Industrial: Maintain a "buy" rating on CHINAHONGQIAO (01378) as aluminum cycle is trending upward, and profit forecasts are being raised.

Industrial released a research report stating that they maintain a "buy" rating on CHINAHONGQIAO (01378). Since the beginning of the year, aluminum prices have accelerated upward, reaching a high of RMB 24,000, mainly due to disruptions in the supply side caused by the shutdown of aluminum factories in Mozambique, as well as expectations for aluminum to replace copper, driving the price of aluminum. It is expected that the company's net profit attributable to shareholders for the years 2025, 2026, and 2027 will be RMB 23.981 billion, RMB 36.184 billion, and RMB 39.413 billion respectively, with year-on-year growth rates of +7.2%, +50.9%, and +8.9% respectively. As of January 15th, the closing price corresponds to a PE of 8.8x for the estimated EPS in 2026. Key points of Industrial are as follows: Increased disruption in overseas supply side The second largest aluminum smelter in Africa, Mozal Aluminum Smelter in Mozambique, has decided to shut down in March 2026 due to increases in electricity prices. Overseas aluminum smelters have aging equipment and thin profits, and the global demand for electricity is increasing. Overseas aluminum smelting capacity will face long-term challenges such as rising electricity costs, geopolitical risks, and equipment failure. Since the end of 2025, disruptions in overseas aluminum smelting capacity have been increasing frequently. Copper price continues to break historical highs, copper-aluminum ratio breaks 4, accelerating the trend of aluminum replacing copper In December 2025, the air conditioning industry introduced industry standards for aluminum replacing copper and established industry self-regulatory agreements. Since the beginning of the year, tariff expectations have driven copper demand, as well as strikes at Capstone Copper's copper mines, leading to record highs in copper prices and further driving aluminum prices up under the narrative of aluminum replacing copper. Supply and demand dominance, aluminum entering a period of scarcity, coupled with low inventory, support the upward trend of aluminum prices Supply: Domestic capacity is approaching the ceiling, and 2026 is expected to be the last year of growth in aluminum smelting capacity, with planned new capacity of nearly 600,000 tons. The resumption of production in Europe and the US is difficult, with Indonesia being the main contributor to global capacity growth, expected to add 700,000 to 900,000 tons of production in 2026 and over a million tons in 2027. In the longer term, plans are in place for capacity to reach tens of millions of tons, but face challenges in power supply. Demand: From 2023 to 2025, global demand for aluminum smelting increased by an average of about 1.8 million tons per year, with a 2-year CAGR growth rate of 2.5%. It is expected that in 2026, the increase will be 1.5-2 million tons, with a year-on-year growth rate of 2.0-2.7%. Structurally increased demand includes transportation, power grid, energy storage, and aluminum replacing copper. Chinese aluminum smelting companies have global competitiveness and are converting industry dividends into shareholder returns Optimistic about the upward trend of aluminum prices, with a 10% increase in aluminum prices bringing about a 30% increase in EPS, the quality resonates with the cycle, and the value of the electrolytic aluminum sector is promising. CHINAHONGQIAO, as an integrated leader in electrolytic aluminum, has strong performance and places a high priority on shareholder returns, leading in shareholder returns in the industry. In 2026, capital expenditures are expected to decrease significantly, with further potential for shareholder returns. Hongqiao's integrated advantage ensures high and stable profitability. The company continues to promote the transfer of capacity to Yunnan until 2027, retrieved some minority shareholder rights in 2025, and the West Mengdutie iron mine is in operation, further strengthening the company's resource attributes. The company places a high priority on protecting shareholder rights, with the dividend payout ratio increasing from around 45% in 2019 to 63% in 2024 over the past 5 years. The company has committed to maintaining a stable dividend level in 2025. In 2025, the company repurchased 310 million shares, costing HK$5.6 billion, with expected shareholder returns exceeding RMB 20 billion in 2025. 2024 and 2025 were peak years for capital expenditures for the company, mainly due to significant investments in the construction of Yunnan's supporting photovoltaic power and capacity relocation. It is expected that capital expenditures will significantly decrease starting in 2026, and free cash flow will greatly improve, with potential for further growth in dividends. Risk warning: Rectification of self-owned power plants, unstable political situation in Guinea, demand falling short of expectations.