Deutsche Bank: Maintains "Buy" Rating on CHINAHONGQIAO (01378) as Performance Exceeds Expectations and High Dividend Highlights Allocation Value

Deutsche Bank recently released a research report, maintaining a "Buy" rating for CHINAHONGQIAO (01378), with a 12-month target price set at HKD 33. The report points out that the company is expected to perform steadily in the first half of 2026, with net profit exceeding market expectations, and future free cash flow is anticipated to grow significantly, providing robust support for sustained high cash returns. The report indicates that CHINAHONGQIAO achieved a net profit of approximately RMB 17.2 billion in the first half of 2026, representing a year-on-year increase of 39%, and exceeding the market consensus by about 6%, which aligns with the profit forecast the company released at the beginning of July. EBITDA for the first half reached RMB 30.2 billion, slightly exceeding expectations, mainly due to better-than-expected performance in the aluminum processing business, effectively compensating for minor gaps in aluminum and alumina operations. Capital expenditure for the first half was RMB 3.7 billion, below expectations, resulting in a net debt level better than previously anticipated, but the company maintains its full-year capital expenditure guidance at RMB 15 to 16 billion. Regarding shareholder returns, Deutsche Bank expects CHINAHONGQIAO to maintain a dividend payout ratio similar to that of 2025 in 2026. Based on a payout ratio of 65%, the annual dividend is about HKD 2.7 per share, corresponding to a yield of around 11%. Additionally, the company is expected to continue its stock buyback program. The report emphasizes that the current valuation of Hongqiao is attractive, with an EV/EBITDA of only 3.5 times for 2027, and a free cash flow yield of about 18%. As free cash flow is expected to significantly increase from 2026 to 2027, the companys ability to provide cash returns will be further enhanced. Furthermore, the report highlights that the companys core operating subsidiary, Shandong Hongqiao Aluminum Industry Holding (listed on the Shenzhen Stock Exchange), has recently applied for regulatory approval to conduct a placement of up to 10% of its equity, raising up to RMB 12 billion, aimed at future capital expenditures as well as improving liquidity and free float. This approval process is lengthy, and the placement is expected to be completed in 2027 or later. Based on the current stock price, if RMB 12 billion is raised, CHINAHONGQIAO's stake in Shandong Hongqiao Aluminum Industry Holding will decline from 88.99% to slightly below 85%. Deutsche Bank believes that this placement will have a broadly neutral impact on Hongqiaos overall valuation. In terms of capacity, CHINAHONGQIAO continues to advance the relocation of smelting capacity to Yunnan Province, which is rich in hydropower resources. To date, approximately 2.2 million tons/year of capacity has been relocated, with a medium-term target of around 3 million tons/year. Deutsche Bank forecasts that the pace of relocation will remain stable in the coming years, though the rhythm will be influenced by local and national policies. Meanwhile, domestic primary aluminum production was strong in the first half of the year, reaching an annualized output of 48.4 million tons in June, but fell to 45.9 million tons in July. Looking ahead, the bank expects that China's capacity limit of 4.5 million tons/year will likely be maintained, and regulatory enforcement may tighten in the second half of the year.