[ET Net News Agency, 24 May 2018] HSBC Global Research said Chalco (02600) reported
weak 1Q earnings; net profit was RMB309m but mostly from one-off gains such as government
grants of RMB265m and investment income of RMB228m. Gross profit margin was 6.8%, down
from 9.4% in 4Q 2017 as a result of weak aluminium prices and cost inflation.
However, HSBC is still not bullish on Chalco because it believes the share price has
already priced in a significant increase in the future aluminium price. The company is
currently trading at 1.3x 2018 PB with an estimated ROE of 5.8%, which is rich.
HSBC retained its "hold" rating on Chalco, with a fair value target price at HK$4.7.
The research house expects that aluminium price remains under pressure, as a result of
high inventory and relatively slow demand pick-up. Capacity closures in 2H 2017 have
helped to reduce some supply glut, but the effort was overshadowed by the build-up of a
huge inventory pile, which increased by 76% from 1,228kt to 2162kt (From July 2017 to
March 2018).
Inventory has stopped increasing since April 2018, and is now decreasing slowly. However
given the size of the inventory, HSBC expects it will take at least 6 months to destock
properly. (KL)