Jefferies has reaffirmed its "Buy" rating on CHINAHONGQIAO (01378) following the company's first-half earnings release, citing robust performance, stable costs, and a declining debt burden. The brokerage notes that management remains highly confident in the aluminum market, projecting a price range of RMB 23,600 to RMB 24,300 per tonne for the second half of 2026.

Strong First-Half Profit with Offset One-Time Items

CHINAHONGQIAO reported a net profit after tax of RMB 17.2 billion for the first half of 2026, representing a 39% year-on-year increase. Benefiting from its vertically integrated structure, unit costs for both electrolytic aluminum and alumina remained steady, declining slightly by 2.4% and 1.9% respectively to RMB 13,000/tonne and RMB 2,200/tonne. The company recorded a fair value gain of RMB 862 million, tied to the US$300 million convertible bonds issued in 2025; however, its RMB 102 billion bond issuance in 2026 will not generate fair value holding gains or losses due to the special design of its term structure. Concurrently, the company absorbed approximately RMB 1.1 billion in impairment losses, comprising: RMB 527 million for alumina inventory write-downs due to lower prices in the first half; no further such impairments are expected if alumina prices hold around RMB 2,700/tonne. A further RMB 583 million was set aside for fixed asset impairments, primarily related to its captive power plants in Shandong stemming from capacity relocation. Whether impairments occur in the second half depends on the year-end impairment tests, with the scale expected to be limited. With these one-off items largely offsetting each other, the results underscore strong operational performance in the core business against a favorable aluminum price backdrop.

Management's Optimistic View on Aluminum Fundamentals

Management believes the domestic policy ceiling on electrolytic aluminum capacity remains firmly in place. Supply gaps created by production cuts at Middle East smelters are expected to continue influencing the market in the second half of 2026, while overseas capacity expansions outside China have progressed slower than anticipated. Although demand from construction, automotive, and photovoltaic sectors has softened year-to-date, aluminum product exports have remained vigorous, growing over 16% year-on-year. Management projects an average aluminum price of around RMB 23,800/tonne for H2 2026, within a range of RMB 23,600-24,300. The alumina market remains oversupplied, with management forecasting prices near RMB 2,700/tonne for the second half, a level at which the company can still realize modest profits.

Capital Expenditure and Expansion Plans

Capital expenditure for H1 2026 was RMB 3.7 billion, a figure deemed low primarily due to payment timing differences. Management has maintained its full-year guidance of RMB 15-16 billion in capital expenditure, allocating RMB 5-6 billion to renewable energy investments such as photovoltaic projects in Yunnan, RMB 2 billion to capacity relocation, RMB 2 billion to aluminum processing operations, with the remainder for maintenance. The company's self-built solar projects aim to secure stable power supply in Yunnan, a region heavily dependent on hydropower that faces supply volatility during dry seasons. This also meets upcoming requirements for green power usage ratios for electrolytic aluminum producers. Regarding capacity relocation, the company remains flexible in its timeline, contingent on power supply availability and stability in Yunnan, as well as the progress of its own solar projects. As of H1 2026, CHINAHONGQIAO has established 2.28 million tonnes of capacity in Yunnan, with a medium-term target of 3 million tonnes.

Continued Deleveraging

The company is actively reducing its leverage. Total debt decreased to RMB 67 billion as of end-June 2026, down from RMB 74 billion at the end of 2025. Although management has not articulated a specific debt reduction target, its core strategy is twofold: first, to lower the proportion of short-term debt, ensuring that over 60% of total debt is long-term (long-term debt accounted for 62% in H1 2026); and second, to reduce high-interest obligations. The company aims to maintain its debt-to-asset ratio below 40%, though it was slightly above 40% at the end of H1 2026.

Valuation Supportive

CHINAHONGQIAO currently trades at 6 times forward 2026 earnings, offering a dividend yield of 11% assuming a payout ratio of 65%. When factoring in the HK$5.2 billion share buyback completed in the first half—equivalent to roughly 15% of expected 2026 net profit—actual shareholder returns are arguably higher. Given attractive valuations, Jefferies maintains its "Buy" recommendation.