Key takeaway

The company disclosed its 2026 stock option incentive plan (draft). It proposes granting 85mn stock options to incentive recipients, representing 5.47% of total share capital. Using 2025 net profit excluding Tianchi Energy as the baseline, net profit growth in 2026/2027/2028 must be no less than 204%/308%/340%, respectively. The plan also includes performance assessments for operating units and individuals, as well as a veto mechanism for HSSE breaches. The company is at a pivotal stage where an earnings turnaround, new capacity ramp-up, and surging AI demand are converging. If Tianchi Energy maintains investment income of RMB412mn, the net profit requirements for 2026-2028 would be RMB1.172bn/RMB1.432bn/RMB1.512bn if the targets are met. The plan primarily covers key business personnel and explicitly includes core employees of subsidiaries. This aligns the teams for new businesses such as Fangchenggang alumina, electronic foil, and high-purity aluminum under a unified incentive framework. The relatively high reserved portion also provides ample flexibility for recruitment during capacity ramp-up and for new technologies.

Event

The company disclosed its 2026 stock option incentive plan (draft).

The company proposes granting 85mn stock options, representing 5.47% of total share capital, including an initial grant of 69.95mn options (4.50%) and 15.05mn reserved options (0.97%). Using 2025 net profit excluding Tianchi Energy as the baseline, net profit growth in 2026/2027/2028 must be no less than 204%/308%/340%, respectively. The plan also includes performance assessments for operating units and individual performance, as well as a veto mechanism for HSSE breaches.

Quick Take

Breakdown of performance targets:

Net profit attributable to shareholders of the parent company was RMB662mn in 2025, including RMB412mn in equity-method income from Tianchi Energy. After excluding this amount, the assessment baseline was approximately RMB250mn. This corresponds to assessed net profit of approximately RMB760mn/RMB1.020bn/RMB1.100bn for 2026-2028. If Tianchi Energy maintains investment income of RMB412mn, the net profit requirements for 2026-2028 would be RMB1.172bn/RMB1.432bn/RMB1.512bn if the targets are met.

Breakdown of incremental earnings:

The company has three sources of incremental earnings going forward: 1. In its traditional business, the Fangchenggang alumina project will commence production in mid-year. Its 2.4mn tonnes of alumina capacity will contribute to output and profit growth this year and next year. 2. The relocation and upgrade of its electrode foil operations are nearly complete. Environmental pressures at its Xinjiang production base previously reduced profits from the company's etched foil production lines. The company also recognized RMB30mn in non-operating expense in its interim results for losses from scrapping the old production lines. Once the relocation is completed, the company's electrode foil business will see its structure recover, costs decline, and production and sales rebound; 3. An industry-wide upcycle driven by rising downstream demand for aluminum electrolytic capacitors. As AI server rack power increases, demand for aluminum electrolytic capacitors will grow exponentially starting with the Rubin generation, driving capacitor price increases. This may replicate the 2021-2023 upcycle, when surging new energy demand boosted prices and profits across the aluminum electrolytic capacitor value chain. The company will benefit substantially across its businesses, from high-purity aluminum to electronic aluminum foil and electrode foil.

The company's equity incentive plan has broad coverage and relatively stringent performance requirements.

The plan proposes granting 85mn shares to 455 participants. Nine directors and senior executives will receive a total of 5.6mn shares, while 447 core management, technical, and business personnel will receive a total of 64.35mn shares. Core personnel account for 75.71% of the proposed grant. Another 15.05mn shares, or 17.71%, will be reserved for future talent recruitment. The plan focuses on core business personnel and explicitly includes core employees of subsidiaries. This will align the teams of new businesses, including Fangchenggang alumina, electronic aluminum foil, and high-purity aluminum. The relatively high reserved portion also provides ample flexibility for recruitment during the production ramp-up period and for new technologies.

Earnings forecast and investment recommendation: The company is at the convergence of an earnings turnaround, new capacity ramp-up, and accelerating AI demand. Net profit attributable to shareholders of the parent company increased by 33.6% YoY in 1H, providing initial confirmation of the earnings inflection point. We estimate the company's net profit attributable to shareholders of the parent company for 2026-2028 will be RMB1.203bn, RMB1.814bn, and RMB2.249bn, corresponding to P/E multiples of 12.5x, 8.3x, and 6.7x, respectively. We maintain our "Buy" rating.

Risks: Risk of cyclical aluminum price fluctuations in the alloy and aluminum products business. The company’s alloy products (RMB2.966bn) and aluminum products (RMB0.698bn) together account for about 46% of total revenue, essentially a cyclical aluminum smelting and processing business whose profitability is highly positively correlated with electrolytic aluminum prices. In 2025, the gross margin of alloy products was 6.27%, and the gross margin of aluminum products was 10.72%, with profit elasticity highly sensitive to aluminum prices. If the global supply-demand structure of electrolytic aluminum reverses or macroeconomic weakness leads to a sustained decline in aluminum prices, profits from this segment will shrink significantly and drag down the company’s overall performance.

Risk of rising energy costs. Electrolytic aluminum consumes about 13,000 kWh of electricity per ton, while the three-layer electrolytic process for high-purity aluminum consumes about 16,000 kWh per ton, making both highly energy-intensive and extremely sensitive to electricity prices; if electricity prices fluctuate and energy costs rise, the company’s costs will increase and profit realization will be affected.

Risk of downstream AI server demand falling short of expectations. The company’s incremental growth logic from high-purity aluminum → electronic aluminum foil → electrode foil is highly dependent on a surge in capacitor demand from AI servers and the rollout of the 800V HVDC architecture. If Nvidia delays its deployment pace due to infrastructure constraints, or if the growth rate of AI computing power investment slows, the related demand pull-through effect will be realized later than expected.