China Merchants Bank International has released a research report maintaining a "Buy" rating on China Hongqiao (01378) while significantly raising its target price from HK$20.6 to HK$27. The firm noted that China Hongqiao delivered impressive first-half 2025 results, and although no interim dividend was announced, the newly launched substantial share buyback program effectively bolsters market confidence. Combined with tight supply-demand balance in the aluminum industry and cost improvements, the company's future profit growth prospects appear highly certain.

According to the report, China Hongqiao achieved net profit of RMB 12.3 billion in the first half of 2025, representing a 35% year-on-year increase, consistent with the profit guidance issued in June. Excluding fair value losses on convertible bonds (CB), core net profit reached RMB 14.9 billion, marking an even higher 42% year-on-year growth.

Examining individual business segments, all three core operations achieved double-digit growth in both revenue and profitability. The aluminum alloy products division, accounting for 64% of first-half revenue, generated RMB 51.9 billion in revenue, up 5% year-on-year. Sales volume increased 2.4% to 2.91 million tons, while average selling price (ASP) rose 2.7% to RMB 17,853 per ton. Benefiting from unit costs rising only 1.9%, unit gross margin improved 5.4% to RMB 4,506 per ton.

The alumina business, representing 26% of first-half revenue, saw revenue surge 28% year-on-year to RMB 20.7 billion. Sales volume grew 10% to 6.37 million tons, with ASP increasing 5% to RMB 3,243 per ton. Unit gross margin jumped significantly by 25% to RMB 933 per ton.

The aluminum processing products segment, comprising 10% of first-half revenue, posted revenue growth of 6.5% to RMB 8.0 billion. Sales volume increased 3.4% to 392,000 tons, while ASP rose 2.9% to RMB 20,615 per ton. Supported by stable unit costs, unit gross margin grew 14% to RMB 4,815 per ton.

Notably, China Hongqiao did not continue its multi-year tradition of interim dividend distribution this year, a decision that caught the market somewhat off guard. However, the company promptly introduced a new share buyback plan as compensation, proposing to repurchase shares worth at least HK$3 billion, representing 1.4% of total share capital and 4.5% of free float, with the program valid until May 2026.

China Merchants Bank International's analysis indicates that this buyback not only demonstrates management's strong confidence in the company's future development but also effectively offsets potential dilution from convertible bond conversions. In fact, China Hongqiao has implemented multiple buybacks this year, completing repurchases of approximately 62.3 million shares (0.67% of total share capital) in Q1 and announcing another buyback program worth up to RMB 2 billion in April.

Looking ahead, based on two core investment themes, China Merchants Bank International has raised its 2025-2027 earnings forecasts for China Hongqiao by 12%-14%. First, the aluminum industry's supply side remains extremely tight, with capacity utilization reaching 98%, supporting aluminum prices at elevated levels. Second, coal and other raw material prices are expected to decline, further alleviating cost pressures.

From a profit sensitivity perspective, the firm calculates that every 1% increase in aluminum prices would boost China Hongqiao's earnings by 3%, while every 1% decrease in coal prices would increase profits by 0.5%. This dual benefit from product pricing and cost dynamics is expected to continue supporting profit margins.

Regarding valuation, China Hongqiao has averaged a forward P/E ratio of 6x over the past decade. China Merchants Bank International's HK$27 target price is based on an expected 2026 P/E of 8.6x (one standard deviation above historical average), reflecting both the support from the industry's sustained upward cycle and the premium for the company's improving balance sheet. Despite recent share price gains, with an expected dividend yield of 7.9% (assuming a 60% payout ratio), the valuation remains attractive.