Aluminum Corp. of China: Low power costs at the Baotou base and hard capacity constraints strengthen earnings resilience

Overview

This report is Morgan Stanley's update following a visit to Aluminum Corp. of China Ltd.'s Baotou plant and a management meeting. The report focuses on the Baotou base's aluminum capacity, power mix, and cost advantages, as well as the impact of China's aluminum industry capacity cap, retrospective regulation of excess production, and overseas investment scrutiny on industry supply and the company's investment pace.

Core views

The core view is that Aluminum Corp. of China's Baotou base has substantial capacity and low power costs. Its captive power and renewable power tariffs are significantly below average power prices, helping improve earnings resilience. At the same time, the 45mnt industry capacity cap is still seen as a hard constraint, and the new retrospective regulatory framework for excess production may raise the difficulty of non-compliant capacity expansion or overproduction, thereby improving supply discipline. On overseas investment, the new rules require more detailed review of investment entities, assets, location, financing structure, and exports of key technologies, which may slow some overseas aluminum investments.

Analysis framework

The report combines on-site plant research, management discussions, regulatory policy interpretation, cost structure analysis, and Morgan Stanley's ModelWare forecasting framework to assess Aluminum Corp. of China's relative return outlook, valuation target, and key risks.

Methodology notes

• Valuation methodResidual income model

  Base-case valuation

  The H-share target price is based on a residual income model. Key assumptions include a 12.1% cost of equity, 1.3 beta, 2.3% risk-free rate, 7.5% equity risk premium, 2% terminal growth rate, and 11.0% long-term ROE.

• Valuation methodA/H share target price conversion

  A-share target price derivation

  The A-share target price is derived by applying a 10% premium to the H-share target price and adjusting it using the estimated CNY/HKD exchange rate of 1.14.

• Earnings forecastMorgan Stanley ModelWare

  Financial metrics forecasting framework

  Unless otherwise stated, the financial metrics in the report are based on Morgan Stanley ModelWare; some EPS consensus data come from Refinitiv Estimates.

• Policy analysisCapacity cap and retrospective regulation framework

  Governance of excess production in the aluminum industry

  The report treats NDRC Document No. 45 and the retrospective inspection mechanism as important variables in analyzing supply discipline, focusing on power consumption, approved capacity, actual output, potline parameters, environmental compliance, renewable power sources, and maintenance records.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Aluminum Corp. of China Ltd. (2600.HK)

  Core covered name, Hong Kong-listed H-share

  Strengths

  Overweight rating, HKS11.20 target price, and about 30% upside; low power costs and a high captive power ratio at the Baotou base support earnings resilience.

  Weaknesses

  Earnings are still affected by aluminum prices, demand, supply recovery, and the strength of policy enforcement.

  Comparison

  The A-share target price is derived from the H-share target price using a 10% premium and the CNY/HKD exchange rate of 1.14.

  Risks

  Weaker-than-expected demand, faster-than-expected production restarts, and faster-than-expected launch of new replacement capacity.

• Aluminum Corp. of China Ltd. (601600.SS)

  The same company's A-share listed security

  Strengths

  Also benefits from supply constraints in China's aluminum industry and the company's cost advantages.

  Weaknesses

  A-share valuation is affected by the premium to H-shares and exchange-rate conversion.

  Comparison

  The report derives the A-share target price by adding a 10% premium to the H-share target price and adjusting by CNY/HKD 1.14.

  Risks

  Weaker-than-expected demand, faster-than-expected supply recovery, and overseas investment regulation affecting the pace of expansion.

• China's aluminum industry

  Core industry backdrop for the company's earnings and valuation

  Strengths

  The hard 45mnt capacity cap and retrospective regulation help improve supply discipline; the industry view is Attractive.

  Weaknesses

  There is uncertainty around the effectiveness of policy execution, and demand volatility will affect prices and earnings.

  Comparison

  Morgan Stanley's Attractive industry view indicates that industry performance over the next 12-18 months is expected to outperform the relevant broad market benchmark.

  Risks

  Insufficient enforcement of excess production regulation, weaker-than-expected demand, and faster-than-expected capacity replacement or production restarts.

Key data

• Baotou base aluminum capacity1.46mntThe report discloses that the Baotou plant has 1.46mnt of aluminum capacity.
• Captive power ratio62.5%62.5% of the Baotou base's power supply comes from captive generation.
• Power mix200MW solar, 1900MW wind, 1720MW coal-fired power, 4-hour ESSReflects the Baotou base's diversified power sources and energy storage configuration.
• Average power costBelow Rmb0.40/kWhThe report states that average power cost is below Rmb0.40/kWh.
• Renewable power costRmb0.17/kWhRenewable power cost is significantly below the average power cost.
• Industry capacity cap45mntManagement believes 45mnt remains a hard capacity cap.
• Target priceHKS11.20Applies to 2600.HK.
• Closing priceHKS8.63As of July 23, 2026.
• Implied upside30%Based on the target price and closing price.
• Market capitalizationRmb158,628mnThe report's disclosed current market capitalization.
• Enterprise valueRmb223,232mnThe report's disclosed current EV.
• 2026e EPSRmb1.27Morgan Stanley Research estimate.
• 2026e EBITDARmb62.4bnMorgan Stanley Research estimate.
• 2026e ROE29.0%Morgan Stanley Research estimate.
• 2026e P/E5.9xMorgan Stanley Research estimate.

Impact & implications

If the capacity cap and retrospective regulation are effectively enforced, improved industry supply discipline could support aluminum prices and Aluminum Corp. of China's earnings; the Baotou base's low power costs and renewable energy configuration would help the company remain competitive on the cost curve. Tighter scrutiny of overseas investment may limit the industry's ability to rapidly expand capacity through overseas projects, creating a medium-term supply constraint, but it may also affect the overseas growth choices of the company and its peers.

Risks

• Better-than-expected demand and larger-than-expected supply cuts are upside scenario risks.
• Faster-than-expected production restarts could pressure aluminum prices and company earnings.
• Faster-than-expected launch of new replacement capacity could weaken the effect of supply constraints.
• Weaker-than-expected demand would drag on aluminum prices, sales volumes, and earnings expectations.
• Tighter scrutiny of overseas investment may affect the pace of overseas investment in aluminum projects.
• Morgan Stanley discloses that it may have investment banking or other business relationships with the covered company, and investors should pay attention to potential conflicts of interest.

What to watch

• The strength of enforcement after NDRC Document No. 45 takes effect on August 1, 2026.
• Whether regulators conduct retrospective checks through power consumption, approved capacity, and actual output.
• Whether the 45mnt capacity cap in the aluminum industry continues to be strictly enforced.
• Changes in the Baotou base's renewable energy and captive power ratio, and whether average power costs remain low.
• The actual impact of Document No. 837 on approval and project pacing for overseas aluminum investments.
• Changes in aluminum demand, the pace of production restarts, and the speed of new replacement capacity launches.