Huatai: Maintains CHINAHONGQIAO (01378) Buy Rating, Target Price HK$32.28

Huatai released a research report maintaining its 2026-2028 net profit attributable to parent forecasts for CHINAHONGQIAO (01378) at RMB 30.443 billion, RMB 27.119 billion, and RMB 29.720 billion, corresponding to EPS of RMB 3.21, RMB 2.86, and RMB 3.14, respectively. Based on the DDM absolute valuation method, assuming a dividend payout ratio of 62% for 2026-2028, a risk-free rate of 4.4%, a risk premium of 5.9%, a beta of 1.08, a cost of equity of 10.79% (previous: 10.67%), and a perpetual growth rate of 3.0%, the company's target market capitalization is calculated at HK$316.99 billion, corresponding to a target price of HK$32.28 (previous: HK$32.67), maintaining the "Buy" rating. The bank noted that the company released its 2026 interim report, achieving operating revenue of RMB 87.506 billion, up 8.0% year-on-year; net profit attributable to parent of RMB 17.210 billion, up 39.2% year-on-year, in line with the previous earnings preview (net profit attributable to parent up 39% year-on-year). Looking ahead, the domestic electrolytic aluminum capacity ceiling constraint remains, and overseas high-cost capacity provides support for aluminum prices; meanwhile, the company's integrated industrial chain layout gives it a prominent cost advantage, and profit elasticity is expected to continue to be released, considering the company's solid high-dividend attributes. Huatai's main points are as follows: Aluminum price increases drive profit improvement, expense ratio remains stable In terms of profitability, the company's 2026H1 gross margin was 31.5%, up 5.8pct year-on-year. By business segment, gross margins for aluminum alloy, alumina, and aluminum alloy deep-processed products were 38.5%, 6.3%, and 32.7%, respectively, up 13.3pct, down 22.5pct, and up 9.4pct year-on-year, mainly due to aluminum prices remaining high and alumina prices declining. According to SMM, the average prices of electrolytic aluminum and alumina in 2026H1 were RMB 24,100/ton and RMB 2,704/ton, respectively, up 18.8% and down 22.1% year-on-year; in Q2, the average prices were RMB 24,200/ton and RMB 2,724/ton, respectively, up 20.0%/down 11.5% year-on-year and up 0.9%/up 1.5% quarter-on-quarter. In terms of expenses, the company's period expense ratio increased 0.2pct year-on-year to 5.1%, mainly due to an increase in related taxes and fees that led to a 28.8% year-on-year increase in administrative expenses to RMB 2.991 billion; financial expenses decreased 13.6% year-on-year to RMB 1.110 billion, mainly benefiting from a reduction in interest-bearing debt and lower financing rates. Deep-processed alloy sales volume increased year-on-year, Simandou iron ore may open up profit space According to the company's interim report, the company's 2026H1 aluminum alloy product sales volume was 2.811 million tons, down 3.3% year-on-year; alumina sales volume was 6.917 million tons, up 8.6% year-on-year; aluminum alloy deep-processed product sales volume was 444,000 tons, up 23.2% year-on-year, with the product structure continuing to optimize toward high value-added segments. Looking ahead, aluminum prices remaining high combined with growth in deep-processed product sales volume is expected to continue to support the company's profitability; the Simandou iron ore project was put into production at the end of 2025, with the project as a whole possessing approximately 4.4 billion tons of iron ore resources and a planned annual capacity of 120 million tons. As capacity gradually ramps up in 2026, it is expected to contribute new investment income through the associate company, opening up medium- to long-term growth space. Under long-term tight balance, future aluminum prices are not pessimistic On the supply side, domestic electrolytic aluminum capacity is already close to the 45 million ton ceiling, with electrolytic aluminum output expected to be 45.14/45.23/45.03 million tons in 2026-2028, with future increments mainly coming from overseas. Even fully including projects in Indonesia and India, corresponding global electrolytic aluminum supply would be 73.82/77.47/80.95 million tons, down 1.2%/up 5.0%/up 4.5% year-on-year. On the demand side, considering the continued recovery of photovoltaic, automotive, and other sectors in 2027-2028, as well as the recovery of global manufacturing, global electrolytic aluminum demand is expected to be 74.83/77.81/80.62 million tons. In summary, the global supply-demand balance for 2026-2028 is calculated at -1.013/-0.343/+0.327 million tons. With supply and demand remaining in deficit in 2027, the bank expects aluminum prices to remain high, and the market should not be overly pessimistic. **Risk warnings:** Downstream demand falling short of expectations, macroeconomic disruptions exceeding expectations, and the company's high dividend falling short of expectations.