Investment positives

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

Why an OUTPERFORM rating?

A leading producer of aluminum heat exchange materials with rapid capacity expansion. Huafon Aluminium operates industrial bases in Shanghai and Chongqing, with a combined finished aluminum production capacity of 500,000t/yr as of end-2024. The Chongqing Phase II project, scheduled for a two-year construction period, will add 450,000t/yr of high-end aluminum sheet, strip, and foil production. The construction period will last two years. We expect total production capacity to exceed 800,000t/yr after this project starts operation. The firm has become a global leading manufacturer of aluminum heat exchange materials.

Advantages in R&D, scale, and cost underpin Huafon Aluminium’s industry-leading ROE. The firm registered an average ROE of 20.6% over 2021-2024, much higher than the industry average of 12.0%, mainly due to higher net margin and asset turnover ratio. The firm enjoys three core advantages: 1) Strong R&D capabilities enabling the firm to target the high-end market and obtain higher-than-industry-average processing fees; 2) economies of scale allowing for effective reduction in unit manufacturing cost and enhanced ability to quickly supply downstream customers; and 3) lean management practices that reduce costs and improve yield rate. We believe the cost-effective expansion of the Chongqing factory will further dilute average production cost.

Emerging markets driving demand growth; competitive landscape improving. Demand from new energy vehicles (NEV) has doubled compared to internal combustion vehicles (ICV). We believe that the robust global NEV penetration will sustain downstream demand, while emerging applications in air conditioning systems and data centers will fuel long-term demand.

Supply side: The aluminum heat exchange material industry has high customization, small-batch production, and stringent continuous supply requirements, creating high entry barriers. Leading companies like Huafon Aluminium mitigate unit cost and improve profitability through high capacity utilization and turnover efficiency. Notably, the firm’s share in the total output of the global top 3 manufacturers expanded from 32% in 2020 to 45% in 2024, cementing its competitive edge.

How do we differ from the market? While the market focuses on orders from the NEV industry, we believe strong demand from emerging markets such as air conditioners may boost the firm’s sales volume growth. In addition, we expect the firm to reduce costs thanks to improving efficiency.

Potential catalysts: Booming downstream orders; smooth capacity expansion; higher-than-expected cost reduction and efficiency enhancement.

Financials and valuation

Our EPS forecast is Rmb1.42 and Rmb1.68 in 2025 and 2026, a CAGR of 17.4%. The stock is trading at 11.4x 2025e and 9.6x 2026e P/E. We initiate 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; intensifying international trade friction.