Chalco Alert:1Q results missed on lower alumina sales volume;maintain Hold

Results missed on lower alumina sales and higher minority

    Chalco released its 1Q17 results, reporting NPAT of RMB391m, strong yoy growth but accounting for only 14% and 13% of 2017 DB and consensus estimates, respectively. We mainly attribute this to its lower alumina sales volume (30%yoy decline) during 1Q17 and a higher portion of minority. We thus cut our earnings estimates by 13% for this year and 10% for next year. However, we remain constructive on Chalco as a beneficiary of recent non-compliance capacity control and seasonal shutdown during heating season.

    Unit cost on track and external power purchase about to be closed

    According to Chalco management, within its RMB9.2bn pre-tax profit, the alumina segment contributed RMB7bn, followed by trading RMB1.5bn and energy RMB0.7bn. The aluminium segment was almost at breakeven at an aluminium price level of RMB13600/t during 1Q17. We expect it to be the other way around in the second quarter, the aluminium segment should be the most profit contributor rather than alumina. Unit costs were RMB1818/t and RMB10600/t for alumina and aluminium, respectively, in line with our expectation. Management also mentioned the company is about to close all external power purchases once it settles the deal in Liancheng and Zunyi. The company will then have 60-70% floating power cost with a benchmark of RMB30cents/kwh at an aluminium price of RMB12000/t (earlier, during the annual results meeting, management talked about 33-35cents for RMB13500/t).

    New production bases to be ramped up late this year; maintain Hold

    Chalco spent RMB2.2bn capex in the first quarter and management mentioned the company is about to ramp up most of its new production bases, - Baotou Hualei, Guangxi Hualei, Guizhou Huajin and Shanxi Huarun - late this year. With strong volume growth this year and next, and the aluminium price well supported by control of illegal capacity and a potential shutdown during the heating season, we view Chalco as a direct beneficiary. Chalco is currently trading at 31x 2017DBe EPS and 1.8x 2017DBe BVPS and looks fairly valued. Maintain our Hold rating.