High Growth, High Dividends, High Potential: China Hongqiao (01378.HK) Achieves Leapfrog Development in H1 2024

Recently, China Hongqiao (01378.HK), a global market leader in the aluminum industry, released a remarkable interim results announcement, attracting significant market attention.

China Hongqiao has demonstrated accelerated development in the first half of 2024, various performance indicators of the company showed a substantial year-on-year growth, with figures increased far exceeding those announced during the positive profit alert released by the Group in June. In particular, the company’s profit has surged by over three times, setting a historic peak.

Remarkable Growth in Financial Performance and Dividends

In the first half of the year, China Hongqiao achieved a revenue of RMB 73.592 billion, representing a 12.0% year-on-year increase. The net profit attributable to equity holders was RMB 9.155 billion, representing a significant increase of 272.66% year-on-year. The net profit excluding extraordinary profit and loss was RMB 10.77 billion, representing a substantial year-on-year increase of 352.68%. Basic earnings per share increased by approximately 273.0% year-on-year to RMB 0.966.

In addition to the growth in revenue and net profit, China Hongqiao also saw a significant increase in gross profit and gross profit margin. In the first half of the year, the company's gross profit increased by approximately 202.1% year-on-year to RMB 17.802 billion, while the overall gross margin was about 24.2%, showing a significant increase of 15.2 percentage points compared to 9.0% in the same period last year.

China Hongqiao’s rapid performance growth is driven by both increased product volume and prices, alongside a reduction in cost of key raw materials. "The average selling prices of the Group's aluminum alloy products and alumina products increased compared to the same period in 2023, at the same time, the increase in sales volume and the reduction in purchase prices of key raw materials such as coal and anode carbon blocks were also the favorable factors, thus the Group's gross profit saw a significant increase compared to the same period in 2023," said Mr. Zhang Bo, Chairman of the Board of China Hongqiao.

The rising demand in the aluminum industry also contributed to the improvement in China Hongqiao's performance. As Inflation continues to moderate globally,  and major central banks contemplating potential rate cuts, better than expected improvements in economic performances for major countries are observed, with key growth indicators exhibiting an upward trend. In the context of a slow economic recovery, there are renewed expectations for increased demand for metals like copper and aluminum, driven by industries such as photovoltaics and electric vehicles. Additionally, the supply capacity for certain types of ore and smelting process is experiencing a periodic weaknesses, leading to a significant overall increase in the prices of non-ferrous metals, including aluminum, in the second quarter of 2024.

According to Guosheng Securities, with the completion of China Hongqiao’s relocation on electrolytic aluminum production to Yunnan Province, the production cost of electrolytic aluminum is expected to reduce further. Meanwhile, aluminum prices are expected to remain high due to rigid domestic supply and the post-interest rate hike cycle. The increase in both prices and sales volume is foreseen under the expectation of the US Federal Reserve’s rate cuts and increased use of aluminium in green energy applications. All these positive factors further enhance the company’s performance elasticity.

As profits surges, China Hongqiao also highly focused on delivering strong returns to its shareholders, China Hongqiao also places great emphasis on shareholders’ returns and continues to increase its dividend payout ratio. In the first half of the year, the company declared a dividend of HKD 0.59 per share, showing a year-on-year increase of 73.5%, with a dividend yield of approximately 5.72% and a payout ratio of 56%. The company's average dividend payout ratio has consistently ranked among the top tier within the industry, providing a stronger secured margin to its shareholders since it became a listed company in HKEX from 2011.

Moreover, China Hongqiao currently has a strong cash flow. As at June 30, 2024, the company held approximately RMB 37.502 billion in cash and cash equivalents, which also helps ensuring the stability and flexibility of its business operations.

Integrated Industry Chain Highlights Advantages with Strong Momentum for Performance Growth

The significant growth in China Hongqiao's performance is not only a result of the overall improvement in industry demand but also the outcome of the company's commitment to building an integrated industry chain and continuously enhancing its internal innovation capabilities.

Chairman of the Board Mr. Zhang Bo highlighted that the company is currently at a critical stage of transforming and upgrading from traditional industries, developing and expanding emerging industries, and exploring future industry layouts. During this period, China Hongqiao continued to cement its presence in the aluminum industry, further strengthening its full industry chain from bauxite, alumina, primary aluminum, aluminum deep processing, to recycled aluminum. The company has continuously deepened the conversion of new and old growth drivers, leveraging new technologies to empower sustainable development, and consistently increasing the role of “Green” in business growth.

As China Hongqiao continues to enhance its industrial chain, it is also proactively expanding into international markets. The company is currently cooperating with countries and regions such as India, Europe, Malaysia, North America, and other Southeast Asian regions.

The key materials for electrolytic aluminum production are alumina, electricity, and prebaked anodes. China Hongqiao has made arrangements for bauxite resources in Guinea and Indonesia while expanding its sources of raw materials from Australian bauxite, this ensures the diversification of raw material supply to reduce exposures to raw material risks.

As at March 2024, China Hongqiao's project in Guinea has maintained an annualized production capacity of approximately 50 million tonnes of bauxite, with a total alumina production capacity of 19.5 million tonnes per year (including 17.5 million tonnes per year of domestic alumina production capacity and 2 million tonnes per year of Indonesian alumina production capacity). The company has become fully self-sufficient in alumina, highlighting its advantages through all-round integration.

Currently, China Hongqiao's total electrolytic aluminum production capacity has reached 6.46 million tonnes per year, and the company plans to relocate a total of 3.96 million tonbes per year of capacity to Yunnan, which is expected to further reduce the overall electricity costs of the company's total production capacity.

While China Hongqiao previously relied primarily on coal-fired power for its energy consumption, in response to national policies and with the support of the Yunnan government, the company has relocated part of its capacity to Yunnan to fully utilize the local hydropower advantages. Additionally, the company is vigorously investing in clean energy projects such as photovoltaics in both Yunnan and Shandong, increasing the proportion of clean energy.

China Hongqiao continues to build itself as a global market leader in the integrated aluminum industry chain, with industry chain advantages bringing cost advantages to the company. At the same time, the company's capacity relocation actively adapts to the on-going low-carbon development trends. Along with the company's internal initiatives to enhance both the quality and the efficiency, and external efforts to expand international markets, China Hongqiao is further unleashing its strong development momentum and continuously unlocking its potential for significant performance growth.