Buying opportunities emerge
- Expecting aluminum demand to drive metal price recovery
- Rising contribution from its stake in Yunnan Aluminium
- ROE to rebound and strengthened balance sheet support future dividend increase
- Maintain BUY with TP of HK$5.0, based on a 1.1x target PB multiple
Investment Thesis
Riding on pick up in China downstream consumption market.
Current share price level has turned attractive since the share price correction in 2Q, in view of the continuous downtrend in the society inventory level. After the group asset restructure and the recent increase stake in Yunnan Aluminium (to 29.1% from 10.1%), we expect the company to benefit from a better growth prospect next year onwards.
Strengthened balance sheet to support dividend increase.
Due to increased profitability and inflow of cash, the company’s net debt level has been continuously reducing since 2019. Meanwhile, management has declared a final dividend in FY21 (first time since
2011), which translates to a full-year payout rate of 10%. We believe that with the continuously improving gearing level and cash outlook, the company can raise its payout rate moving ahead.
Maintain BUY.
We cut our FY22F earnings estimate by 11% on our new Shanghai aluminum price assumptions. In anticipation of a pickup in metal price towards next year and the contribution after raising stake in associate, we raise our FY23F estimate by 10%, translating to a faster CAGR of 12% (from 7% prior) during 2021-2023.
Valuation:
We peg our H-share TP of HK$5.0 at a 1.1x FY22F P/BV, which is its average level during 2018-2022, in anticipation of an expected ROE rebound. Our A-share TP of RMB5.5 is pegged at a 1.5x P/BV, consistent with the historical price spread of the dual-listed counter.
Where we differ:
Our earnings CAGR (2021-2023) is above the market consensus, as we are more positive on CHALCO’s GPM and expect the improvement to continue.
Key Risks to Our View:
Unexpected market supply expansion or collapse in demand may adversely impact our assumptions.
