Aluminum Corporation of China Limited Report Interpretation

Overview

This report summarizes Chalco's post-results conference call for 1H26, focusing on costs, capital expenditure, new demand, domestic capacity regulation and overseas resource projects. Morgan Stanley's overall stance is positive, as it believes the company remains cost competitive and that enforcement of the industry's 45mnt capacity cap and long-term resource expansion provide important support.

Core views

Cost control was the first key topic of the conference call. Management reported aluminum and alumina manufacturing costs of Rmb14,000/t and Rmb2,400/t, respectively, in 1H26, while the average electricity price remained broadly stable at Rmb0.45/kWh. The report therefore emphasizes that the company remains cost competitive; for energy-intensive aluminum production, stable electricity prices also help reduce cost volatility. The company's 2026 capex guidance is Rmb15bn, of which Rmb5bn was spent in the first half. This budget excludes funding required for potential M&A and overseas projects, meaning that if the relevant transactions or projects advance, the company will face funding requirements beyond its guidance. On the demand side, management suggested that computing centers could become a new application area for aluminum and estimated that each 1GW computing center would require 15kt of aluminum and more than 20kt of copper, providing a new source of materials demand beyond traditional uses. Domestic supply constraints represent another core thesis. Chalco believes that recent industry inspections of production exceeding approved capacity have reinforced the government's commitment to the 45mnt capacity cap. Management said the government is checking whether aluminum capacity in certain regions exceeds designed levels by monitoring electricity consumption and environmental data; penalties will apply if electricity consumption exceeds designed quotas. If this mechanism continues to be strictly enforced, it will limit incremental supply from production above approved capacity. Greater-than-expected supply cuts are also one of the upside scenarios identified in the report. Overseas expansion is seeing progress while also facing approval constraints. Management said the Chinese government has tightened oversight of overseas projects, including stricter approvals and restrictions on outbound capital, which could affect Chinese companies' development of overseas projects. Chalco's Brazil Aluminum acquisition remains under government review, but the company said it has not yet been affected by tighter ODI controls. Construction of the Guinea alumina refinery began in June 2026, with commissioning targeted for early 2029; management believes its cost competitiveness could be comparable to alumina produced in Australia. The company is also seeking to expand its bauxite resources in Guinea and South America and has set its 2026 total bauxite production guidance at 40-45mnt. This strategy reflects the company's long-term integrated expansion from upstream resource acquisition to alumina capacity development, although commissioning remains several years away and the overseas approval environment is becoming more stringent. The financial table presents figures for 2025, 2026e, 2027e and 2028e: net revenue of Rmb241.1bn, Rmb254.1bn, Rmb225.3bn and Rmb227.0bn, respectively; EBITDA of Rmb41.1bn, Rmb62.4bn, Rmb40.3bn and Rmb47.5bn; and ModelWare net income of Rmb12.7bn, Rmb21.8bn, Rmb12.5bn and Rmb15.6bn. The two EPS series are Rmb0.74/1.27/0.73/0.91 and Rmb0.84/1.26/1.15/1.19, respectively. Corresponding P/E ratios are 14.8/5.7/9.9/8.0x, P/BV ratios are 2.5/1.4/1.3/1.2x and EV/EBITDA ratios are 6.5/3.4/5.1/4.2x; ROE is 18.3%/29.0%/14.1%/16.1%, dividend yield is 2.4%/6.4%/3.7%/4.6%, and period-end gearing is 39.1%/8.6%/-9.6%/-24.8%. These figures show that earnings and returns in the report's model reach a cyclical high in 2026, decline in 2027 and recover somewhat in 2028. For valuation, the H-share base case uses a residual income model, assuming a 12.1% cost of equity comprising a beta of 1.3, a risk-free rate of 2.3% and an equity risk premium of 7.5%; the steady-state growth rate is 2%, and long-term ROE is 11.0%. Morgan Stanley assigns an Overweight rating and an HKS11.20 price target to the H shares, implying 32% upside from the HKS8.46 closing price on August 27, 2026. The A-share price target applies a 10% premium to the H-share price target and is adjusted using an estimated CNY/HKD exchange rate of 1.14. The report's upside scenarios are better-than-expected demand or greater-than-expected supply cuts; downside scenarios include faster-than-expected production resumptions, quicker commissioning of new replacement capacity and weaker-than-expected demand.

Analysis framework

The report first organizes the unit costs, electricity prices and capital expenditure disclosed during the post-results conference call, and then analyzes incremental materials demand from computing centers, regulatory enforcement of the domestic 45mnt capacity cap and the progress of overseas projects. It subsequently combines ModelWare financial metrics with a base-case residual income model to derive the H-share price target, uses the A/H-share premium and exchange-rate assumptions to derive an A-share pricing benchmark, and finally defines upside and downside scenarios based on changes in demand and supply.

Methodology notes

• Valuation MethodRIM Residual Income Model

  Base-case residual income model

  This method estimates value based on book equity and future residual income exceeding the required cost of equity. The report values Chalco's H shares using a 12.1% cost of equity, a 2% steady-state growth rate and an 11.0% long-term ROE.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Scenario analysis of aluminum demand and regulated supply

  The report assesses incremental demand from computing centers and other sources while examining how the 45mnt capacity cap, penalties for production above approved capacity, production resumptions and the commissioning of replacement capacity affect supply, and uses these factors to define upside and downside scenarios.

• Valuation Method

  A/H-share linked price-target method

  The report applies a 10% premium to the H-share price target for the A shares and then adjusts it using an estimated CNY/HKD exchange rate of 1.14 to establish a price-target linkage between the securities listed in the two markets.

• Quantitative/Factor/Portfolio Theory

  Relative rating within industry coverage

  Morgan Stanley's Overweight rating means the stock's risk-adjusted total return is expected to exceed the average of the analyst's industry coverage universe over the next 12 to 18 months; it is not equivalent to a Buy rating in absolute-return terms.

Asset mapping & comparison

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

• Chalco H shares (02600.HK)

  The report's primary covered security, rated Overweight with an HKS11.20 price target, implying 32% upside from the HKS8.46 closing price.

  Strengths

  Cost control in aluminum and alumina, stable average electricity prices, constraints from the domestic 45mnt capacity cap, and integrated expansion into overseas resources.

  Weaknesses

  Funding for potential M&A and overseas projects is excluded from the Rmb15bn annual capex guidance, while overseas projects also face stricter approvals.

  Comparison

  The base-case valuation uses a residual income model; Overweight indicates that expected risk-adjusted total return exceeds the average of the industry coverage universe.

  Risks

  Faster-than-expected production resumptions, quicker commissioning of new replacement capacity or weaker-than-expected demand.

• Chalco A shares (601600.SH)

  The A-share security of the same company corresponding to the H shares, listed as O-rated in the report's coverage table.

  Strengths

  Shares the company's cost competitiveness, domestic supply constraints, and bauxite and alumina resource positioning with the H shares.

  Weaknesses

  Likewise exposed to overseas project approvals, additional funding requirements and uncertainty over project progress.

  Comparison

  The A-share price target applies a 10% premium to the H-share price target and is adjusted using an estimated CNY/HKD exchange rate of 1.14.

  Risks

  Faster-than-expected production resumptions, quicker commissioning of new replacement capacity or weaker-than-expected demand.

Key data

• H-share rating and price targetOverweight; HKS11.2032% upside from the HKS8.46 closing price on August 27, 2026
• Aluminum manufacturing costRmb14,000/tManagement guidance for 1H26
• Alumina manufacturing costRmb2,400/tManagement guidance for 1H26
• Average electricity priceRmb0.45/kWhBroadly stable in 1H26
• 2026 capital expenditureRmb15bnRmb5bn spent in the first half; excludes funding for potential M&A and overseas projects
• Computing center materials demandEach 1GW requires 15kt of aluminum and >20kt of copperNew demand area identified by management
• Domestic aluminum capacity cap45mntManagement believes recent inspections of production exceeding approved capacity reinforced the government's commitment to maintaining this cap
• 2026 bauxite production guidance40-45mntCompanywide total production guidance
• Guinea alumina refineryTargeted commissioning in early 2029Construction began in June 2026; management expects it to be competitive with Australian alumina
• 2025/2026e/2027e/2028e net revenueRmb241.1bn / Rmb254.1bn / Rmb225.3bn / Rmb227.0bnAnnual series presented in the report's financial table
• 2025/2026e/2027e/2028e EBITDARmb41.1bn / Rmb62.4bn / Rmb40.3bn / Rmb47.5bnAnnual series presented in the report's financial table
• 2025/2026e/2027e/2028e ModelWare net incomeRmb12.7bn / Rmb21.8bn / Rmb12.5bn / Rmb15.6bnAnnual series presented in the report's financial table
• 2025/2026e/2027e/2028e ROE18.3% / 29.0% / 14.1% / 16.1%2026e is the highest in the series
• 2025/2026e/2027e/2028e P/E14.8 / 5.7 / 9.9 / 8.0x
• 2025/2026e/2027e/2028e EV/EBITDA6.5 / 3.4 / 5.1 / 4.2x
• Base-case valuation assumptionsCost of equity 12.1%; steady-state growth rate 2%; long-term ROE 11.0%The cost of equity is calculated using a 1.3 beta, a 2.3% risk-free rate and a 7.5% equity risk premium
• Market capitalization and enterprise valueRmb156,116mn; Rmb220,721mnCurrent figures in the report
• H-share average daily trading valueHKS610mnAverage daily trading value stated in the report

Impact & implications

The report believes stable unit costs and electricity prices help Chalco maintain its competitiveness, while domestic inspections of production exceeding approved capacity and the 45mnt capacity cap could constrain incremental supply. Demand from computing centers, the Guinea alumina refinery and overseas bauxite resource expansion provide medium- to long-term growth opportunities, but additional funding requirements, tighter ODI approvals and long project commissioning cycles will affect the pace of realization.

Risks

• A faster-than-expected recovery in aluminum capacity could increase market supply.
• Faster-than-expected commissioning of new replacement capacity could weaken supply constraints.
• Weaker-than-expected demand could affect industry balance and company earnings.
• Stricter approvals for overseas projects and restrictions on outbound capital could affect Chinese companies' development of overseas projects.

What to watch

• Monitor whether the government continues to inspect production exceeding approved capacity through electricity consumption and environmental data and enforces penalties for exceeding designed quotas.
• Monitor the progress of the government review of the Brazil Aluminum acquisition and whether tighter ODI controls have any actual impact.
• Monitor whether the Guinea alumina refinery can commence production as planned in early 2029 and whether its cost competitiveness meets management's expectations.
• Monitor execution of the Rmb15bn capex plan for 2026 and the additional funding requirements arising from potential M&A and overseas projects.
• Monitor whether computing center demand generates the incremental aluminum and copper consumption described by management.