3Q24 results in line with our expectations

Nanshan Aluminium announced its 3Q24 results: In 1-3Q24, revenuerose 11.70% YoY to Rmb24.23bn, attributable net profit rose 62.94% YoY to Rmb3.49bn, and recurring net profit increased 64.23% YoY to Rmb3.41bn. In 3Q24, revenue rose 19.06% YoY and 1.37% QoQ to Rmb8,559mn, and attributable net profit rose 57.00% YoY but fell 2.72% QoQ to Rmb1.30bn. 3Q24 results were in line with our expectations.

Rising alumina prices boost earnings; distributed cash dividend toreward shareholders in 3Q24. We attribute the earnings growth to the firm’s alumina projects operating at full capacity and rising alumina prices.

According to the firm, domestic alumina prices have been rising YTD due to due to falling domestic bauxite production and overseas smelters’ production cuts. In 3Q24, alumina prices rose 37% YoY to Rmb3,916/t and overseas alumina prices rose 49% YoY to US$505/t. As a result, the firm’s 1-3Q24 gross margin rose 4.86ppt YoY to 25.34% and net margin rose 6.25% YoY to 17.40%. In 3Q24, the firm introduced another cash dividend policy, proposing to pay a cash dividend of Rmb0.40 for every 10 shares to all shareholders, bringing the cumulative cash dividend ratio to 27% in 2024.

Trends to watch Sales volume of high-end products continued rising; contribution from high-end product business to grow. The firm continues to focuson 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. The firm plans to put the new project into operation in late 2024.

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 thefirm’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. 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 ingrowth. 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

We maintain our 2024 and 2025 earnings forecasts. The stock is trading at 10.4x and 9.8x 2024e and 2025e P/E. We maintain an OUTPERFORM rating and TP of Rmb4.8, implying 12.0x 2024e and 11.4x 2025e P/E, offering 16% upside.

Risks

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