1H25 results in line with our expectations

Huafon Aluminium announced its 1H25 results: Revenue rose 20.87% YoY to Rmb5.96bn, and attributable net profit grew 2.15% YoY to Rmb0.57bn (or Rmb0.56/sh), in line with our expectations.

Revenue grew YoY thanks to rising output and rising aluminum prices. In 1H25, revenue rose 20.9% YoY to Rmb5.96bn. We attribute the YoY revenue growth in 1H25 to rising output, as the firm’s production capacity increased and it maintained ample orders in 1H25. In 1H25, ASP of domestic SHFE aluminum rose 2.1% YoY to Rmb21,000/t, and that of overseas LME aluminum rose 6.0% YoY to US$2,544/t. The rising aluminum prices supported the firm’s revenue growth.

Aluminum export tax rebates and changes in trade environment affected processing fees. In 1H25, the firm's gross profit fell 1.7% YoY to Rmb0.81bn, and its gross margin fell 3.11ppt YoY to 13.55%. Due to multiple factors such as the cancellation of export tax rebates for aluminum products and changes in the international trade environment, competition in the domestic and global aluminum processing industries has intensified, and aluminum processing fees trended downward.

Processing fees for some of the firm's conventional products dropped. This was why the firm’s gross profit and gross margin declined despite revenue growth. In 2Q25, the firm's gross margin fell 0.1ppt QoQ to 13.5%, as its processing fees roughly bottomed out in 2Q25.

Trends to watch

Capacity expansion for Phase II project in Chongqing continues; incremental capacity to increase. The firm has 0.5mnt/yr of finished aluminum production capacity. In April, it secured land use rights for its Phase II project in Chongqing, and the project is progressing as scheduled. We expect the firm's production capacity to exceed 0.8mnt/yr after the Phase II project is put into operation. In our view, the firm can add hot-rolled aluminum capacity via this project and thus achieve capacity expansion and cost reduction.

Demand for liquid-cooling systems to ramp up as requirements of data centers increase; market potential of liquid-cooling systems to materialize. Aluminum heat transfer materials are key materials for liquid- cooling systems in data centers. We expect liquid-cooling systems to gradually replace traditional air-cooling systems on the back of their advantages in increasing the density of computing power and reducing system power consumption. We expect AI computing power to grow rapidly. NVIDIA's GB300 system uses liquid-cooled servers equipped with 72 NVIDIA Blackwell Ultra GPUs and 36 Arm architecture-based NVIDIA Grace CPUs. With the gradual delivery of systems using liquid-cooled servers, we expect the market potential for aluminum heat transfer materials in data center liquid cooling applications will steadily materialize.

Financials and valuation

We cut our 2025 and 2026 net profit forecasts 7.5% and 2.6% to Rmb1.31bn and Rmb1.63bn due to the cancellation of export tax rebate policy for aluminum products and pressure on processing fees from exports to domestic sales. The stock is trading at 14.1x 2025e and 11.3x 2026e P/E. As processing fees have stabilized and the liquid-cooling system market is growing, we maintain an OUTPERFORM rating and our TP of Rmb21.24, implying 16.2x 2025e and 13x 2026e P/E, offering 14.6% upside.

Risks

Processing fees under pressure due to deteriorating competitive landscape; disappointing downstream demand; intensifying international trade friction.