CMBC International: Supply and demand dynamics optimize reassessment, raise target price for CHINAHONGQIAO (01378) to HK$39.

CMB International has published a research report, maintaining a "buy" rating on CHINAHONGQIAO (01378) and raising its target price from HK$27 to HK$39. The report pointed out that CHINAHONGQIAO is expected to be further revalued by the market, benefiting from the improvement in supply and demand dynamics, strong end-demand, and stable costs. CMB stated that China, as the main aluminum producer accounting for about 60% of global supply, has set a cap on aluminum production capacity at around 45 million tons since the supply-side reforms in 2017. By September 2025, the industry capacity utilization rate had reached a ten-year high of 99%, and was still at a high level of 98.6% in October. In addition, overseas new capacity (such as in Indonesia) is progressing slowly, and the bank predicts that global supply growth will continue to be constrained in the next 3-6 months. At the same time, end-demand for electric vehicles, power equipment, and electronics remains strong, supporting the rise in aluminum prices. CMB forecasts that global aluminum demand will grow by 2.1%/1.7% in the 2025/26 fiscal year, while supply growth will only be 1.7%/1.3% during the same period, shifting the global aluminum market balance from supply surplus in the 2025 fiscal year to supply shortage in the 2026 fiscal year. Based on the more optimistic outlook for aluminum prices, CMB has raised CHINAHONGQIAO's profit forecasts for 2025-2027 by 4-5%. The bank estimates that a 1% increase in aluminum prices will drive a 3% increase in company profits, while a 1% decrease in coal prices will boost profits by 0.4%. The report emphasizes the company's strong free cash flow, which is expected to support a dividend payout rate of 60% and achieve a nearly net cash position on the balance sheet by the end of 2026. The current stock price corresponds to a dividend yield of approximately 6%, which is attractive. In terms of valuation, CHINAHONGQIAO's forward P/E ratio has peaked at 10 times over the past decade. Although the stock's expected P/E ratio for 2026 is already around 10 times, CMB believes that there is still room for the stock price to rise. Reasons for this include the positive outlook for the short-term industry supply and demand dynamics which will further boost market sentiment, as well as the substantial improvement in the balance sheet (with the net debt ratio expected to decrease from 24% at the end of 2024 to a nearly net cash position by the end of 2026) which will be a key driver for reducing valuation risks.