CHINAHONGQIAO: Opportunities brought by high dividends and missed expectations

In recent months, the market's demand expectations for industrial metals have fluctuated, triggering adjustments in many cyclical stocks. However, it is often during times of widespread pessimism in market sentiment that opportunities for contrarian investments are hidden. Especially for industries that are not purely cyclical, after a round of price adjustments in commodities, they still possess strong intrinsic value. Taking the Hong Kong stock market as an example, the electrolytic aluminum giant CHINAHONGQIAO (1378.HK) has just released its interim report, with both revenue and profit reaching historic highs. In the first half of 2024, CHINAHONGQIAO achieved annual revenue of 73.59 billion RMB, a year-on-year increase of 12%; net profit attributable to shareholders was 9.15 billion RMB, a year-on-year increase of 272.7%; interim dividend was 0.59 HKD per share, with a dividend payout ratio increased to 56%, yielding an annual dividend rate of over 10%. Looking ahead, as China is the world's largest producer of electrolytic aluminum and its supply side is clearly restricted, coupled with the gradual electrification of the global energy structure, the outlook for aluminum's additional demand is relatively optimistic. With the end of the Fed's interest rate hike cycle, the weakness of the US dollar is also expected to further boost aluminum prices. It can be said that the current pullback in aluminum prices is preparing for a new upward cycle. From another perspective, even during last year's weak cycle, CHINAHONGQIAO's profit still exceeded 10 billion RMB. Despite the current macroeconomic uncertainties, the company's demonstrated profit resilience and dividend characteristics should be recognized and valued by the market. I. Record high revenue and profit, further increase in dividend payout ratio In the first half of this year, prices of industrial metals such as copper and aluminum experienced a significant rise, mainly due to the clear recovery of overseas economies in March, the increase in manufacturing PMI in the US and Europe, and the slight rebound in China's manufacturing PMI. Driven by the dual factors of optimistic macro sentiment and the recovery of peak season demand, aluminum prices surged strongly, reaching a new high since April 2022. However, in June, with the shift in macro indicators, including increased supply, weak performance in the off-season demand, uncertainty about potential Fed rate cuts, capital withdrawal occurred, leading the non-ferrous metal market into a downward trend. According to data from Antaike, in the first half of 2024, the average price of LME three-month aluminum futures was around $2,401 per ton, a year-on-year increase of about 1.6%. The average price of SHFE three-month aluminum futures was around 19,846 RMB per ton, a year-on-year increase of about 8.2%. Specifically, overseas markets still exhibit weak demand in traditional sectors such as packaging, construction, and durable consumer goods, which significantly restrain the export of bulk commodities like aluminum. In stark contrast, the Chinese aluminum consumption market remains stable with growth, especially with the rapid development of new energy vehicles and the photovoltaic industry, bringing new growth momentum to aluminum consumption. According to statistics from Shanghai Nonferrous Network, the aluminum consumption of new energy vehicles is 3-4 times that of traditional fuel vehicles, and the long-term trend of automotive lightweighting remains unchanged, with the per-vehicle aluminum usage expected to continue to rise It can be expected that as overseas economies enter an interest rate reduction cycle, the macro economy will be supported, and the demand for aluminum in traditional industries will gradually recover. At the same time, the green demand for aluminum will also bring new market opportunities, and the subsequent global aluminum demand recovery is worth looking forward to. Looking back at the performance of CHINAHONGQIAO in the first half of the year, benefiting from the rise in both volume and price, the company's revenue and profit have reached new highs. During the period, the sales volume of the company's aluminum alloy products reached approximately 2.837 million tons, an increase of about 0.5% year-on-year, with an average selling price rising by about 6.7% to approximately 17,379 yuan/ton, and revenue increasing by 7.2% to 49.3 billion yuan; the sales volume of alumina products was approximately 5.507 million tons, an increase of about 2.4% year-on-year, with an average selling price rising by about 16.9% to approximately 2,942 yuan/ton, and revenue increasing by 19.7% to 16.2 billion yuan; the sales volume of aluminum alloy processed products was approximately 379,000 tons, an increase of about 35.9% year-on-year, with an average selling price decreasing by about 1.2% to approximately 20,027 yuan/ton, and revenue increasing by 34.3% to 7.58 billion yuan. Additionally, the continuous decrease in raw material prices, coupled with effective cost control, has driven a significant increase in the company's gross profit margin, from about 9% in the same period of 2022 to 24.2%. The company's administrative expenses decreased by 12.6% year-on-year during the period, ultimately achieving a 272.7% year-on-year increase in net profit attributable to shareholders to 9.15 billion yuan, and a 100% year-on-year increase in net cash flow from operating activities to 14.26 billion yuan. It is worth noting that during the period, the company incurred other expenses of 596 million yuan and a loss of 1.61 billion yuan from changes in the fair value of financial instruments. The other expenses mainly include impairment losses on property, plants, and equipment of 530 million yuan; the loss from changes in the fair value of financial instruments is mainly due to a loss of 1.39 billion yuan on the derivative portion of convertible bonds. Excluding these non-operating factors, the company's profit performance will be even more outstanding. In terms of the balance sheet, At the end of June 2024, the company's cash and cash equivalents increased by 18.2% year-on-year to 37.5 billion yuan, with an asset-liability ratio of approximately 48.5%, maintaining a historically low level. During the period, the company continued to optimize its debt structure, issuing a $300 million senior unsecured bond in the US dollar bond market with a coupon rate of 7.75% at the beginning of the year, receiving subscriptions of over 7 times the amount; its subsidiary Shandong Hongqiao also successfully issued short-term financing bonds, medium-term notes, and innovation medium-term notes totaling 9.5 billion yuan, setting a new historical low for long-term bond rates. Positive market feedback indicates that domestic and foreign investors are confident in the future development of China Hongqiao. In addition, the major shareholders of China Hongqiao disclosed two increases in holdings in June, at prices of approximately HKD 11.76 and HKD 11.87 respectively, involving a total of approximately 160 million Hong Kong dollars, reflecting optimism about the company's prospects. Against the backdrop of record profits and sound financial conditions, China Hongqiao further rewards shareholders by increasing its dividend payout ratio from around 47.6% in 2023 to 56%, with a year-on-year increase of 73.5% in mid-term dividends, approaching the level of the previous year's total dividends. Looking ahead to the second half of the year, the current average price of aluminum is slightly higher than the average level in the second half of last year. If this trend continues, the company's profits in the second half of the year are expected to exceed the same period last year, reaching around 9 billion yuan, which means that annual profits are expected to reach 18 billion yuan, with a dividend yield of over 10%. However, in the face of market pessimism about future demand, the company's PB ratio has once again fallen below net asset value, but this expected deviation may be a good opportunity for allocation. II. Overseas Entering a Rate Cut Cycle, Traditional Demand Expected to Recover From a long-term perspective, supply constraints and the addition of green demand remain the investment logic for electrolytic aluminum, while in the short term, aluminum prices are at a relatively low level for the year, with significant upside potential. As of the end of July this year, China's electrolytic aluminum operating capacity reached 43.5 million tons, close to the capacity ceiling, and the operating rate remained at a high level. In addition, in May, the State Council issued the "2024-2025 Energy Saving and Carbon Reduction Action Plan," which mentioned the aluminum industry multiple times, such as strict implementation of electrolytic aluminum capacity replacement, etc. This indicates that as the world's largest aluminum processing country, China's future supply-side growth will be constrained by policy guidance and environmental requirements. On the overseas front, according to data from the International Aluminum Association, overseas electrolytic aluminum production in the first half of the year reached 1, The overseas output of aluminum is expected to maintain a growth rate of around 2% for the whole year, considering the continuous lower-than-expected new capacity construction and the trend of production restrictions and shutdowns in developed countries such as Europe. At the same time, weak overseas demand may also suppress capacity utilization, providing some support for aluminum prices in the short term. From the demand side, although traditional demand sectors still face pressure, the operating rates of most downstream industries in China have achieved year-on-year growth, and demand is expected to gradually recover. In addition, with the peak season for growth in clear areas such as photovoltaics and new energy vehicles approaching, as well as many countries globally entering an interest rate reduction cycle to stimulate the economy, aluminum prices are expected to receive further boosts. In summary, although there are uncertainties in the short term for aluminum prices, the positive impact of supply and demand fundamentals and macro policies will be an important basis for the upward trend of aluminum prices in the medium to long term.

III. Conclusion In the first half of the year, CHINAHONGQIAO achieved explosive profits, driven by both the expectation of macroeconomic recovery and favorable changes in supply and demand relationships, as well as the strong push from the company's own advantages and strategic layout. CHINAHONGQIAO has been committed to actively integrating overseas bauxite resources, establishing a global integrated operation model, which has not only formed a significant advantage in cost control but also enabled the company to maintain a leading position in the market competition in the long term. By the end of 2023, as an upstream raw material, the company's alumina production capacity reached 19.5 million tons, including 17.5 million tons in Shandong and 2 million tons in Indonesia. Therefore, in the first half of the year, the company not only benefited from the rapid rise in aluminum prices but also achieved higher profits in the context of a significant increase in alumina prices and a sharp increase in industry-wide costs. Based on CHINAHONGQIAO's layout of the bauxite, alumina, and electrolytic aluminum industry chain, the company has basically completed its layout, providing the opportunity to fully enjoy the resonance effect of market growth (beta) and the company's own advantages (alpha) when the industry's prosperity rises in the future. Currently, the real turning point for the industry depends on the recovery of traditional demand. Although there is uncertainty in this process, taking a step back, the weak economic recovery environment remains unbroken, and high dividend styles are expected to continue to dominate. For CHINAHONGQIAO, the company has demonstrated its profitability resilience and elasticity in the past year and the first half of this year, possessing strong dividend attributes, bringing relatively high allocation value, and still expected to continue to attract market attention