Company Report
China
Aluminium
Analyst: Wu Xianfeng
86 (755) 82485666-3005
[email protected]
3 August 2004
CHALCO: Alumina Price Reduced 12.8% to RMB3750/ton
CHALCO
ACCUMULATE
Code: 2600.HK
Price: HK$4.00
The Company reduced alumina spot price in August by 12.8% to RMB3,750/tonne. The price adjustment is
in line with our expected and we believe the price fall may last longer. Nevertheless, electrolyzed aluminum
price has risen to a level from where it will not step down easily. The price adjustments on average realized
prices of alumina and electrolyzed aluminum lead we downgrade the Company’
s profit forecasts accordingly. In
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k,the current stock price has already factored the
negative factors. We ret
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DCF valuation.
Yr End
12/31
2002A
2003A
2004F
2005F
2006F
Turnover
(RMB m)
16,793
24,246
32,786
36,203
39,014
Net
Profit
(RMB m)
1,402
3,552
6,414
7,156
8,033
EPS (RMB)
0.134
0.338
0.580
0.648
0.727
Shares Outstanding (m)
11,049.9
Free Float (%)
29.9
52 Weeks High/Lo (HK$)
7.050/2.100
Source: The Company, GTJAS(HK)
EPS
(Δ%)
(29.7)
153.3
71.6
11.6
12.3
PER (x)
31.8
12.5
7.3
6.5
5.8
DPS
(RMB)
0.045
0.096
0.174
0.194
0.218
Yield
(%)
ROE (%)
1.1
2.3
4.1
4.6
5.1
9.5
20.7
27.9
24.0
22.7
NBV per share (RMB)
P/B (x)
2.4
1.7
The reduction of alumina out-factory price is in line with market expected. The Company announced that
the spot price of alumina has been reduced from RMB4300 to RMB3740/tonne with effect 1 August 2004. The
Company readjusted the current price of alumina in accordance to the international and domestic markets of
alumina and the price trend. We made a forecast before that the alumina price would be further reduced. The
minimum on-shore price of imported alumina is approximately US$320/ton, fell nearly 40% from the peak price
US$530. It fell lower than our expected minimum price of US$350/ton. The fall of imported alumina price was
mainly due to most of electrolyzed aluminum manufacturers in China were losing money. Almost zero demand
was temporarily recorded.
The alumina price may last for longer after the price adjustment. TheCompa
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to RMB3,750/ton, still higher than the lowest imported price of alumina. We think the price adjustment has
China Aluminium –August 3 2004
See back of report for disclaimer
www.gtjas.com.hk
1
included the demand and supply of alumina in China and imported price of alumina, or other way to say,
imported alumina price will not maintain at US$320/ton level for long time. The price of imported alumina may
rebound after touching the bottom. China may be still lacking in alumina over 40% before 2006. On the other
hand, new capacity for international alumina may commence operations to solve the over-demand situation after
2006. Therefore, alumina price may hover highs and the adjusted price is expected to maintain for longer.
Current alumina price in China has risen to a level from where not easy to step down. Since the State
introduced the macro-control adjustment in April 2004, electrolyzed aluminum price in mainland has been
falling from above RMB19,000/ton to below RMB15,000/ton. The Company recently has further reduced the
out-factory price of electrolyzed aluminum to RMB14,850/ton. Spot price of LME electrolyzed aluminum closed
US$1,686/ton last day and the ratio has fallen to 8.8, far higher than the normal ratio of 10. It is less probably to
import more electrolyzed aluminum to fulfill the demand. With rising costs of alumina and power electricity, it is
no doubt that the electrolyzed aluminum industry is making loss. In addition, it seems the industry has difficulty
to release the capacity of electrolyzed aluminum, so the output has been falling. Furthermore, the difference
between electrolyzed aluminum price and fined copper price is further widened. Copper and aluminum may
replace each other along with the widening applications of copper. Therefore, the price of electrolyzed aluminum
is less likely to fall rather than to rise.
Average spot price of alumina price is lower than expected. Although we forecasted before the alumina price
would fall, we stressed on that we would further reduce the average realized price of alumina as the stock price
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scurrent alumina products (accounting for over 80% of total output) were priced at
RMB3700/ton for 2.5 months, RMB4300/ton for 4.5 months and RMB3,750/ton for 5 months approximately.
Prices of alumina for long-term contracts (accounting for less than 20% of total output) should be RMB2,812/ton
in 2004, compared to average projected price of RMB3,000/ton. Weighted average projected price in 2004 is
RMB3,800, down 5% over the previous expected. Average prices in 2005 and 2006 may reduce 9.8% and 7.7%
yoy to RMB3,700a
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50% above.
Average price of electrolyzed aluminum will be reduced. The adverse impacts of macro-control adjustment to
the price of mainland electrolyzed aluminum are more than our expected. Average projected price of alumina is
reduced and the forecasted price for 2004 –2006 is approximately RMB16,000/ton. According to our profit
f
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-factory price. Gross profitoft
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electrolyzed aluminum for 2004 may be in the red. Projected gross profit margins for electrolyzed aluminum for
the three years are –2.37%, 0.55% and 4.21% respectively.
Assumptions of profit forecasts and EPS adjustment
Original forecasts on average price of alumina (RMB/ton)
Present forecasts on average price of alumina (RMB/ton)
Change (%)
Projected output of alumina (10k tonnes)
Original forecasts on average price of electrolyzed aluminum (RMB/ton)
Present forecasts on average price of electrolyzed aluminum (RMB/ton)
Change (%)
Original aluminum output (10k tonnes)
Original projected EPS (RMB)
Current projected EPS (RMB)
Change (%)
Source: The Company, GTJA (HK)
04F
4,000
3,800
(5.0)
660
17,000
16,000
(5.9)
83
0.680
0.580
(14.7)
05F
4,100
3,700
(9.8)
750
17,000
16,000
(5.9)
91
0.814
0.648
(20.4)
06F
3,900
3,600
(7.7)
850
16,500
16,000
(3.0)
94
0.857
0.727
(15.2)
Reduce profit forecasts. We have readjusted average realized prices of alumina and electrolyzed aluminum.
However, the output forecasts on alumina and electrolyzed aluminum remain unchanged. Projected EPS for 2004
to 2006 are reduced 14.7%, 20.4% and 15.2% to RMB0.580, RMB0.648 and RMB0.727 respectively.
China Aluminium –August 3 2004
See back of report for disclaimer
www.gtjas.com.hk
2
Valuation and investment rating. Th
eCompa
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’
si
nc
omei
s mainly gained from alumina product sales which
have already peaked out. However, the supply of alumina in China cannot fulfill the demand. The difference
percentage between demand and supply may remain 40% above before 2006. It is expected new capacity of
international alumina in coming years will not be high. The recovery of global economy boosts the demand of
international alumina. We expect the tightening supply of alumina may last till 2006 afterwards. Alumina price
will hov
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reflected its profit forecasts were downgraded. If the stock price further decreases, it may impact the stock
adversely. Nevertheless, we positively reta
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purchase the stock when it dips to HK$3.5. Based on the DCF valuation, NAV of the stock is HK$4.50. Target
price in 12 month is same as the NAV, equivalent to projected PEs of 8.2x, 7.4x and 6.6x for 2004 to 2006
respectively. For being a resource-oriented and growth company, the current valuation of CHALCO is
reasonably attractive.
Rating Definition
The Benchmark: Hong Kong Hang Seng Index
Rating
Buy
Accumulate
Neutral
Reduce
Sell
Time Horizon: 6 to 18 months
Relative Performance
>15%
5% to 15%
-5% to 5%
-5% to –15%
<-15%
Editor: Christine Yim
Research Report Disclaimers
This report is only subject to GTJAS (HK) Ltd. Co. be circulated to specified clients and other
professionals for reference information. Neither the information nor any opinions contained in this
report constitutes a solicitation or offer by the Group to buy or sell. The GTJAS (HK) Ltd. Co.,
fellow subsidiaries, associates or other affiliates (the "Group") may become placing agent, lead
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Please also note that in relation to information provided, by GTJAS (HK) Ltd. Co. (GTJAS), we
endeavour to ensure the accuracy and reliability of the information provided but do not guarantee
its accuracy or reliability and accept no liability (whether in tort or contract or otherwise) for
any loss or damage arising from any inaccuracies or omissions. The report may contain some
subjective and prospective assumptions and judgements on future politics and economy without
certainties. Investors should thoroughly understand the purposes and risks of equities and
derivatives investment therein. Before making the investment, if necessary, investors should
consult the professionals and then make a prudential investment decision.
China Aluminium –August 3 2004
See back of report for disclaimer
www.gtjas.com.hk
3