Morgan Stanley: Dividend protection and stock buyback plan will enhance shareholder returns. Maintains "overweight" rating on CHINAHONGQIAO (01378).

CHINAHONGQIAO (01378) announced its mid-term performance for 2025 last week. Morgan Stanley released a research report stating that the company's net profit for the first half of 2025 met previous guidance. Although the company did not announce a mid-term dividend, the bank believes that the assurance of a full-year dividend payout, along with a HK$3 billion share buyback plan, will continue to increase shareholder return. Morgan Stanley maintained a "overweight" rating for CHINAHONGQIAO, listing the stock as its "top pick," with a target price of HK$24.80. Morgan Stanley stated that CHINAHONGQIAO's net profit in the first half of 2025 increased by 35% year-on-year to approximately RMB 12.4 billion, in line with guidance. The bank attributed the strong profit performance of the company to: 1) an increase in profit contribution from the aluminum business, especially in the second quarter of 2025, due to a decrease in self-generated electricity prices in Shandong (affected by the decline in thermal coal prices) and a drop in hydropower prices in Yunnan, leading to a decrease in aluminum production costs; 2) an increase in sales volume for aluminum and alumina, growing by 2.4% and 15.6% respectively year-on-year; 3) the resilient profit contribution from the alumina business, with gross profit in the first half of 2025 increasing by 44% year-on-year, and gross margin improving by 1.5 percentage points to 25.7% year-on-year. Morgan Stanley pointed out that CHINAHONGQIAO's balance sheet continues to improve. With a reduction in debt, the net debt ratio in the first half of 2025 further decreased to 23%, lower than 26% in the first half of 2024. Due to optimization of debt structure and a decrease in interest rates, the total financing cost decreased by 18% year-on-year to RMB 1.3 billion. Morgan Stanley added that a guaranteed full-year dividend payout and a new share buyback program will enhance shareholder returns for CHINAHONGQIAO. The bank stated that although the management did not distribute mid-term dividends in the first half of 2025, they guarantee that the full-year dividend payout in 2025 will not be lower than the 2024 level (approximately 63%). Meanwhile, the company's board of directors announced a new share buyback program, in which they will repurchase company shares from the market from time to time, with a total repurchase amount not lower than HK$3 billion, and all repurchased shares will be cancelled. In conclusion, Morgan Stanley summarized that despite a slowdown in consumer demand, aluminum prices are supported by low social inventory levels, fluctuating at high levels. Higher aluminum prices, coupled with lower prices of bauxite and electricity, will help further reduce production costs, and it is expected that the company's profit resilience will continue into the second half of 2025.