Preannounces 2023 earnings up to 50.29%-74.15%

Aluminum Corporation of China (Chalco) preannounced that its net profit attributable to shareholders may rise 50.29%-74.15% YoY to Rmb6.30- 7.30bn, and recurring net profit may grow 112.90%-145.16% YoY to Rmb6.60bn. In 4Q23, attributable net profit may turn positive YoY to Rmb0.95-1.948bn (between -51.06% and +0.59% QoQ), and recurring net profit may turn positive YoY (between -18.36% and +30.52% QoQ) to Rmb1.67-2.67bn. The firm's preannounced earnings are in line with our expectations.

Trends to watch

Continuing to strengthen cost control and enhance efficiency; full- year earnings improving markedly. According to the preannouncement, Chalco’s earnings may increase YoY in 2023 thanks to strengthening production planning and process control, improving effective capacity utilization, and continued efforts to deepen all-factor benchmarking. The sector average prices of alumina, thermal coal, and prebaked anodes fell 0.9%, 6.1%, and 27.8% YoY in 2023. Despite a 6.3% YoY decline in aluminum prices in 2023, we estimate sector average per-tonne cash profit grew 25.6% YoY thanks to lower cost. Sector profitability improved significantly.

New projects to increase capacity; share purchases by major shareholder showing confidence. Corporate filings show the firm's 420,000t/yr Huayun Phase III aluminum project in Inner Mongolia (actual addition of 170,000t/yr) and 2mnt/yr Huasheng Phase II alumina project in Guangxi are well on track, which we think will boost Chalco’s aluminum and alumina production capacity by 2.3% and 9.0% after they come on line. The firm announced on October 20, 2023 that its controlling shareholder plans to spend Rmb250-500mn over the next six months on purchasing shares of Chalco. As of November 6, 2023, the controlling shareholder had invested Rmb136mn on purchasing 0.13% of Chalco’s share capital.

Strengthened market-cap management of central SOEs to improve earnings and average valuation. In 2023, the State-owned Assets　Supervision and Administration Commission (SASAC) established a target management system for the performance evaluation of central SOEs, which focuses on total profits, return on equity, liability-to-asset ratio, operating cash ratio, productivity and R&D expense ratio. On January 24, 2024, SASAC further stated that market-cap management would be included in the performance assessment. We believe the adjustment will guide central SOEs to improve their operating quality and capital market performance, conducive to enhancing earnings and average valuations.

Global aluminum supply and demand conditions to remain tight; aluminum prices to continue trending upward. We believe the global supply of primary aluminum may slow systematically, and the supply side will remain tight. We anticipate tightening global supply and demand balance for aluminum in 2023-2025, considering the boost to demand from recovering global economy and rising emerging demand. We think aluminum prices may trend upward, boding well for global aluminum leaders such as Chalco

Financials and valuation

We maintain our earnings forecasts for 2023-2025. A-shares are trading at 13.5x 2024e and 13.5x 2025e P/E. H-shares are trading at 8.0x 2024e and 7.8x 2025e P/E. For A-shares, we maintain our NEUTRAL rating and target price of Rmb7.2, implying 17.0x 2024e and 17.0x 2025e P/E, offering 26% upside. We maintain our NEUTRAL rating and target price of HK$4.9 for H-shares, implying 11.5x 2024e and 11.5x 2025e P/E, offering 26% upside.

Risks

Economic recovery and/or pro-growth policies disappoint; sharp price fluctuations.