Investment positives

We initiate coverage on Tianshan Aluminum Group Co., Ltd. (Tianshan Aluminum) with an OUTPERFORM rating and a target price of Rmb10.13, implying 11x 2025e P/E.

Why an OUTPERFORM rating?

Factories located in regions with rich energy resources; well-

established industry chain. Tianshan Aluminum has a well- established low-cost industry chain. It has 1.2mnt/yr of electrolytic aluminum production capacity, supporting thermal power units and anode carbon block facilities, and 60,000t/yr high-purity aluminum production capacity in Xinjiang where energy resources are abundant. In bauxite-rich Guangxi, it has 2.5mnt/yr of alumina production capacity. In addition, it has built production lines with 220,000t/yr of aluminum foil deep-processing capacity in Jiangsu to capture strong downstream demand. The firm enjoys notable cost advantages, and its per-tonne C1 cost in 2023 was at the 10% percentile in the domestic electrolytic aluminum industry.

Acquiring high-quality overseas bauxite ores to counter disruptions to resource supply; developing high-end deep- processing business to increase added value.

Presence in upstream sectors: Tianshan Aluminum acquired

mining rights of bauxite mines in Indonesia and Guinea in February and December 2023. It plans to build 2mnt/yr of alumina capacity in Indonesia. Its project with 6mnt/yr of bauxite capacity in Guinea has entered the production and mining stage and has shipped products to China. We expect the project to help Tianshan Aluminum enhance the stability of raw material supply and further reduce production costs.

Presence in downstream sectors: 1) High-purity aluminum: The

firm has introduced world-class high-purity aluminum segregation technology from Japan, and has significantly reduced costs by directly purifying its self-produced molten aluminum. Its downstream customers are mainly electronic foil manufacturers in China and Japan. 2) Aluminum foils: The firm equips its aluminum foil production lines with advanced devices, and it has signed strategic cooperation　　agreements with 13 major downstream clients. The firm expects capacity of its aluminum foil project to increase in 2024. It is leveraging advantages in upstream sectors to acquire clients and expand markets for downstream aluminum processing business and thus to boost profit.

Macro expectations to improve; the aluminum sector presents

investment opportunities. At present, the electrolyte aluminum sector sees significant supply-demand imbalance. We expect interest rate cuts by the Federal Reserve (Fed) and China's pro-growth policies to boost global aluminum demand. In addition, we think disruptions to global bauxite and alumina supply may increase, and companies with high bauxite and alumina self-sufficiency ratios will likely stand out.

How do we differ from the market? The market is discussing Tianshan Aluminum’s earnings growth potential driven by rising aluminum prices.

Given frequent disruptions to global resource and energy supply, we think companies with higher resource self-sufficiency ratios and strong cost control abilities will likely maintain stable earnings.

Potential catalysts: Unexpected growth in aluminum prices; the project in Guinea may help reduce production costs; stronger-than-expected demand for high-end aluminum products.

Financials and valuation

We estimate the firm’s EPS at Rmb0.85 in 2024 and Rmb0.92 in 2025, implying a CAGR of 39%. The stock is trading at 9.9x 2024e and 9.2x 2025e P/E. Given the firm’s expansion along the industry chain and its overseas projects in Indonesia and Guinea, we are upbeat on its earnings growth and future growth upside. We initiate coverage on Tianshan Aluminum with an OUTPERFORM rating and a target price of Rmb10.13, implying 11x 2025e P/E and offering 20% upside.

Risks

Sharp fluctuations in raw material and aluminum prices; disappointing expansion of aluminum processing capacity; slower-than-expected economic recovery.