CHALCO (2600.HK)

Alumina prices lifted twice within a week

WHAT HAPPENED

Chalco (2600 HK) increased alumina prices twice in a row in a week. Effective January 9, Chalco increased alumina price by 7.1% to Rmb3,000/t from Rmb2,800/t in January 1. The last price increase on January 1 was 5% from 1 October, 2009.

ANAYLYSIS

è  Strong demand boosting prices. The price increase in alumina reflected strong demand for aluminium smelting and rising aluminium prices in China, in our view.

è  Highly leveraged to aluminium price changes. Chalco's earnings are highly geared to aluminium price changes. For every 2% increase in Aluminium prices (given alumina prices unchanged), its net income could increase by 14%.

è  Aluminium prices on the rise. LME aluminium 3-month futures in January 8 was US$2,310/t, rose 4% on week on week basis. SHFE (Shanghai Future Exchange) 3-month futures rose by 2% WoW to Rmb17,380/t. On Year on year basis, LME and SHFE 3-month futures have increased by 47% and 45% YoY, respectively.

è  Upward revision for aluminium prices is likely. We previously expected Chalco's aluminium 2010 ASP to increase by 21% YoY to Rmb14,538/t (excluding VAT) or Rmb17,009/t (including VAT). The current SHFE spot price of Rmb17,380/t as quoted on January 8, has exceeded our forecast. Also market sentiment/consensus towards base metal prices for 2010 is also positive. We think upward revision on Chalco's 2010 ASP forecast is very likely.

ACTIONS

We reiterate our BUY on Chalco and shall review our earnings and target price of HK$10.80.