High earnings sensitivity to aluminium price, high dividend payout; initiate with BUY

High earnings sensitivity to aluminiumprice,highdividend payout; initiate with BUY Target PriceRMB29.00Up/Downside25.2%Current PriceRMB23.16 Our latest industry analysis suggests that the global aluminium supply deficit willwiden in 2026E andwillremain in place in 2027E(see oursector notepublishedtoday).We believeHongqiao Holdings, whichcarries the majority of operatingassets ofChina Hongqiao (1378 HK, BUY), will benefit from the elevatedaluminium price.We like Hongqiao Holdings’ high earnings sensitivity (~3.3%for 1% change in aluminium price) and high potential dividend payout ratio (75%in ourmodelassumption).Initiate withBUYwith TP of RMB29, based on13.2x2026E P/E, equivalent to20% premium to our target multiple (11x) for ChinaHongqiao. Our premium isin line with thecurrent A/H premiumofChalco (2600HK/601600 CH, NR). China MaterialsWayne FUNG, CFA(852) 3900 0826waynefung@cmbi.com.hk Jake Zhang(852) 3900 0849jakezhang@cmbi.com.hk Comparisonwith China Hongqiao.After the completion of backdoorlistingin Dec 2025,China Hongqiao currently owns 89%interest inHongqiao Holdings.Hongqiao Holdings differs from China Hongqiao inseveral key aspects: (1) It has no equity interest in bauxite business; (2) Itsalumina capacity is 2mt less than China Hongqiaoas the Indonesia aluminais not included; (3) Itdoes not owncaptive power plants. Stock Data Key assumptions.For the duplicated business lines, our key operatingassumptions are the same as that for China Hongqiao. For 2026E, weforecast 15% YoY increase in aluminium price and 13% YoY decline inalumina price. For 2027E, we forecast aluminium / aluminapriceto onlyslightly drop 3%/5% YoY. Shareholding Structure More sensitive to aluminium price.We estimate every 1% increase inaluminium price will boost Hongqiao Holdings’ 2026E earnings by ~3.3%(other factors being constant). This is more sensitivethanChina Hongqiao’s2.3%, based on our calculation. Highdividend payout ratio to support China Hongqiao.ChinaHongqiao’s dividend payout ratio was>66% in 2025. Assuming that ChinaHongqiaoisto maintain such ratio going forward, Hongqiao Holdings willhave to maintaina highpayout ratio. Key risks:(1) unexpected removal of capacity cap in China; (2) faster-than-expected overseas capacity ramp-up for the industry as a whole; (3)slowdown oftheglobal economy; (4) sharp increases incosts ofinput suchas bauxite and coal. Source: FactSet Related reports:China Hongqiao (1378 HK)–Major subsidiary’s 1Q26 profit +38% YoY; inline with expectations–27 Apr 2026(link) China Hongqiao (1378 HK)–2025 coreprofit in-line; Supply disruption to driveASP in 2026E–22 Mar 2026 (link) Company Overview Backgroundof the backdoor listing On31Dec2025,Hongqiao Holdings (formerly known asShandong Hontron)acquired100% of Hongtuo Industrial(a platform thatheld thecore operating assets of ChinaHongqiao(1378 HK)).Before the acquisition,Hongtuo Industrial was owned byWeiqiaoAluminum and Power (“Weiqiao”), anindirectwholly owned subsidiary ofChinaHongqiao,and eight other shareholders. Weiqiao held 95.295% of Hongtuo, with the remaining sharesheld by the other eight shareholders. The total transaction value was ~RMB63.5bn. Hongqiao Holdings issued ~11.9bn newshares(RMB5.34 per share) as consideration. Following the acquisition, Hongqiao Holdings’ businessscopeand shareholders structurechangedsignificantly: Changeinbusinessscope:Hongqiao Holdings expanded its business fromonlyaluminium deep processing to a fully integrated operationcovering aluminaproduction, primary aluminium smelting, and aluminium product processing.Changein shareholding:Prior to the transaction, China Hongqiao held a 22.98%stake in Hongqiao Holdings. Following the acquisition,China Hongqiao’sstakeincreased to 88.99%. Source: Hongqiao Holdings, CMBIGM Comparison with China Hongqiao Hongqiao Holdings differs from China Hongqiao in several keyaspects:(1) Ithas noequity interest inbauxitebusiness; (2) Its alumina capacity is2mt lessthan ChinaHongqiao; (3) It hasaslightlyhigher tariff due tono ownership of captivepower plants. Bauxite exposure:China Hongqiao holds stakes in thebauxite operation in Guineathrough JVs, giving it direct exposure to bauxite mining. In contrast, HongqiaoHoldings has no bauxiteoperation ownershipandinsteadprocures a portion of itsbauxite fromthe JVs. Capacity:Hongqiao Holdings and China Hongqiao share the same primaryaluminium smelting assets, with anannual capacity of 6.46mt. The two companiesdiffer in alumina and processing capacities: Hongqiao Holdings has 2mt lessalumina capacity(the capacity in Indonesia)and 0.2mt more aluminium processingcapacity than China Hongqiao. In-house power plantsand electricity costs:Hongqiao Holdings does not ownanycaptivepower plants, whereas China Hongqiao has~10GW of power capacitythathistorically supplied~55% of its electricity needs. As a result, HongqiaoHoldingshasa slightly higher averageelectricitytariffthan China Hongqiao. Key businesssegments Alumina