Investment positives

We initiate coverage on Huafon Aluminium with an OUTPERFORM ratingand a target price of Rmb21.24, implying 15.0x 2025e P/E. The firm is aleading manufacturer of aluminum heat transfer materials in China.

Why an OUTPERFORM rating?

A leading producer of aluminum heat transfer materials withrapid capacity expansion. Huafon Aluminium operates industrialbases in Shanghai and Chongqing, with a combined finishedaluminum production capacity of 500,000t/yr as of end-2024. TheChongqing Phase II project, scheduled for a two-year constructionperiod, will add 450,000t/yr of high-end aluminum sheet, strip, and foilproduction. The construction period will last two years. We expecttotal production capacity to exceed 800,000t/yr after this project startsoperation. The firm has become a global leading manufacturer ofaluminum heat transfer materials.

Advantages in R&D, scale, and cost underpin HuafonAluminium’s industry-leading ROE. The firm registered an averageROE of 20.6% over 2021–2024, much higher than the industryaverage of 12.0%, mainly due to higher net margin and assetturnover ratio. The firm enjoys three core advantages: 1) Strong R&Dcapabilities enabling the firm to target the high-end market and obtainhigher-than-industry-average processing fees. 2) Economies of scaleallowing for effective reduction in unit manufacturing cost andenhanced ability to quickly supply downstream customers. 3) Leanmanagement practices that reduce costs and improve yield rate. Webelieve the cost-effective expansion of the Chongqing factory willfurther dilute average production cost.

Emerging markets driving demand growth; competitivelandscape improving. Demand from new energy vehicles (NEV) hasdoubled compared to internal combustion vehicles (ICV). We believethat the robust global NEV penetration will sustain downstreamdemand, while emerging applications in air conditioning systems anddata centers will fuel long-term demand.

Supply side: The aluminum heat transfer material industry has highcustomization, small-batch production, and stringent continuoussupply requirements, creating high entry barriers. Leading companieslike Huafon Aluminium mitigate unit cost and improve profitabilitythrough high capacity utilization and turnover efficiency. Notably, thefirm’s share in the total output of the global top three manufacturersexpanded from 32% in 2020 to 45% in 2024, cementing itscompetitive edge.

How do we differ from the marketWhile the market focuses on ordersfrom the AFV industry, we believe strong demand from emerging marketssuch as air conditioners may boost the firm’s sales volume growth. Inaddition, we expect the firm to reduce costs thanks to improving efficiency.

Potential catalysts: Booming downstream orders; smooth capacityexpansion; higher-than-expected cost reduction and efficiencyenhancement.

Financials and valuation

Our EPS forecast is Rmb1.42 and Rmb1.68 in 2025 and 2026, a CAGR of17.4%. The stock is trading at 11.4x 2025e and 9.6x 2026e P/E. Weinitiate coverage with an OUTPERFORM rating and TP of Rmb21.24,implying 15.0x 2025e P/E, and offering 31% upside.

Risks

Disappointing downstream demand; worsening competitive landscape;i ntensifying international trade friction.