Unveiling the 100-Billion Giant China Hongqiao: An Exceptional Value Pick Among Industry Peers

Recently, China Hongqiao (01378.HK) has ignited a new wave of market enthusiasm with its consecutive large-scale share buybacks.

From January 15 to January 17, China Hongqiao conducted share buybacks for three consecutive trading days, spending a total of HKD 87.58 million to repurchase 7.59  million shares. This move immediately won enthusiastic responses from the market. China Hongqiao's stock price increased by more than 5 percentage points in two consecutive trading days, with investors casting their votes through turnover  which exceeded HKD 1 billion.

China Hongqiao, a leading electrolytic aluminum company with a market value exceeding HKD 120 billion, which  initiated this new round of share buybacks, has sent  a strong signal to the market that the company's value is significantly underestimated by the market.

From market feedback, the company's buyback action has become a new engine for its valuation improvement.

Buybacks Demonstrate Confidence, Catalyzing New Momentum for Valuation Growth

China Hongqiao has already clarified in its announcement regarding the reason behind this round of buybacks: The current stock price deviates from the company's value, and further share buybacks may be considered depending on market conditions. According to the share buyback authorization resolution, China Hongqiao can repurchase up to 948 million shares. It can be boldly predicted that the company will continue to conduct share buybacks in the future.

Regarding the purpose of the share buybacks, China Hongqiao clearly stated that the action is  for cancellation. While listed companies' share buyback purposes include equity incentives, future resale and cancellation, among which cancellation is seen to be the most direct and beneficial method for all shareholders.

When a listed company cancels its repurchased shares, the number of floating shares in the market decreases while the value remains the same. This means the value per-share of the listed company will increase significantly.

From a market demand and supply perspective, a reduction in a listed company's share count indicates a decrease in market supply. While demand remains constant,  conditions for stock price appreciation are created .

It can be said that buybacks are not only a valuation enhancement measure taken by listed companies when they believe their stocks are undervalued, but it’s also a means for listed companies to return capital to shareholders and reward them for holding the shares. Therefore, many large listed companies with outstanding performances frequently conduct large-scale share buybacks throughout the year.

For example, the champion of the 2024 Hong Kong sharebuybacks  - Tencent Holdings (00700.HK).  has bought back 307 million shares throughout the year, with a total amount of HKD 112 billion according to the public information from the Hong Kong Stock Exchange, as of December 31,Driven by the continuous buybacks, Tencent's total share capital further decreased to 9.22 billion, reaching its lowest level in ten years, while its earnings per share continued to rise, with growth rates exceeding its revenue and operating profit.

Therefore, buybacks are always seen to be beneficial for both the company and the investors. China Hongqiao's recent actions of buybacks and upcoming cancellations, in terms of short-term effects, not only reduce the number of shares circulating in the market which directly pushing up the stock price, but also convey to the market about the company's firm confidence in its future development. This demonstration of confidence, especially against the background of steady growth in company performance, has attracted more investor’s attention, thus adding strong momentum for further improving the company's valuation.

Buybacks Support Asset Integration, Opening a New Chapter in Value Reassessment

More profoundly, China Hongqiao's buyback actions are closely connected to its overall strategic deployment. The company optimizes resource allocation and enhances overall market competitiveness through buybacks coordinated with asset restructuring of its indirect subsidiary companies.

Recently, China Hongqiao welcomed a historic positive development for valuation improvement. Hontron Holdings (a company listed on the Shenzhen Stock Exchange,stock code: 002379.SZ), an indirect subsidiary of China Hongqiao, proposed to acquire all equity of another indirect subsidiary, Hongtuo Industrial.

Hongtuo Industrial is China Hongqiao's core asset in the aluminum products business, owning all aluminum alloy products, alumina products, and some aluminum alloy processing product production lines of China Hongqiao and its subsidiaries in mainland China.

Hontron Holdings is an integrated aluminum plate, strip, and foil processing enterprise, mainly engaged in the development, production, and sales of high-precision aluminum plate, strip, and foil products, with main products including pharmaceutical foil, household foil, and container foil.

From an industrial development perspective, Hontron Holdings operates as a downstream enterprise within the same industry as Hongtuo Industrial. After their restructuring, the upstream and downstream industry synergies will be further improved, and they can share their respective technology, production, and customer resources, with comprehensive competitiveness that will surpass other companies in the industry.

Therefore, this asset restructuring initiative will not only bring enormous market opportunities to China Hongqiao but is also expected to further enhance the company's profitability and market position through asset integration and synergistic effects. Against this background, the buybacks not only demonstrate the company's determination for future development but also help improve the company's valuation level. Through asset integration, China Hongqiao will further enhance management efficiency and performance, thereby driving sustained valuation improvement in the long term, generating higher market expectations and confidence in China Hongqiao's future.

Golden Opportunity in a Valuation Trough, A Leading Enterprise with Growth Potential

China Hongqiao's combination of capital and industrial "one-two punch" demonstrates its strength as the leading electrolytic aluminum stock. China Hongqiao, as a high-quality target company which is rare in the capital market, is currently undervalued.

As an industry leader, China Hongqiao's valuation is below the average level of Hong Kong-listed aluminum companies. Wind data shows that as of January 17's closing, the average P/E ratio of Hong Kong-listed aluminum companies was approximately 6.73 times, while China Hongqiao, even after a recent round of price increases, remains at a low P/E ratio of only about 6.04 times. Compared to its peers in the same tier, such as Chalco with a P/E ratio of 7.42 times, China Hongqiao appears to be underpriced.

From this perspective, China Hongqiao demonstrates impressive strength, yet its valuation falls short of what a top-tier industry leader deserves., making it a clearly undervalued industry giant. Many third-party investment institutions have also taken notice, explicitly stating that China Hongqiao's valuation is at a low level within the industry.

Recently, Bank of America's Global Research team set a target price of HKD 17.9 per share for China Hongqiao, showing significant upside potential compared to its January 17 closing price of HKD 12.68 per share.

Since the second half of 2023, the aluminum industry has entered a cyclical upward trend, with continuous improvement in industry prosperity bringing opportunities for rapid growth in enterprise performance. China Hongqiao has demonstrated a more powerful development momentum compared to industry peers by deepening its upstream and downstream integrated layout.

Tebon Securities issued a research report stating that on January 10, the State Council Information Office press conference again emphasized loose and proactive fiscal policy, expecting electrolytic aluminum demand to potentially increase under continued domestic stimulus. Based on the current cost curve, to meet the projected 2025 electrolytic aluminum demand, the aluminum price should reach at least RMB 22,065.5 per ton.

On January 7, the price of electrolytic aluminum was RMB 19,660 per ton. Tebon Securities judges that future electrolytic aluminum prices and profits may increase, with profit margins potentially rising by approximately RMB 2,406 per ton, recommending investment in leading industries such as China Hongqiao.

Under the catalysis of a series of major positive factors including strong performance, buybacks, and asset restructuring, China Hongqiao, currently in a value low point, is offering a golden opportunity. The market is expected to further recognize its value, paving the way for a return to fair valuation.