Jefferies maintains a "Buy" rating on CHINAHONGQIAO (01378): performance in the first half of 2026 is stable, debt optimization, and management is optimistic about aluminum prices reaching 23,600-24,300 yuan/ton in the second half.

Jefferies recently released a research report on CHINAHONGQIAO (01378), stating that the company demonstrated solid performance in the first half of 2026, with stable costs and a decrease in debt scale. The management remains confident about the aluminum market, expecting aluminum prices in the second half of 2026 to range from 23,600 to 24,300 yuan per ton. The firm believes the company's valuation is attractive and maintains a buy rating. Strong performance in the first half, with one-off gains and losses largely offsetting each other CHINAHONGQIAO forecasts a net profit after tax of 17.2 billion yuan for the first half of 2026, a year-on-year increase of 39%. Benefiting from its vertically integrated layout, the unit costs of electrolytic aluminum and alumina remained stable in the first half, with slight year-on-year decreases of 2.4% and 1.9%, respectively, corresponding to costs of 13,000 yuan per ton and 2,200 yuan per ton. Hongqiao achieved a fair value gain of 862 million yuan, related to the $300 million convertible bonds issued in 2025. The bonds the company issued in 2026, totaling 102 billion yuan, will not generate fair value holding gains or losses due to their uniquely structured maturities. Meanwhile, the company incurred approximately 1.1 billion yuan in impairment losses, which includes: 1) An impairment loss of 527 million yuan on alumina inventory, caused by the decrease in alumina prices in the first half; if alumina prices remain around 2,700 yuan per ton, it is expected that no further impairments of this kind will arise; 2) An impairment loss of 583 million yuan on fixed assets, mainly from its self-built power plant in Shandong, stemming from capacity relocation. Whether there will be further impairments in the second half will depend on the year-end impairment test, and it is anticipated that the scale of any impairment will not be significant. The one-off gains and losses in the first half largely offset each other, reflecting that, against the backdrop of favorable aluminum prices, the company's core business performed robustly. Management maintains an optimistic outlook on the aluminum market Management believes that there has been no easing of the domestic electrolytic aluminum capacity limit policy; the supply gap resulting from production cuts in Middle Eastern smelters will continue to affect the market in the second half of 2026; they observe that the pace of capacity expansion outside China is slower than expected. Although demand in the construction, automotive, and photovoltaic sectors has slowed down in the year to date, aluminum exports have performed strongly, with a year-on-year growth rate exceeding 16%. Management expects aluminum prices in the second half of 2026 to range between 23,600 and 24,300 yuan per ton, with an average price of around 23,800 yuan per ton. The alumina market remains oversupplied, and management anticipates that alumina prices will be around 2,700 yuan per ton in the second half of 2026. Even at this price level, the company can still achieve a slim profit. The companys capital expenditures for the first half of 2026 are 3.7 billion yuan. This figure is relatively low, mainly due to timing differences in payments, and management maintains a full-year capital expenditure guidance of 15-16 billion yuan. The main areas of investment include: 5-6 billion yuan for renewable energy projects (such as photovoltaic power generation projects in Yunnan); 2 billion yuan for capacity relocation; 2 billion yuan for aluminum processing operations; and the remainder for maintenance capital expenditures. The company's self-built photovoltaic projects aim primarily to ensure stable power supply in Yunnan, which relies heavily on hydropower, particularly during dry seasons; at the same time, it aims to meet the green power supply ratio requirements for electrolytic aluminum enterprises in advance. Regarding capacity relocation, the company's schedule remains flexible, mainly depending on the availability and stability of power supply in Yunnan, as well as the progress of its photovoltaic project construction. As of the first half of 2026, Hongqiao has established 2.28 million tons of capacity in Yunnan, with a mid-term target of 3 million tons. Additionally, the company continues to push for deleveraging. As of the end of June 2026, the company's total debt has decreased to 67 billion yuan, down from 74 billion yuan at the end of 2025. While management has not provided a specific debt reduction target, the core approach is: 1) Reducing the proportion of short-term debt, ensuring that over 60% of debt is long-term (62% long-term debt proportion in the first half of 2026); 2) Reducing high-interest debt. The company's goal is to keep the debt-to-asset ratio below 40%, with the debt-to-asset ratio slightly above 40% in the first half of 2026. Hongqiao currently has a corresponding expected price-to-earnings ratio of 6 times for 2026; assuming a dividend payout ratio of 65%, this corresponds to a dividend yield of 11%. Combined with a stock buyback of 5.2 billion HKD in the first half (approximately equivalent to 15% of the expected net profit for 2026), the actual return level for shareholders is even higher. The valuation is attractive, and a buy rating is maintained.