Guosen: CHINAHONGQIAO (01378) 26H1 profit surged significantly, reinforcing the trend of industry chain integration. Maintain "Outperform Market" rating.

Guosen released a research report stating that it maintains a Outperform rating for CHINAHONGQIAO (01378). The company is a global leader in electrolytic aluminum, and its joint venture possesses the world's largest bauxite mine. With a complete industrial chain, the company is leveraging the current high prosperity cycle of electrolytic aluminum and the opportunity for capacity transfer to continue shedding the long-term constraints of debt pressure and carbon emission pressure, thereby enhancing its future sustainable development capability. Assuming that the average spot price of aluminum including tax from 2026 to 2028 is 24,000 yuan/ton, the alumina price is 2,700 yuan/ton, the prebaked anode price is 5,700 yuan/ton (originally 6,000 yuan/ton), and the delivered price of 5,500 kcal thermal coal is 800 yuan/ton (originally 700 yuan/ton), while the included tax price of hydropower in Yunnan is 0.44 yuan/kWh. Guosen's main points are as follows: The companys net profit attributable to the parent company is expected to grow by 39.2% in H1 2026. CHINAHONGQIAO disclosed that its half-year performance for 2026 includes operating revenue of 87.51 billion yuan, a year-on-year increase of 8.0%; net profit attributable to the parent company of 17.21 billion yuan, a year-on-year increase of 39.2%; net cash flow from operating activities of 22.15 billion yuan, a year-on-year decrease of 0.7%. The profit growth primarily benefits from the rise in aluminum prices, particularly a gross profit increase of 8.8 billion yuan in the electrolytic aluminum business; however, the gross profit in the alumina business decreased by 4.9 billion yuan due to a year-on-year drop in alumina prices. The aluminum alloy deep processing business, which includes some profits from the electrolytic aluminum segment, saw a gross profit increase of 1.7 billion yuan year-on-year in H1 2026. To maintain market confidence, the company repurchased a total of 5.29 billion HKD/159 million shares during the reporting period, which were subsequently canceled. In early June, the controlling shareholder increased their holdings by 1.1 billion HKD/41.5 million shares. Asset Impairment During the reporting period, the company recognized an impairment of 1.1 billion yuan for fixed assets and inventory, which included 580 million yuan for fixed asset impairment, primarily related to coal-fired generating units, and 530 million yuan for inventory write-down provisions, mainly due to the decline in alumina prices in the first half of the year leading to write-down losses in alumina and bauxite inventory. Fair Value Changes of Financial Instruments In the reporting period, fair value changes of financial instruments contributed a profit of 950 million yuan, compared to a loss of 2.1 billion yuan in the same period last year. The primary reason is the drop in the company's share price during the reporting period, which reduced the value of a $300 million convertible bond issued last year, leading to a fair value change profit, whereas the opposite occurred in the same period last year. According to the companys announcement, it will redeem this $300 million convertible bond early on September 11 of this year. Risk Warning: The risk of rising coal or prebaked anode prices and the risk of declining aluminum prices.