Morgan Stanley: Strong Increase in Aluminum Demand Coupled with Supply Constraints, Raises CHINAHONGQIAO's (01378) Target Price to HK$44.7

Morgan Stanley released a research report stating that the prospects of the aluminum industry have improved, thanks to the demand for Energy Storage Systems (ESS) far exceeding its expectations, and supply challenges brought about by power issues. Therefore, Morgan Stanley currently expects CHINAHONGQIAO (01378) to have greater earnings growth potential. Based on this, Morgan Stanley has raised the target price for CHINAHONGQIAO from HK$30.6 to HK$44.7 and reiterated it as a top pick stock with a "hold" rating. First, Morgan Stanley stated that the demand for Chinese aluminum will significantly increase due to ESS and other consumer electronics products: as the growth rate of ESS accelerates, the amount of aluminum used in it is also increasing. In June, ESS accounted for only 25% of the overall battery installation in China, but it has since increased to over 40%. Morgan Stanley expects this high growth trend to continue. Considering factors such as rolling, foil, and components, Morgan Stanley estimates that every 100GWH of ESS will consume 160,000 tons of aluminum; the global ESS scale is expected to reach 350GWH by 2024 and is forecasted to reach 600GWH by 2025; it is expected to grow by 50% or more in 2026. For 2025, Morgan Stanley estimates that ESS will consume around 960,000 tons of aluminum (a year-on-year growth of 71.4%), with an additional demand for 1.44 million tons of aluminum in 2026. Together with electric vehicles, appliances, power cables, etc., this will bring about over 2% demand growth. Furthermore, Morgan Stanley also pointed out the challenges facing supply. Regarding new supply, Morgan Stanley estimates that global production will reach around 1.4 million tons by 2026. Indonesia is an important new supply source country with bauxite, coal, and alumina, making it an ideal location for aluminum production. However, China pledged in 2021 not to build any new coal-fired power plants overseas to achieve its carbon neutrality goals. Chinese companies will need to find local partners to provide them with electricity. Building power plants may take a considerable amount of time, around 18 to 24 months. Therefore, despite Indonesia having significant aluminum production capacity construction plans, actual output is progressing slowly. Morgan Stanley estimates that Indonesia's new supply in 2026 will only be 700,000 tons. Additionally, due to power issues causing supply risks, several production interruptions totaling around 700,000 tons of capacity occurred globally this year. Thus, Morgan Stanley expects a global supply shortage in 2026. Furthermore, inventories are also very low. Currently, Chinese aluminum inventory is only 600,000 tons, relatively low compared to historical levels over the past five years. Additionally, the government encourages increasing the proportion of molten aluminum from the current approximately 77% to 90% by 2027, which may lead to a decrease in deliverable aluminum ingots on the futures market, thus supporting aluminum prices.