Accelerating supply release pressures profits; downgrade Chalco to Sell

Overview

This report focuses on changes in the supply-demand dynamics of the aluminum industry. Based on latest communications with industry consultants and project updates, Goldman Sachs notes that driven by high industry margins, aluminum supply from both China and overseas (particularly Indonesia and Central Asia) is accelerating. This fundamental change reinforces the firm's cautious view on aluminum prices and spreads. Accordingly, Goldman Sachs downgrades Chalco's H-shares and A-shares to Sell and substantially lowers target prices; simultaneously maintains China Hongqiao at Neutral, but also lowers its target price. The core logic of the report is that the supply surge will compress profit margins beginning in the second half of 2026, with significant impact in 2027.

Core views

Supply is showing comprehensive acceleration. On the domestic front, Goldman Sachs expects China's effective aluminum capacity to increase from 46 million tons at end-2025 to over 48 million tons by end-2026. This is mainly driven by restarts of idle smelters, net additions from some replacement projects, and new projects utilizing underutilized old quotas. Production increases during 2026-2027 are expected to reach 3.3 million tons, double the previous estimate. On the overseas front, capacity expansion from Indonesia and Central Asia is even more rapid. According to expert call information, total capacity additions in Indonesia and Central Asia between 2026-2028 will approach 6 million tons. Of this, Indonesia's production growth alone in 2026-2027 is expected to reach 2.9 million tons, nearly 80% higher than previous estimates. Price and spread forecasts are significantly revised downward. Although the widening SHFE-LME spread in April-May led to increased Chinese exports, temporarily supporting domestic prices, the fundamental oversupply risk dominates. Goldman Sachs maintains its forecast that the SHFE aluminum spread will decline from CNY 8,879/ton in 1H26 to CNY 7,000/ton in 2H26, and further to CNY 4,250/ton in 2027. Corporate earnings face downward pressure. According to sensitivity analysis, for every CNY 2,000/ton decline in the SHFE spread, Chalco's earnings would fall by 37%, and China Hongqiao by 23%. Affected by this, Chalco's recurring profit in 2027 is expected to decline by 50%, and China Hongqiao by 40%. Valuation and rating adjustments. To reflect downside risks over the next 12 months, the firm rolls forward its valuation basis to 2027. For Chalco, based on historical P/B and ROE correlation, it applies 2027 P/E multiples of 10x (H-shares) and 12x (A-shares), corresponding to target prices of HKD 7.5 and CNY 7.8 respectively, with ratings downgraded to Sell. For China Hongqiao, based on 10x 2027 P/E, the target price is adjusted to HKD 26.0, maintaining a Neutral rating.

Analysis framework

The firm's analytical framework follows the logic chain of 'supply shock -> price transmission -> earnings revaluation -> rating adjustment'. First, through field research and industry expert interviews (such as the Indonesia trip), it updates expectations for global aluminum supply growth, confirming the fact of supply acceleration. Second, it uses a supply-demand framework to derive price trends. With relatively stable demand and substantially increased supply, it infers that aluminum prices and processing spreads must face downward pressure, providing a specific spread forecast path. Finally, it employs sensitivity analysis and relative valuation methods for individual stock pricing. By calculating the specific earnings elasticity to spread changes (e.g., profit decline corresponding to a CNY 2,000 drop), combined with expected margin contraction (ROE decline), it re-anchors to 2027 reasonable valuation multiples (P/E, P/B), thereby deriving new target prices and investment recommendations. This method highlights how earnings volatility at cyclical turning points determines valuations for cyclical stocks.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Supply-demand balance determines commodity prices and spreads

  The report's core logic is built on supply-demand analysis. When supply (capacity additions) grows far faster than demand, commodities' pricing power weakens and spreads narrow. This is the fundamental paradigm for analyzing strongly cyclical resource industries.

• Valuation MethodPB valuation

  Valuation based on historical P/B and ROE correlation

  For highly cyclical, capital-intensive industries (such as aluminum), P/E valuation often becomes distorted at earnings peaks. The firm employs P/B ratio and links it to return on equity (ROE). When expected ROE declines due to industry downturn, the P/B multiple the market is willing to pay also contracts correspondingly, leading to lower target prices.

• Company Fundamental and Financial FrameworkEarnings Quality Analysis

  Spread sensitivity analysis

  The report details the specific impact of product spread (SHFE Spread) changes on net profit (e.g., 37% or 23%). This sensitivity analysis helps investors quantify the impact of macro price volatility on micro corporate performance, a key tool for assessing downside risk in cyclical stocks.

Asset mapping & comparison

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

• Chalco (2600.HK / 601600.SS)

  Negatively impacted. As one of China's largest aluminum and alumina producers, directly exposed to declines in aluminum prices and spreads, with increasing supply weakening its pricing power.

  Weaknesses

  Earnings highly sensitive to spreads; 2027 profit expected to halve; target prices imply approximately 27%-28% downside.

  Comparison

  Compared to peers, may be more affected by alumina business volatility, and has greater negative elasticity in a loose supply cycle.

  Risks

  Aluminum and alumina prices higher than expected; overseas project expansion slower than expected; green demand (EVs, etc.) accelerates; recycled aluminum supply lower than expected.

• China Hongqiao (1378.HK)

  Neutral. Similarly faces industry-wide profit decline, but the firm believes its valuation already partially reflects risks, hence maintaining Neutral.

  Weaknesses

  2027 recurring profit expected to decline 40%; target price implies approximately 4% downside.

  Comparison

  Relative to Chalco, its earnings decline is somewhat smaller, but overall still constrained by industry beta.

  Risks

  Supply-demand balance deterioration leading to lower-than-expected prices; changes to primary aluminum capacity cap policies; green demand below expectations; increased recycled aluminum supply.

Key data

• Estimated China effective aluminum capacity at end-2026>48 million tonsSignificant increase from 46 million tons at end-2025
• Estimated Indonesia production growth 2026-20272.9 million tonsNearly 80% higher than previous estimates
• SHFE aluminum spread forecast (2027E)CNY 4,250/tonSharp decline from CNY 8,879/ton in 1H26
• Chalco expected recurring profit change in 2027-50%Expected sharp decline due to spread compression
• China Hongqiao expected recurring profit change in 2027-40%Expected sharp decline due to spread compression

Impact & implications

For the aluminum industry, this means the era of high profits may be nearing its end, entering a profit squeeze phase driven by supply surplus. For Chalco, as an industry leader with substantial alumina capacity, its earnings are sensitive to both aluminum and alumina prices, and thus suffers more in the context of increasing supply (rating downgrade). For China Hongqiao, while similarly facing profit decline, its cost structure or operational efficiency may allow relatively stable performance, hence the Neutral rating but with a lowered target. Investors should be alert to continued margin deterioration in aluminum companies' financial reports over the next 12 months.

Risks

• Aluminum and alumina prices higher than expected (due to better supply-demand balance)
• Overseas aluminum project expansion slower than expected, limiting market supply
• Green demand (including EVs and renewable energy) in China growing faster than expected
• China's recycled aluminum supply lower than expected