Tuesday, January 09, 2007
Buy China, Buy Chalco (2600)
Price of Chalco (2600) has fell to HK$6.88 (as I'm writing now) from as high as HK$8 only a few days ago, a fall of comparable extent to the Chinese property and financial counters. Maybe it's profit taking from the proposed A-share listing hype or maybe it's early bird selling on proprietary information. But I'm gonna stick my neck out and defend Chalco, as the current retreat of price has made the share less speculative and attractive again.
Chalco is one of Tony Measor's top picks for 2007 and he started recommending it as far as in last June. I quickly came to agree to him after some fact finding and yesterday I looked at my email to him back then.
"I ended up buying some Chalco at $5.3, at which price it looked to be a safer bet...I know it's the largest alumina supplier in PRC (representing over 90% of domestic supply) and PRC has to satisfy 50% of its alumina demand from overseas. That two factors alone will gurantee buyers for Chalco for a long time...Chalco is also expanding both forward to smelters and -backward to mines with the surplus cash. And it appears smelters are turning around after almost two tough years, judging from the segmental figures of Chalco and the [timing of] Asia Aluminum privatisation. I'm however uncertain about global supply of alumina which can depress the domestic supply price, although Chalco should has the logistics advantage.
Even a 6b profit (2004 level) will give a p/e of ~10x [at current price is ~12.5x], and future profits will go up because of acquisitions and expansions."
Later I found out Chalco actually is the second largest player in the world after Alcoa of US, which holds a 8% stake in Chalco. The management was quoted yesterday saying accordingly to plan 2007 capacity of primiary aluminium could reach 3.4m tons (~30-35% share in domestic market) whilst that of alumina will be close to 10m (my guess is 2/3 of domestic market). As it takes 2 tons of alumina to produce a ton of aluminium, logistics aside, Chalco can utilize up to ~70% of its alumina output internally. This should ease concerns about the continual drop in Alumina price due to an increase in domestic supply which went up by some 50% in 2006 alone! Aluminium price (LME) on the other hand rose 18% in 2006. The PRC government has made its goal clear in its latest 5-yr policy address for a clean and efficient economy. That means curbing any further investments in capacity and consolidating existing ones. I believe it's a matter of time before Chalco will emerge as a winner.
We are taking about the biggest player in a major construction and industrial material and in perhaps the biggest consuming nation, and with government blessing! How risky can it be? Well very much so according to the market.
Starting from 2006 and up to yesterday, Chalco (up by 17.8%) has underperformed other constuction material plays like steel (angang up by 164%), copper (jiangxi up by 100%), and even cement (anhui up by 170%)! 2-year performances (in the same order) were 50%, 150%, 90%, and 200%. As far as I know those industries also face similar issues of rising energy prices, over capacity, and are in consolidation phase too. Maybe the market thinks Chalco only just started to go downhill while the rest is already in recovery. But this also serves to illustrate the extent of a rebound should the market changes it perception. Of course I don't expect Chalco to repeat its peers' performances in 2007 as market sentiments are hard to predict, but I do think it's a very reasonable buy into the China long term growth story.
DISCLOSURE: I hold 2600 at time of writing.
Chalco is one of Tony Measor's top picks for 2007 and he started recommending it as far as in last June. I quickly came to agree to him after some fact finding and yesterday I looked at my email to him back then.
"I ended up buying some Chalco at $5.3, at which price it looked to be a safer bet...I know it's the largest alumina supplier in PRC (representing over 90% of domestic supply) and PRC has to satisfy 50% of its alumina demand from overseas. That two factors alone will gurantee buyers for Chalco for a long time...Chalco is also expanding both forward to smelters and -backward to mines with the surplus cash. And it appears smelters are turning around after almost two tough years, judging from the segmental figures of Chalco and the [timing of] Asia Aluminum privatisation. I'm however uncertain about global supply of alumina which can depress the domestic supply price, although Chalco should has the logistics advantage.
Even a 6b profit (2004 level) will give a p/e of ~10x [at current price is ~12.5x], and future profits will go up because of acquisitions and expansions."
Later I found out Chalco actually is the second largest player in the world after Alcoa of US, which holds a 8% stake in Chalco. The management was quoted yesterday saying accordingly to plan 2007 capacity of primiary aluminium could reach 3.4m tons (~30-35% share in domestic market) whilst that of alumina will be close to 10m (my guess is 2/3 of domestic market). As it takes 2 tons of alumina to produce a ton of aluminium, logistics aside, Chalco can utilize up to ~70% of its alumina output internally. This should ease concerns about the continual drop in Alumina price due to an increase in domestic supply which went up by some 50% in 2006 alone! Aluminium price (LME) on the other hand rose 18% in 2006. The PRC government has made its goal clear in its latest 5-yr policy address for a clean and efficient economy. That means curbing any further investments in capacity and consolidating existing ones. I believe it's a matter of time before Chalco will emerge as a winner.
We are taking about the biggest player in a major construction and industrial material and in perhaps the biggest consuming nation, and with government blessing! How risky can it be? Well very much so according to the market.
Starting from 2006 and up to yesterday, Chalco (up by 17.8%) has underperformed other constuction material plays like steel (angang up by 164%), copper (jiangxi up by 100%), and even cement (anhui up by 170%)! 2-year performances (in the same order) were 50%, 150%, 90%, and 200%. As far as I know those industries also face similar issues of rising energy prices, over capacity, and are in consolidation phase too. Maybe the market thinks Chalco only just started to go downhill while the rest is already in recovery. But this also serves to illustrate the extent of a rebound should the market changes it perception. Of course I don't expect Chalco to repeat its peers' performances in 2007 as market sentiments are hard to predict, but I do think it's a very reasonable buy into the China long term growth story.
DISCLOSURE: I hold 2600 at time of writing.
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