Wednesday, May 07, 2008
Results Brief: Chalco (2600)
Here's the long overdue review of the final results of Chalco, so late that it's even after the company's 08Q1 results. My apologies, as I had a conclusion quite some time ago but couldn't find the time to put it down. And my neck pain led to further delay.
So let me start with my conclusion 1st to save you reading time, Chalco is still a good investment but unlike when I recommended it in Jan last year, I don't think it can outperform the index (2828) this year. So if you have a fair share of money in the index already you need not bother adding Chalco.
Final results were far below expectation, or more precisely 2nd half results were quite bad considering Chalco had taken on a few aluminium smelters. I was looking for earnings of about $13b (a guess based on 1st half earnings of $6.6b) but in the end there's only $10.2b. If you work out the math you'd see 2nd half results were only half of the 1st half.
Segmental margins for alumina and aluminium were 27% and 19% in the 1st half but full year margins decreased to 23% and 14%, so 2nd half went pretty bad as Chalco was squeezed pretty hard at both end of the value chain. This wasn't something I had expected as a lower alumina price didn't seem to help the downstream aluminum business.
Management reported that alumina was still in shortage (though China will probably gain self-sufficiency in a year or two) and aluminum market was basically in balance. And looking at the use of metals, i.e. construction, transportation, electricity, and packaging, it's safe to say demand will hardly go away. Yet prices were falling for both alumina and aluminium. Management cited the fear of the US economy softening in the 2nd half drove London future prices down which in turn affected the domestic prices in China. This is probably true as Chalco has to compete with import as well and alumina/aluminum is a light metal to be transported around.
Another contributory factor, though smaller, was the newly acquired smelters which were likely to be run less efficiently (henceforth the reason for integration with Chalco), and it will take time for Chalco to turn them around and synergy to kick in.
Chalco is extremely financially sound, so much so that I think it should not issue any more new shares in future acquisitions. Gearing was only 30% (it's always been kept at such low level) and interest coverage was over 16x.
One can't go wrong putting money in the biggest alumina/aluminum producer in China which occupies over half of the market, for demand will continue to grow as long as China is in the building mode.
DISCLOSURE: I hold 2600 at time of writing.
So let me start with my conclusion 1st to save you reading time, Chalco is still a good investment but unlike when I recommended it in Jan last year, I don't think it can outperform the index (2828) this year. So if you have a fair share of money in the index already you need not bother adding Chalco.
Final results were far below expectation, or more precisely 2nd half results were quite bad considering Chalco had taken on a few aluminium smelters. I was looking for earnings of about $13b (a guess based on 1st half earnings of $6.6b) but in the end there's only $10.2b. If you work out the math you'd see 2nd half results were only half of the 1st half.
Segmental margins for alumina and aluminium were 27% and 19% in the 1st half but full year margins decreased to 23% and 14%, so 2nd half went pretty bad as Chalco was squeezed pretty hard at both end of the value chain. This wasn't something I had expected as a lower alumina price didn't seem to help the downstream aluminum business.
Management reported that alumina was still in shortage (though China will probably gain self-sufficiency in a year or two) and aluminum market was basically in balance. And looking at the use of metals, i.e. construction, transportation, electricity, and packaging, it's safe to say demand will hardly go away. Yet prices were falling for both alumina and aluminium. Management cited the fear of the US economy softening in the 2nd half drove London future prices down which in turn affected the domestic prices in China. This is probably true as Chalco has to compete with import as well and alumina/aluminum is a light metal to be transported around.
Another contributory factor, though smaller, was the newly acquired smelters which were likely to be run less efficiently (henceforth the reason for integration with Chalco), and it will take time for Chalco to turn them around and synergy to kick in.
Chalco is extremely financially sound, so much so that I think it should not issue any more new shares in future acquisitions. Gearing was only 30% (it's always been kept at such low level) and interest coverage was over 16x.
One can't go wrong putting money in the biggest alumina/aluminum producer in China which occupies over half of the market, for demand will continue to grow as long as China is in the building mode.
DISCLOSURE: I hold 2600 at time of writing.
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