David Riedel of Riedel Research Group recently released a note to investors regarding Aluminum Corp. of China Limited (ACH). Though Riedel feels the company experienced healthy revenue and net profit growth in 2005, they none-the-less recommend investors HOLD the stock due to its high price and fair valuation. Excerpts follow:
Through expansion and acquisition, ACH increased alumina and primary aluminum production capacity 29% and 81%, respectively. Due to high energy costs, shortages of alumina supply and over-capacity, majority primary aluminum manufacturers in China experienced a downturn in 2005. ACH was the only alumina manufacturer in China and supplied 50% of domestic alumina demand.
In 2H06, alumina production from new entre'es will increase alumina supply. Though ACH’s monopoly position will shake as a result, the company will still dominate the market. On the whole, the industry will witness an increase in primary aluminum prices and a gradual decrease in alumina price.
In 2005, ACH continuously consolidated capacity in primary aluminum at low cost. Early in 2006, ACH invested in Shanghai Color Metal Co. and entered the copper manufacturing sector. Both primary aluminum and the copper sector will bring new growth to the Company.
Still, at the current price of $95.02 per share, and an estimated valuation of $106.5 per share, the stock is fairly valued. We recommend HOLDing for the time being.
2005 Financial Results
Sales for 2005 amounted to RMB37,110 mn, representing an increase of 14.85% YOY. Profit attributable to equity holders of the Company was RMB7,022 mn, representing an increase of 9.86% YOY. Earnings per share were RMB0.64, representing an increase of 10.34% YOY.
Increased Production Capacity
In 2005, ACH produced 7.18 mn tons of alumina, 0.94 mn tons of alumina chemical, and 1.05 mn tons of primary aluminum, representing a YOY increase of 13.2%, 17.0%, and 36.4%, respectively. During 2005, refining capacity of alumina amounted to 8.33 mn tons, representing an increase of 29% over 2004, and through greenfield projects, brownfield projects and merger/acquisitions, the company's smelting capacity of primary aluminum reached 1.5 mn tons, representing an increase of 81% over 2004.
Primary Aluminum Industry in China
Due to over-capacity, high energy costs, shortage of alumina supply, and high pollution in 2005, the Government abolished tax refund of 8% along with the imposition of a 5% tariff on primary aluminum export. China’s aluminum market was relatively weak in the first three quarters with the price of three-month aluminum futures on Shanghai Futures Exchange ("SHFE") ranging from RMB16,000 to RMB17,000. In the cost of primary aluminum, approximately 40% and 30% gets attributed to alumina and electricity, respectively.
ACH was the only alumina manufacturer in China, and supplied 50% of domestic alumina in 2005. Additionaly, it is one of only two companies that have alumina import rights. Due to high alumina and electricity costs, plus the imposed export tariff in 2005, over 60% of the domestic primary aluminum manufacturers recorded a net loss and the industry entered into consolidation by increasing numbers of medium to large companies and reducing obsolete production line capacity...
Since October 2005, aluminum price on LME started to rise again based on market rumors of a decrease in aluminum output, which led to the increase in domestic aluminum prices. The highest price of primary aluminum futures on SHFE in three-months was RMB19,870 per ton, recording a new ten-year high. Annual average price was RMB16,848 per ton, representing a slight increase of 4.8% compared to 2004.
ACH’s Dominant Position in the Alumina Market in 2006
In 2005, ACH’s average external selling price of alumina reached RMB3,268.32 per ton, representing an increase of RMB38.66 per ton up from RMB3,229.66, which in turn represents an increase of 0.64% in total turnover.
Growth in the Primary Alumina and Copper Industry
In 1Q06, GDP growth in China reached 9.5%, even though the Government intended to slow GDP growth and will continue to do so for the next five years. Increasing consumption of primary aluminum sustained different industries to varying extents. The primary aluminum sector will increase 12-16% in 2006, and primary aluminum price will increase as well.
At the current price of $95.02 per share, an estimated valuation of $106.3 per share, stock is fairly valued. We recommend HOLD.
ACH 1-yr chart: