CHALCO (2600 HK) – acquisition of 19% stake in Yunnan Aluminium
- Aluminum Corporation of China (“CHALCO”) announced to raise the equity interests in Yunnan Aluminium (000807 CH) to 29.1%
- Overall progress is earlier than indicated restructure target timeline
- We expect the deal would boost CHALCO’s earnings by 14% and net gearing by 7ppt but benefit a better synergy in operation in long term
- We expect +ve share price reaction
– According to HKEx dated 24 July, CHALCO announced it would acquire 19% stake in Yunnan Aluminium held by Yunnan Metallurgical in cash through a non-public agreement.
– Total consideration is about RMB6.66b paying in cash or 0.3x of net asset value as of end-2021. That is discounting to CHALCO’s currently trading PB multiple of 0.6x
– Upon completion, CHALCO will hold about 29.1% of Yunnan Aluminium shares from 10.1%.
– We read the move is positive on the company’s long-term development.
– Compared to the original restructure plan, the move came in earlier than the indicated schedule to be completed by 2023.
– We believe the price is attractive for this deal at deep below book value.
– Yunnan Aluminium reported RMB4,203m net profit after taxes and non-recurring items last year. It would represent associate earnings tripled to RMB1,223m from RMB420m calculated back for the period, and increase the contribution to CHALCO’s earnings to 20% up from 8%. CHALCO had RMB69b net debt end-2021. We estimate the deal would increase CHALCO’s net debt-equity ratio to 91% by 2022 versus before the deal’s 84%.
– In short, the deal would boost CHALCO’s earnings by 14%.
– Also, we think that the move could help to resolve the problem of competition between CHALCO and Yunnan Aluminium compared to before the deal the two cos were under the same parentco.
– In future, we believe CHALCO could transfer more aluminium capacity to Yunnan to benefit lower hydro power cost. This is positive for CHALCO to have better synergy in operation.
– We have BUY rating and TP is under-review.