2Q26 Net Profit In Line with Expectations; Earnings Resilience Expected to Continue in 3Q26

Overview

Morgan Stanley reviews Tianshan Aluminum's 2Q26 results. The company's first-half net profit rose 100% YoY to Rmb4.2bn, in line with its prior earnings guidance; second-quarter net profit was Rmb1.96bn, up 91% YoY but down 12% QoQ. The report maintains an Equal-weight rating and a Rmb13.30 target price.

Core views

The QoQ decline in quarterly profit was mainly due to the Xinjiang tax rate increasing from 15% to 25%, with an approximately Rmb700mn impact on after-tax profit. Meanwhile, higher aluminum sales volume, rising aluminum prices, and lower costs drove 2Q26 gross margin to 39%. Analysts expect continued tight overseas supply, domestic inventory destocking during the off-season, and easing concerns over US rate hikes, together with sales growth from new capacity in Xinjiang, to support the company's solid 3Q26 earnings.

Analysis framework

The report uses a core framework of actual results versus expectations, quarterly earnings drivers, industry supply-demand and pricing conditions, and changes in capital structure, and derives the target price using a residual income valuation model.

Methodology notes

• Valuation methodsResidual Income Valuation Model

  Derives equity value from forecast earnings and long-term returns on capital

  The model discounts earnings forecasts through 2037 before normalizing earnings thereafter; key assumptions include a 9.1% cost of equity, 10% long-term ROE, and a 4% steady-state growth rate.

• Earnings AnalysisQuarterly Earnings Bridge

  Decomposes operating and non-operating drivers of YoY and QoQ profit changes

  The report attributes changes in 2Q26 profit to tax-rate adjustments, aluminum production and sales volumes, prices, costs, selling and administrative expenses, and financing costs.

Asset mapping & comparison

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

• Tianshan Aluminum (002532.SZ)

  Directly covered company

  Strengths

  Aluminum output growth, improved aluminum pricing and cost environment, higher gross margin, sales growth driven by new capacity, lower debt ratio, and reduced financing costs.

  Weaknesses

  The higher Xinjiang tax rate has an approximately Rmb700mn after-tax impact on earnings, and the target price is close to the current price.

  Comparison

  Analysts expect its risk-adjusted total return over the next 12 to 18 months to be broadly in line with the average for the covered industry.

  Risks

  Slower global aluminum demand, higher raw material and energy prices, industry overcapacity, and greater-than-expected maintenance.

Key data

• 1H26 Net ProfitRmb4.2bn, +100% YoYIn line with prior earnings guidance.
• 2Q26 Net ProfitRmb1.96bn, +91% YoY, -12% QoQThe QoQ decline was mainly affected by the higher Xinjiang tax rate.
• Impact of Tax-Rate AdjustmentApproximately Rmb700mnThe Xinjiang tax rate increased from 15% to 25%.
• 2Q26 Gross Margin39%Driven by improvements in aluminum output, prices, and costs.
• 1H26 Aluminum Output661kt, +13% YoYSales growth was also supported by new capacity in Xinjiang.
• 2Q26 Net Gearing17%Long-term debt declined, while financing costs fell 11% YoY.
• Target Price and Current PriceRmb13.30 / Rmb13.28The current price is the closing price on August 18, 2026, implying 0% upside.

Impact & implications

Results in line with expectations do not alter the investment thesis. Operationally, elevated aluminum prices, tight supply, and new capacity can support near-term earnings; financially, deleveraging helps reduce financing costs. However, the higher tax rate has materially eroded profit, and the target price is close to the current price, supporting the maintained relatively neutral Equal-weight view.

Risks

• Slower global aluminum demand.
• Higher raw material and energy prices.
• Industry overcapacity.
• More plants undergoing maintenance than expected.
• Continued impact of changes in the tax burden on earnings.

What to watch

• The extent of tightness in overseas aluminum supply and aluminum price trends.
• Domestic inventory destocking and changes in consumption seasonality.
• Delivery of sales growth following the ramp-up of new capacity in Xinjiang.
• Changes in raw material and energy costs and gross margin.
• The impact of changes in tax rates and long-term debt on net profit and financing costs.