China Hongqiao's 1H net profit rose 39%, supported by aluminum prices, sales volume, and its financial structure
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China Hongqiao's 1H net profit rose 39%, supported by aluminum prices, sales volume, and its financial structure
China Hongqiao's net profit reached RMB17.2 billion in 1H26, in line with its profit alert; Morgan Stanley expects the global aluminum market to remain in deficit, supporting 2H earnings, and considers the current valuation and dividend yield attractive.
- Net profit rose 39% YoY to RMB17.2 billion in 1H26, in line with the previous profit alert.
- Aluminum prices rose 18.7% YoY, while sales volume of downstream processed aluminum alloy products increased 23.2% YoY.
- Gross margin increased 5.8 percentage points YoY to 31.5%.
- The net gearing ratio declined from 29% to 21%, while financing costs fell 14% YoY.
- The report expects the global aluminum market to remain in deficit for the full year, supporting earnings in 2H26.
- The HK$28.60 target price implies 23% upside from the HK$23.18 closing price.
Report interpretation
Overview
The report reviews China Hongqiao's 1H26 results. Net profit growth was in line with its profit alert, mainly driven by higher aluminum prices and increased sales of downstream processed products, while gross margin, leverage, and financing costs all improved. Morgan Stanley expects the global aluminum market's supply deficit to persist and therefore believes the company's earnings will remain resilient in 2H.
Core views
China Hongqiao's net profit rose 39% YoY to RMB17.2 billion in 1H26, in line with its previous profit alert. The report attributes the strong earnings to both pricing and volume: global supply disruptions drove aluminum prices up 18.7% YoY, while sales volume of downstream processed aluminum alloy products increased 23.2% YoY. Improved pricing and product sales growth together lifted the overall gross margin to 31.5%, up 5.8 percentage points from 25.7% in 1H25. The company's financial structure continued to improve. The net gearing ratio declined to 21% in 1H26 from 29% in 1H25, driven by lower debt. Financing costs decreased 14% YoY to RMB1.1 billion, reflecting an optimized debt structure and lower interest rates. The report believes earnings growth was driven not only by the aluminum pricing environment but also by improvements in the balance sheet and funding costs. For 2H26, the report acknowledges that supply is beginning to recover at the margin: some Middle Eastern capacity suspended due to conflict resumed production earlier than expected, while Indonesian output is also gradually increasing. However, Morgan Stanley believes global aluminum supply will remain in deficit throughout 2026, meaning aluminum prices are likely to continue fluctuating around their current high levels and support resilient earnings for China Hongqiao in 2H. The report's rationale is that the recovery of some capacity remains insufficient to fully close the global supply-demand gap, leaving price support intact. Morgan Stanley ModelWare forecasts show the company's earnings per share rising from RMB2.38 in 2025 to an estimated RMB3.33 in 2026, followed by an estimated RMB2.44 and RMB2.45 in 2027 and 2028, respectively; corresponding ModelWare net profit is RMB22.636 billion, RMB31.633 billion, RMB23.137 billion, and RMB23.297 billion. The forecasts indicate that earnings will be elevated in 2026 before normalizing thereafter. The corresponding estimated 2026 P/E is 6.0x, P/B is 1.3x, EV/EBITDA is 3.7x, ROE is 23.9%, dividend yield is 10.7%, and free cash flow yield is 10.7%; estimated 2027 P/E is 8.1x and dividend yield is 7.9%, with the same respective figures of 8.1x and 7.9% for 2028. Based on this, the report considers the current valuation inexpensive and the dividend yield attractive. The report assigns China Hongqiao an Overweight rating, with an Attractive industry view and a target price of HK$28.60. Based on the HK$23.18 closing price on August 21, 2026, the target price implies 23% upside. The target price is derived using a residual income model because the report believes the company's long-term earnings have high visibility; valuation assumptions include a 10.5% cost of equity, a beta of 1.18, a 1.6% risk-free rate, a 7.5% equity risk premium, and a 2% long-term stable revenue growth rate.
Analysis framework
The report first verifies whether interim net profit is consistent with the profit alert, then breaks down the change in earnings into aluminum prices, downstream processed product sales volume, and gross margin factors. It subsequently examines the net gearing ratio, debt, and financing costs to assess earnings quality and the financial structure. The outlook section projects 2H pricing and earnings based on Middle Eastern production resumptions, incremental Indonesian output, and the global aluminum supply-demand balance, before deriving the target price using ModelWare financial forecasts and a residual income model.
Methodology notes
Decomposition of aluminum prices and downstream processed product sales volume
The report separately examines the 18.7% YoY increase in aluminum prices and the 23.2% YoY growth in sales volume of downstream processed aluminum alloy products to explain the sources of revenue and profit improvement.
Global aluminum supply-demand balance analysis
The report considers Middle Eastern capacity resumptions, increased Indonesian output, and the overall global supply deficit to determine whether aluminum prices can remain elevated and whether the company's 2H earnings can remain resilient.
Residual income model
This model values the company based on book capital and residual income generated above the cost of equity. The report uses this method to derive the HK$28.60 target price because China Hongqiao's long-term earnings have high visibility.
Estimation of cost-of-equity parameters
The report uses a beta of 1.18, a risk-free rate of 1.6%, and an equity risk premium of 7.5% to derive a 10.5% cost of equity, which is then applied in the residual income valuation.
Morgan Stanley ModelWare framework
The report's earnings forecasts and key financial metrics are based on the Morgan Stanley ModelWare framework, which connects operating assumptions, financial forecasts, and valuation.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- China Hongqiao Group (1378.HK)The global aluminum supply deficit and elevated aluminum prices support earnings, while growth in downstream processed product sales, deleveraging, and lower financing costs further improve operating and financial performance.
- Strengths
- Net profit rose 39% YoY in 1H26, gross margin increased to 31.5%, the net gearing ratio declined to 21%, and the estimated 2026 dividend yield is 10.7%.
- Weaknesses
- Earnings are relatively sensitive to changes in global aluminum demand, aluminum prices, and raw material and energy costs.
- Risks
- A slowdown in global demand, higher raw material and energy prices, or industry overcapacity could weaken earnings; stronger-than-expected demand, lower costs, or more plant maintenance shutdowns could provide upside.
Key data
- 1H26 Net ProfitRMB17.2 billionUp 39% YoY, in line with the previous profit alert
- Change in Aluminum Prices+18.7%YoY change in 1H26, attributed by the report to global supply disruptions
- Sales Volume of Downstream Processed Aluminum Alloy Products+23.2%YoY growth in 1H26
- Overall Gross Margin31.5%Up 5.8 percentage points YoY from 25.7% in 1H25
- Net Gearing Ratio21%1H26 level, compared with 29% in 1H25
- Financing CostsRMB1.1 billionDown 14% YoY
- Estimated 2026 Earnings per ShareRMB3.33Morgan Stanley ModelWare forecast, compared with RMB2.38 in 2025
- Estimated 2026 Net ProfitRMB31.633 billionOn a Morgan Stanley ModelWare basis
- Estimated 2026 P/E6.0xThe report considers the current valuation inexpensive
- Estimated 2026 Dividend Yield10.7%The report considers the dividend yield attractive
- Target PriceHK$28.60Implies 23% upside from the HK$23.18 closing price
- Valuation Cost of Equity10.5%Based on a beta of 1.18, a 1.6% risk-free rate, and a 7.5% equity risk premium
- Long-Term Stable Revenue Growth Rate2%Steady-state assumption in the residual income model
Impact & implications
The report believes that elevated aluminum prices, growth in downstream processed product sales, and lower financing costs jointly supported 1H earnings. Although supply from the Middle East and Indonesia is gradually recovering, the global aluminum market is still expected to face a full-year supply deficit, supporting resilient earnings for the company in 2H26. Low forecast valuation multiples and a high dividend yield underpin its Overweight rating and HK$28.60 target price.
Risks
- Upside risks include better-than-expected demand.
- Lower raw material and energy prices could provide additional earnings upside.
- More plants undergoing maintenance than expected could tighten supply and create upside risk.
- A slowdown in global demand could depress aluminum prices and the company's earnings.
- Higher raw material and energy prices could compress margins.
- Industry overcapacity could weaken the supply-demand balance and price support.
What to watch
- Monitor the actual pace of production resumptions at conflict-affected aluminum capacity in the Middle East.
- Monitor the scale and pace of gradual increases in Indonesian aluminum output.
- Monitor the global aluminum market supply deficit and whether aluminum prices can continue fluctuating around current elevated levels.
- Monitor whether 2H26 earnings can maintain the resilient level expected in the report.