Huatai: Maintain a buy rating on CHINAHONGQIAO (01378) with a target price of 35.22 Hong Kong dollars, optimistic about the company's high profitability and high dividends.

Huatai releases research report stating that the net profit attributable to CHINAHONGQIAO (01378) for the years 2025-2027 is expected to be 25.625/25.426/25.76 billion yuan. Since 2017, the company's average PE ratio has been 8 times. Due to the company's prominent high dividend attribute, as well as the scarcity of the company's electrolytic aluminum assets in the Hong Kong stock market and the recent increase in overall market risk appetite, the bank maintains a 12XPE for the company in 2025 and sets a target price of 35.22 Hong Kong dollars with the exchange rate of 0.92 on November 18th. It also maintains a buy rating. According to the announcement on November 18th, the company plans to sell up to 400 million shares through a rights issue, with a price of 29.2 Hong Kong dollars per share, representing a discount of approximately 9.6% from the previous trading day's closing price, raising up to 11.68 billion Hong Kong dollars. The shares to be sold account for approximately 4.2% of the existing issued share capital and approximately 4.03% of the enlarged share capital. The bank believes that this rights issue will help optimize the company's capital structure and provide a good foundation for the development of domestic and overseas projects. As a global leader in aluminum, with expectations of strong aluminum prices, the bank continues to be optimistic about the company's stable performance in 2026-2027, as well as ongoing capital structure optimization which may provide necessary conditions for the company to continue its high dividend policy. Huatai's main points are as follows: Use of funds from the rights issue to optimize capital structure and advance domestic and overseas projects According to the company's announcement, the funds raised will be mainly used for the development of domestic and overseas projects, as well as further optimizing the company's debt structure. As of mid-2025, the company has a domestic capacity of 6.46 million tons of electrolytic aluminum and 19 million tons of alumina, as well as overseas capacity in Indonesia of 2 million tons of alumina. The joint venture company "Win Alliance" in Guinea is primarily responsible for bauxite development and the construction of the West Coast iron ore project (WCS), which is expected to start production by the end of 2025. The bank believes that this rights issue will further enhance the robust progress of the aforementioned projects under construction. In addition, the rights issue is expected to further reduce the company's debt ratio and cost of debt, providing necessary conditions for the continuation of the high dividend policy in the future. Continued share buybacks demonstrate confidence and commitment to high dividends The company is continuing its shareholder return strategy of "large buybacks + high dividends." According to the company's announcement on August 15, following a buyback of 1.87 billion shares worth 26 billion Hong Kong dollars in the first half of the year, the company plans to conduct a new round of buybacks in the open market based on market conditions, with an expected total amount of at least 30 billion Hong Kong dollars. Since October, the company has carried out 4 large-scale share buybacks, repurchasing a total of 866,500 shares at a cost of approximately 227.046 million Hong Kong dollars, with an average purchase price of 26.2 Hong Kong dollars per share. In terms of dividends, the company's dividend payout ratios in the past three years were 46.8%, 47.0%, and 63.4%, consistently above 45% since 2020. This not only reflects the company's confidence in future development, but also demonstrates its high regard for shareholder returns. Profit expectations for the electrolytic aluminum sector are expected to continue to expand, offsetting downward pressure from alumina prices With strict restrictions on domestic electrolytic aluminum production capacity, the growth rate on the supply side has significantly slowed down, while industries such as automobiles and power grids on the demand side remain highly prosperous. The bank believes that the global supply and demand pattern for electrolytic aluminum may further tighten in 2026. In contrast, the upstream supply and demand for alumina remains relatively loose, with alumina prices likely to fluctuate weakly in 2025-2026. Overall, the bank believes that the electrolytic aluminum industry still has room for profitability expansion in 2025-2026. The company's main business lies in alumina and electrolytic aluminum, with alumina prices currently in a bottoming stage of fluctuation and limited potential for significant decline. Therefore, the profit growth of the electrolytic aluminum sector is expected to offset the pressure from the alumina sector. Based on this, the bank remains optimistic about the company's future performance, believing that it will continue to benefit from the upward trend in the profitability of the electrolytic aluminum sector. Risk warning: Downside in downstream demand leading to aluminum price decline, high dividends falling short of expectations.