2023 results in line with our expectations

Aluminum Corporation of China (Chalco) announced its 2023 results: Revenue dropped 22.65% YoY to Rmb225.07bn, attributable net profit rose 60.23% YoY to Rmb6.72bn, and recurring net profit grew 111.27% YoY to Rmb6.61bn. In 4Q23, revenue fell 42.14% YoY (32.53% QoQ) to Rmb36.67bn, and attributable net profit stood at Rmb1.36bn, with YoY growth turning positive and QoQ growth declining 29.51%. The firm's results are in line with our expectations.

Profit per tonne of aluminum widened; profit of primary aluminum increased. In 2023, the firm's electrolytic aluminum output fell 1.31% YoY to 6.79mnt. Aluminum prices dropped 6.42% YoY, and alumina, coal, and anode prices fell 0.88%, 23.62%, and 24.23% YoY. Pre-tax profit of primary aluminum rose 15.61% YoY to Rmb11.24bn thanks to a sharper decline in costs (sharper than the decline in aluminum prices) and higher profit per tonne of aluminum.

Alumina profit increased thanks to lower impairment losses. Chalco's alumina output fell 5.50% YoY to 16.67mnt in 2023. Pre-tax profit of alumina rose Rmb773mn YoY to Rmb985mn, thanks to lower asset impairment losses.

Asset structure improved; dividend payout ratio increased. The firm's liability-to-asset ratio dropped 2.31ppt YoY to 53.30% in 2023. Chalco proposed a cash dividend of Rmb0.08/sh (incl. tax), and raised its dividend payout ratio 5.7ppt YoY to 20.44%. In addition, the firm's annual asset impairment dropped Rmb4.13bn YoY to Rmb760mn.

Trends to watch

Chalco is ensuring resource supply in China and accelerating business upgrading. The upstream resource segment continues to increase supply, and the firm added 21mnt of bauxite resources in 2023. Amid the accelerating industrial upgrading and adjustment, Chalco also plans to speed up the construction of its Phase II 2mnt alumina project in Guangxi, 420,000t light alloy material project in Inner Mongolia, 500,000t electrolytic aluminum project in Qinghai, and 1,200MW source-grid-load storage project in Baotou (Inner Mongolia) in 2024.

Expanding overseas to enhance sustainable development. The firm now has about 1.8bn tonnes of bauxite resources overseas, and it plans to acquire more bauxite resources in Africa and Southeast Asia to continue improving its resource supply capability.

Financials and valuation

We cut our revenue forecast due to decreases in trading, but raise our 2024 and 2025 earnings forecasts 8.3% and 8.3% to Rmb7.89bn and Rmb7.90bn due to rising electrolytic aluminum output. A-shares are trading at 16.1x and 16.1x 2024e and 2025e P/E. H-shares are trading at 9.6x and 9.2x 2024e and 2025e P/E. We maintain NEUTRAL for A-shares and H-shares. Given the robust demand in the industry, we raise our TP for A-shares 15% to Rmb8.3 (18x and 18x 2024e and 2025e P/E) offering 12% upside and raise our TP for H-shares 14% to HK$5.6 (11x and 11x 2024e and 2025e P/E) offering 13% upside.

Risks

Global economic recovery and/or pro-growth policies of China disappoint; sharp price fluctuations.