1H24 earnings in line with our expectation

Nanshan Aluminium announced its 1H24 results: Revenue rose 8.05% YoY to Rmb15.667bn, net profit attributable to shareholders grew 66.68% YoY to Rmb2,189mn, and recurring net profit grew 68.61% YoY to Rmb2,157mn. In 2Q24, the firm’s revenue rose 10.14% YoY and 16.88% QoQ to Rmb8,443mn, and net profit attributable to shareholders grew 68.45% YoY and 57.20% QoQ to Rmb1,338mn. The firm’s 1H24 earnings are in line with our expectation.

Rising alumina prices significantly boosted earnings of the firm’s alumina business. Based on the firm’s corporate filings, domestic alumina price rose 18% YoY to Rmb3,409/t and overseas alumina price rose 14% YoY to US$403/t in 1H24 due to falling domestic bauxite production and overseas smelters’ production cuts. Profit of the firm’s alumina business increased considerably in 1H24, with its alumina company in Indonesia recording a net profit of Rmb1,281mn (+164% YoY) and its domestic alumina company recording a profit of Rmb26.69mn (+721% YoY).

Trends to watch

Sales volume of high-end products to continue rising; contribution from high-end product business to grow. The firm continues to focus on developing high value-added products (e.g., aluminum sheets for automobiles and aviation), with high-end products accounting for 14% of its total sales volume and 25% of its total gross profit in 1H24. Looking ahead, we expect the firm’s expansion of production capacity for automotive aluminum sheets to accelerate, and the firm expects such production capacity to grow markedly to 0.4mnt in 2024.

Based on the firm’s corporate filings, demand for automotive aluminum sheets is growing rapidly and technological barriers to entry for such products are high. As China’s first large-scale supplier of interior and exterior aluminum sheets for passenger vehicles, the firm currently has 0.2mnt/year of production capacity for such products in operation and is building another 0.2mnt/year of such pro2duction capacity. The firm plans to put the new project into operation in late2024.

Meanwhile, the global aviation industry is recovering and mass production of domestic large passenger aircraft is boosting demand for aluminum materials used in aviation. Based on its corporate filings, the firm is a main manufacturer of products for a demonstration project for raw materials of domestically-produced large passenger aircraft. As the overseas aviation industry recovers and the mass production of domestic large passenger aircraft accelerates, we expect the firm’s 50,000t production capacity for aluminum sheets for aviation to continue growing in the future, and the proportion of high-end products in the firm’s profit to increase further.

Further expansion of alumina production lines in Indonesia; integrated presence in the industry chain improving. Based on the firm’s corporate filings, its 2mnt/year alumina production capacity in Indonesia has been completed and reached full capacity. On April 30, the firm announced plans to build another 2mnt/year alumina production capacity to further boost its profit. Meanwhile, the firm plans to expand its presence in downstream industries and build 0.25mnt/year electrolytic aluminum production capacity. The firm expects the project to be put into operation in July 2026.

Shareholder return plans for next three years show confidence in growth. The firm has unveiled a series of specific shareholder return plans for 2024-2026. First, it plans to use no less than Rmb300mn of its own funds to buy back shares and cancel them each year. Second, it plans to pay a cash dividend that is equivalent to no less than 40% of its distributable net profit each year.

Financials and valuation

Given rising prices of electrolytic aluminum and alumina, we raise our 2024 and 2025 net profit forecasts by 17% and 24% to Rmb4.68bn and Rmb4.95bn. The stock is trading at 9.0x 2024e and 8.5x 2025e P/E. We maintain an OUTPERFORM rating and raise our target price by 15% to Rmb4.8, implying 12.0x 2024e and 11.4x 2025e P/E, offering 33% upside.

Risks

Sharp fluctuations in aluminum prices; disappointing progress of projects and/or demand recovery in downstream industries.