Idea of the Week: Can aluminium giant China Hongqiao ride the wave of rising EV demand?

Chart 1: China Hongqiao Aluminum Value Chain (Revenue Breakdown as of H1 2024)

Source: Company's report, iFAST Compilations

Data as of: 30 June 2024

Industry demand growth and price stability enhance Hongqiao’s profitability

As shown in Chart 2, aluminum prices stabilised in 2024, with a slight increase compared to 2023, primarily driven by structural demand growth. We expect aluminum prices to remain at current levels in 2025, as China’s aluminum production capacity has nearly reached the government’s 45 million-ton cap, limiting future supply increases and supporting aluminum prices.

Chart 2: Aluminum Spot Prices on the London Metal Exchange (LME) and Shanghai Futures Exchange (SHFE)

The Chinese aluminum consumption market continues to grow steadily, fueled by new momentum from the electric vehicle and photovoltaic industries. In 2024, China’s aluminum production reached 44 million tons (Chart 3), while aluminum consumption rose to 47 million tons, representing a compound annual growth rate (CAGR) of approximately 4% over the past five years. Notably, China Hongqiao’s capacity utilization rate reached an impressive 99.7%, reflecting robust market demand.

Chart 3: China’s Aluminum Production and Consumption

Aluminum is a critical industrial material, widely used in construction, power, transportation, and automotive manufacturing. Its demand is expected to grow further, particularly with the trend toward lightweight materials. The rapid development of electric vehicles has significantly increased aluminum usage. According to research by DuckerFrontier, compared to traditional fuel vehicles, each electric vehicle uses an average of 41.6% more aluminum, solidifying aluminum’s role in automotive manufacturing.

Moreover, the government’s strong push for infrastructure development and renewable energy initiatives further stimulates domestic aluminum demand. In this market environment, where supply is constrained and demand continues to grow steadily, we believe that China Hongqiao, as the world’s second-largest aluminum producer, will directly benefit from rising industry demand and price stability, further enhancing its profitability.

China Hongqiao’s product sales continue to grow, declining raw material costs drive significant operating profit growth

In the first half of 2024, China Hongqiao recorded revenue of RMB 73.6 billion (Chart 4), representing a 12.0% YoY increase. The growth was primarily driven by higher prices for molten aluminum alloy and alumina products (up 6.7% and 16.9% YoY, respectively) and increased product sales volumes, which contributed to the overall revenue growth (Table 1).

Operating profit surged by 237% to RMB 10.0 billion, mainly benefiting from lower raw material costs, such as declining coal and anode material prices. Additionally, the company’s highly vertically integrated model, with self-owned bauxite mining and power generation capabilities, further reduces production costs and enhances profitability stability. Earlier, the company issued a positive profit alert, projecting a YoY increase of approximately 95% in net profit attributable to shareholders for the full year 2024.

Chart 4: China Hongqiao’s revenue and operating profit margin

Table 1: China Hongqiao Product Revenue

China Hongqiao possesses a fully integrated aluminum value chain, ensuring stable upstream raw material supply. The company adopts a diversified overseas bauxite sourcing strategy, obtaining bauxite from Indonesia, Australia, and Guinea. Additionally, Hongqiao has established self-owned power plants to meet its energy needs, reducing reliance on external electricity supplies. The company also actively utilises hydropower to lower production costs, aligning with China’s carbon reduction policies. These measures provide Hongqiao with significant cost advantages and robust profitability, enabling it to effectively navigate industry cycles.

As bauxite prices stabilise, Hongqiao’s production costs are expected to remain steady in 2025, potentially enhancing profitability. Moreover, the joint venture in Guinea has successfully developed a bauxite mining project, ensuring a stable raw material supply and reducing reliance on third-party suppliers. Alongside this, the commissioning of a 2-million-ton annual capacity alumina production line in Indonesia ensures stability across the supply chain from bauxite to alumina.

It is worth noting that while recent policy changes, such as China’s removal of the 13% export tax rebate for aluminum products and the US tariff increase on aluminum imports from 10% to 25% under Trump, may pressure the aluminum industry’s export business, the impact on Hongqiao is limited. This is because approximately 94% of the company’s revenue is derived from domestic customers.

The rapid growth of the electric vehicle and photovoltaic industries will continue to drive aluminum demand. In addition, the company plans to further expand into the high-end aluminum product segment by acquiring equity in Shandong Hongtuo Industrial, aiming to increase product value-added. With these factors combined, Hongqiao is well-positioned to further enhance profitability in 2025.

China Hongqiao’s debt structure continues to improve, credit metrics remain healthy

As of the end of June 2024, China Hongqiao’s total debt increased to RMB 68.5 billion (Table 2), up from the end of 2023. This growth was primarily driven by an increase in long-term debt. The company has begun expanding its long-term debt, which will gradually reduce the proportion of short-term debt, reflecting ongoing optimisation of its debt structure and helping to alleviate short-term refinancing pressure.

Table 2: China Hongqiao’s Credit Metrics

On the other hand, total cash increased significantly to RMB 37.5 billion, up from RMB 31.7 billion at the end of 2023. The cash-to-short-term debt ratio rose to 0.8x, while the total debt/EBITDA ratio decreased to 2.6x. The company’s improved profitability is expected to further enhance its leverage position, with this ratio likely to remain at a low level in the future.

Notably, the interest coverage ratio rose sharply to 7.9x, significantly higher than the 2.0x recorded at the end of 2023, reflecting the company’s stronger ability to meet interest payment obligations. Meanwhile, cost of borrowing reduced further to 5.0%.

China Hongqiao has demonstrated strong financing capability through various methods, including share placements, issuance of onshore and offshore bonds, and convertible bonds. The company’s total bank loans currently stand at RMB 44 billion (accounting for 64% of total debt), of which unsecured loans total RMB 31.8 billion, comprising 70% of total bank loans. This highlights the company’s robust ability to secure financing. Furthermore, with the support of its state-owned shareholder, CITIC Group, Hongqiao enjoys a significant advantage in obtaining bank financing.

It is worth noting that Moody’s withdrew its rating for the company in October 2024 at Hongqiao’s request. However, S&P and Fitch have maintained their ratings of BB- and BB+, respectively. The withdrawal of Moody’s rating is expected to have minimal impact on Hongqiao.

China Hongqiao’s 2028 USD Bond offers a YTM of 6.1%

Currently, our platform offers one China Hongqiao 2028 USD bond, “HONGQI 7.050% 10Jan2028 Corp (USD)”, with issuer credit ratings of BB-/BB+ (S&P/Fitch) and bond credit rating of BB+ (Fitch). The bond has a remaining maturity of 2.9 years and offers a net yield to maturity of 5.9%.

In comparison, a similar investment-grade peer, China Aluminum’s 2028 USD bond, provides a net yield to maturity of only 4.4%, which is 150 basis points lower. While China Aluminum benefits from its state-owned enterprise (SOE) background and is priced with relatively lower credit risk, China Hongqiao also demonstrates strong and continuously improving operating performance. Its credit metrics are steadily improving, making it comparable to investment-grade companies.

Given the aluminum industry’s current upward cycle, China Hongqiao has a solid profitability foundation and strong financing capabilities. Hongqiao bonds present an attractive alternative to China Aluminum’s bonds for investors seeking high-quality investment options. For those looking for higher returns, China Hongqiao’s bond with a 6.1% yield makes it a particularly attractive choice.

Table 3: China Hongqiao’s Bond

Related Risks

The aluminum industry is highly cyclical, with aluminum prices significantly influenced by changes in supply and demand as well as policy adjustments. A sharp decline in aluminum prices could adversely impact China Hongqiao’s profitability and cash flow.

Although China Hongqiao’s credit metrics are improving, its short-term debt remains relatively high. If the company experiences fluctuations in cash flow, it may face challenges in maintaining short-term liquidity.

The Chinese government continues to promote carbon neutrality, with increasingly stringent regulations on energy-intensive industries. If future standards tighten further, the company may face additional compliance costs, potentially impacting its operations and profitability.

Conclusion

The Chinese aluminum consumption market continues to grow steadily, driven by increasing demand from the electric vehicle (EV) and photovoltaic industries. China Hongqiao has seen consistent growth in product sales, while declining raw material costs have significantly boosted operating profits.

The company has started expanding its long-term debt, which will gradually reduce the proportion of short-term debt. This reflects ongoing optimisation of its debt structure, helping to ease short-term refinancing pressure. Additionally, with the support of its state-owned shareholder, CITIC Group, China Hongqiao enjoys considerable advantages in securing bank financing.

China Hongqiao’s 2028 USD bond offers ayield to maturity of 6.1%, which is 150 basis points higher than its investment-grade peer, Aluminum Corporation of China (Chalco). This provides an attractive option for investors seeking higher returns.

RISK DISCLOSURE STATEMENTS FOR BONDS