a decrease in coal purchase prices by 110 yuan/ton and a reduction in anode block costs by 420 yuan/ton. Every penny saved contributes to the final competitive advantage. In terms of strategic capacity transfer, shifting from Shandong's thermal power capacity to Yunnan's hydropower capacity may seem like a simple "relocation", but it involves a deep understanding of the industry chain. Currently, Hongqiao's Yunnan hydropower aluminum base has a capacity of 3.96 million tons, with a 15% decrease in unit energy consumption and a 40% increase in the proportion of green electricity. This not only reduces costs but also aligns with the country's environmental policies, achieving a win-win situation. Over the years, CHINAHONGQIAO is undergoing an important role transition: from being the "answerer" of the industry to being the "questioner", leading the aluminum industry's transformation with its own verified development approach. This transition harbors great investment opportunities. In the short term, CHINAHONGQIAO still has a significant room for revaluation of its value. The Q1 performance surge is just the beginning, and the advantage of the entire industry chain will magnify during the industry's upswing cycle. SMM data shows that by the end of April this year, domestic electrolytic aluminum and aluminum rod inventories had rapidly declined by 28% compared to the past five years, due to strong demand. Against the backdrop of continued explosive demand in new energy and new infrastructure, Hongqiao, which controls 37% of global bauxite production capacity, is clearly not just a follower in the industry, but has the capability to drive the industry's development direction and become a leader.