2023 results in line with our expectations

Nanshan Aluminium announced its 2023 results: Revenue fell 17.47% YoY to Rmb28.84bn; net profit attributable to shareholders fell 1.18% YoY to Rmb3.47bn; and recurring net profit fell 29.03% to Rmb2.72bn. In 4Q23, revenue fell 15.07% YoY or 0.48% QoQ to Rmb7.15bn, but attributable net profit rose 99.76% YoY or 60.70% QoQ to Rmb1.33bn. The firm’s 2023 results were in line with our expectations.

Sales volume and prices of aluminum products both fell; asset disposal income increased significantly thanks to transfer of

electrolytic aluminum quota. According to the firm’s announcement, sales volume of cold-rolled plates, aluminum profiles, and aluminum foil products fell 15.30%, 2.21%, and 9.64% YoY in 2023 due to weak overseas demand; aluminum prices declined 6.20% YoY; and revenue contribution from aluminum processing fell 7.2ppt YoY to 79.42%. In 2023, the company transferred 336,000t of electrolytic aluminum quota to external parties, which generated asset disposal income of Rmb755mn, accounting for 21.73% of the firm’s attributable net profit in 2023.

Trends to watch Sales volume of high-end products to keep rising; firm expects such products to account for growing share in profit. The firm focuses on

developing high value-added products such as auto sheets and aviation sheets. The sales volume of high-end products accounted for 14% of the firm’s total sales volume in 2023, up about 1ppt YoY. Meanwhile, high-end products represented 30% of the firm’s gross profit in 2023, up about 9ppt

YoY. Looking ahead, we expect the expansion and ramp-up of the firm’s production capacity for automotive aluminum sheet products to accelerate. The firm expects its production capacity for such products to be 0.4mnt/year in 2024.

According to the firm, demand for automotive aluminum sheets is growing rapidly and technological barriers to entry for such products are high. As the first large-scale supplier of interior and exterior aluminum sheets for passenger vehicles in China, the firm currently has 0.2mnt/year of　　production capacity in operation and it expects its 0.2mnt/year newly built capacity to be put into operation in 2024.

Meanwhile, the global aviation industry is recovering, and we think domestic mass production of large airplanes will boost demand for

aluminum materials used in aviation. According to the company, it is the main contractor of the demonstration platform for the domestically-made raw materials of China’s large aircraft. As overseas aviation industries recover and domestic mass production of large airplanes accelerates, we expect the firm to continue ramping up its 50,000t production capacity for aviation aluminum sheets. We expect the proportion of high-end products in the firm’s total profits to rise further.

Alumina production line in Indonesia reached designed capacity, marking a step further toward presence along an integrated value

chain. According to the firm’s announcement, its 2mnt/yr alumina capacity in Indonesia has reached the designed capacity in 2023. The firm announced plans to expand downstream by building 250,000t/yr electrolytic aluminum capacity. It expects construction of the project to complete in July 2026.

Shareholder return plan shows confidence in growth. The firm

announced its plan to buy back shares with no less than Rmb300mn of its own funds each year over 2024-2026. These shares will be written off after the buyback. The firm also plans to pay annual dividends (excluding repurchased shares) with no less than 40% of its net profit in 2023

Financials and valuation

We keep our 2024 net profit forecast unchanged. Given the schedule of collecting proceeds from asset disposal, we raise our 2025 net profit forecast 14% to Rmb3.99bn. The stock is trading at 9.2x 2024e and 9.2x 2025e P/E. We maintain an OUTPERFORM rating and our TP of Rmb4.19, implying 12.3x 2024e and 12.3x 2025e P/E, offering 34.3% upside.

Risks

Sharp fluctuations in aluminum prices; disappointing project operation and/or downstream demand recovery.