Macquarie initiates CHINAHONGQIAO (01378) with "Outperform": 45 million-ton capacity ceiling locks in supply, compliant capacity has become a "scarce asset"

Macquarie initiates coverage on CHINAHONGQIAO (01378) with "Outperform": 45 million-ton capacity ceiling locks in supply, compliant capacity has become a "scarce asset" Macquarie released a research report, initiating coverage on CHINAHONGQIAO (01378) with an "Outperform" rating and a 12-month target price of HK$29, implying approximately 37.7% upside from the September 29 closing price of HK$21.06, with a 12-month total shareholder return (TSR) of about 49.1% including dividends. The bank believes that CHINAHONGQIAO has transformed from a cyclical electrolytic aluminum smelter into a global aluminum leader underpinned by four pillars: resource security, cost advantages, green energy transition, and high shareholder returns. After the recent stock price correction, valuation is cheap and dividend yield is attractive, with the re-rating still underway. Capacity ceiling combined with new demand drivers pushes the aluminum price center structurally higher Macquarie notes that the 45 million-ton electrolytic aluminum capacity "ceiling" established by the 2018 capacity replacement mechanism has evolved from policy text into a physical constraint. As of end-2025, industry built capacity stands at 44.83 million tons, with an operating rate as high as 98.5%, supply elasticity has nearly vanished, and compliant capacity itself has become a scarce asset. On the demand side, new energy vehicles, photovoltaic, power grids, and power electronics have replaced real estate as marginal drivers aluminum intensity per battery electric vehicle reaches 226.8 kg, about 26% higher than internal combustion engine vehicles, and is expected to rise to 283.5 kg by 2030. State Grid's "14th Five-Year Plan" includes 24 AC and 14 DC ultra-high-voltage projects with total investment of RMB 380 billion, providing high visibility for power-sector aluminum demand over the next two to three years. The bank estimates that the domestic aluminum market will remain in deficit from 2026 to 2028. Integrated cost moat through the cycle CHINAHONGQIAO operates one of the industry's most complete value chains: Guinea bauxite (accounting for 75.3% of ore consumption in the first half) alumina captive power plants 6.46 million tons of compliant electrolytic aluminum capacity (about 14.5% of national total, second in the industry) downstream processing. Alumina self-sufficiency exceeds 100%, with a theoretical value as high as 171%, turning this key raw material from a cost item into a profit center. In 2025, external alumina sales reached 13.4 million tons, contributing revenue of RMB 38.83 billion with a gross profit of RMB 643 per ton; Shandong captive power and Yunnan hydropower form a dual power platform, with Yunnan dry-season electricity prices at RMB 0.42-0.43/kWh and wet-season prices as low as RMB 0.32-0.35/kWh, effectively smoothing the cost curve. In 2025, the company's electrolytic aluminum gross profit per ton reached RMB 5,183. Macquarie estimates that for every RMB 1,000/ton increase in aluminum prices, the company's net profit increases by approximately RMB 3.8 billion. High profitability and shareholder returns The bank expects the company's adjusted net profit to rise from RMB 22.6 billion in 2025 to RMB 33.2 billion in 2026, and RMB 31.2 billion and RMB 29.8 billion in 2027 and 2028 respectively. On the balance sheet, in November 2025 the company placed 400 million shares at HK$29.20, raising approximately HK$11.49 billion net, the largest refinancing since listing, reducing the debt-to-asset ratio to 42.2% and net debt to RMB 19.9 billion. Shareholder returns continue to increase: the full-year 2025 payout ratio reached 65.4%, with dividends plus buybacks accounting for 88% of net profit attributable to shareholders; the company initiated buybacks for the first time in 2025, canceling 306 million shares at a cost of HK$5.58 billion, and buybacks in the first half of 2026 are already close to the full-year total of last year. Management guides for annual dividends plus buybacks of approximately HK$20 billion over the next one to two years. Based on the bank's forecasts, the 2026 dividend yield is as high as 11.4%. Macquarie's target price is based on 4.7x 2027 forecast EV/EBITDA, slightly above the company's historical average and in line with the average of Hong Kong-listed Chinese aluminum companies. Currently, CHINAHONGQIAO's stock price corresponds to only 3.6x 2027 EV/EBITDA and 5.5x 2027 P/E.