Channel Check on China Hongqiao Group ()
15 September 2014
For Tiger Global Management Only
© 2014 BDA
2
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
• Cash-Flow Analysis
Summary: The market has been recovering since 2Q 2014, and, as a
leading aluminum manufacturer (ranked second as of 2014),
Hongqiao is impacted only mildly by newly released government
regulations
• Primary-aluminum consumption reached MN tons per annum (tpa) in 2013 and is
expected to expand at a % CAGR to MN tons by 2018.
• After a three-year decline, aluminum prices he been rising since 2Q 2014 and the trend is
continuing into 3Q 2014.
3
Market
analysis
Government
policy
Aluminum
consumption
Aluminum
prices
petitive
landscape
• Shandong is the biggest aluminum-production center in China. According to Antaike,
Hongqiao ranked third nationwide on production capacity in 2013 and advanced to second
in 1H 2014 with a capacity of 3,136,000 tpa.
Rising
electricity
prices
Regulations on
production
capacity
Industry
consolidation
• Central and local government he imposed hikes in electricity prices and also launched a
new multitiered price policy for aluminum manufacturers. While this may largely reduce the
profitability of smallpanies, big manufacturers like Hongqiao will not be affected as they
can supply some of their own power and buy the rest from private providers.
• Regulators issued new policies to eliminate outdated capacity and limit capacity expansion.
While the elimination policy does not currently affect Hongqiao as it meets the new
standard, the limitations on expansion may stop it from adding capacity in the future.
• The central government is promoting the consolidation of the aluminum industry; as a
leading localpany, Hongqiao gained support from the government of Shandong and may
therefore benefit from the consolidation process.
Summary: BDA has a high level of confidence regarding Hongqiao’s
aluminum capacity and ownership but relatively lower confidence
with respect to alumina and electricity
4
Aluminum
Alumina
Electricity
pany information and BDA’s channel check
• Hongqiao claims that it has been expanding its aluminum capacity over the past
three years. Most of the new capacity is located at its Zouping production base.
Based on the findings from our truck counts and site visit, we do believe production
at the Zouping base is almost in line with thepany’s reported volume, and the
MN tons of capacity added in 1H 2014 is located in Zouping. Our site visits also
showed that the Weiqiao, Huimin, and Binzhou production bases are well operated.
• Hongqiao claims that its annual alumina-production capacity reached MN tons by
the end of 2013. BDA believes that thepany supplied MN tons of its own alumina
in 2013. Hongqiao announced that it would expand its alumina capacity by 1 MN
tons in 2014. In our site visit, we found that an alumina plant is now under
construction in Beihai and that it belongs to a subsidiary of Hongqiao.
• BDA suspects that Hongqiao shifted this asset from a relatedpany to the listedpany
via CAPEX. We looked into Hongqiao’s past construction projects and found only one
to be suspicious.
• The total installed capacity of Hongqiao’s power generators rose rapidly in 2013,
and thepany’s proportion of self-supplied electricity reached 71% in 1H 2014 with a
unit cost of RMB In our site visits, we found that there is a power-
supply facility near each of Hongqiao’s aluminum plants. Thepany has never used
any electricity from the state grid.
• Some new power plants are now under construction in Zouping, Beihai, Huimin, and
Binzhou, but we are not able to verify whether these power plants belong to
Hongqiao Group or Gaoxin A&P. Hongqiao has been buying a smaller proportion of
its electricity from Gaoxin A&P in the past two years, which could mean Gaoxin has
not expanded its electricity capacity; therefore, we think it ispletely possible that the
new power plants belong to the listedpany.
Confidence level:
Capacity
High confidence
Low confidence
Confidence level:
Owned by
listedpany
Summary: BDA believes it is most likely that thepany’s gross margin
in 2013 amounted to %, slower than the % thepany
disclosed; this means that 81% of Hongqiao’s reported gross profit
can be confirmed
5
• We might overestimate the cost
of raw materials (coal and
alumina).
– According to the auditor’s
report, the cost of Hongqiao’s
raw materials other than coal
and alumina is found using the
first-in-first-out method while
the cost of coal and alumina is
calculated using the weighted
erage method. In our model,
we use each year’s erage
market price when estimating
the cost of coal and alumina.
– Hongqiao’s actual costs might
be lower than our estimates as
some of the raw materials
consumed in a given year
might he been purchased
before. As alumina price has
been increasing in the past two
years, this could cause us to
overestimate the cost of raw
materials.
pps
pps
%
%
%
2013 1H 2014Gross margin
pany
information
2012
pps
pps
%
%
%
%
%
pps
pps
%
Scenario 1
(most-likely
case)
Scenario 2
(pessimistic
case)
Scenario
1pany
information
Scenario 2pany
information
• 80%
• 73%
• 81%
• 71%
• 79%
• 66%
BDA’sments
Summary: In the most-likely case, the unit cost of alumina reported
by thepany in 2013 is very close to BDA’s estimate while the unit
cost of electricity in 2013 is 20% higher than reported
6
Unit 2012 2013 1H 2014
Unit cost of electricity
Volume of coal consumed per kWh of electricity produced
Scenario 1 (most-likely case) [g/kWh] 350 350 350
Scenario 2 (pessimistic case) [g/kWh] 400 400 400
Unit cost of alumina
Volume of bauxite consumed per ton of alumina produced
Scenario 1 (most-likely case) [Tons]
Scenario 2 (pessimistic case) [Tons]
Proportion of Indonesian bauxite used
Scenario 1 (most-likely case) 100% 100% 100%
Scenario 2 (pessimistic case) 70% 70% 70%
Unit 2012 2013 1H 2014
Unit cost of electricity
Price of Qinhuangdao coal (5,500 kcal/kg) [RMB/ton] 600 504 458
YoY growth N/A -16% -9%
Unit cost of alumina
Price of bauxite imported from Indonesia
(cost, insurance, and freight – CIF)
[RMB/ton] 249 268 270
YoY growth N/A 8% 1%
Price of bauxite imported from India (CIF) [RMB/ton] 274 308 297
YoY growth N/A 13% -4%
Price of 100% sodium hydroxide [RMB/ton] 2,360 1,802 1,543
YoY growth N/A -24% -14%
2012
1H 2014
2013
pany informationScenario 1Scenario 2
1,879
1,793
2013
1,763
1,6721H 2014
2012
1,828
1,664
1,726
1,634
Unit Cost of Electricity
Unit Cost of Alumina
Key Assumptions
Key Inputs
Unit: RMB/kWh
Unit: RMB/ton
N/A
As a percentage ofpany
information
142%
129%
100%
131%
120%
100%
134%
124%
100%
115%
110%
100%
110%
104%
100%
N/A
N/A
N/A
input
assume
calculate
% % % % 15%
Summary: Gross margin could certainly improve in 2H 2014pared
with 1H as aluminum prices continued to ascend and coal prices
maintained their downward trend in July and August 2014 and as
Hongqiao still has bauxite s from last year
% % % % %
% % % % %
% % % % %
% % % % %
% % % % %
7
Growth of aluminum price versus 1H 2014
%
%
%
%
%
Gross
margin,
2H 2014E
Data from July–August 2014Gross margin in 1H 2014
• It is very possible that gross
margin will improve in 2H
2014pared with 1H 2014.
– In July and August, the
price of aluminum was
still rising while that of
coal was falling.
– BDA assumes that other
costs, including that of
alumina, will remain flat
in 2H 2014. Hongqiao
expanded its bauxite
purchases in 2013 to
relieve the pressure
stemming from
increasing production
costs caused by
restrictions on bauxite
exports that came into
effect in Indonesia on 12
January 2014; the
inventory will be
sufficient for current
capacity until the end of
1H 2015, according to
Hongqiao’s investor-
relations manager.
G
ro
w
th
o
f
co
al
p
ri
ce
v
er
su
s
1H
2
01
4
Chalco’s
2012
project
Chalco’s
2011
project
Chalco’s
2011
project
Hongqiao
(erage)
Summary: Hongqiao rapidly expanded its production capacity in
recent years; however, according to BDA’s channel check, its unit
CAPEX investments are around or below industry erages
8
Unit CAPEX Budgets for Electricity
Hongqiao Jiaozuo
Wanfang
GD PowerJilin Power
Share
Unit: RMB/W
Unit CAPEX Budgets for Alumina
Unit: RMB/ton
Unit CAPEX Budgets for Aluminum
Chalco’s
2007 project
Chalco’s
2007 project
Hongqiao’s
2011 project
Unit: RMB/ton
Unit CAPEX Budgets for
Aluminum Strips and Plates
Yunnan
Aluminum
Nanshan
Aluminum
Henan
Zhongfu
Industrial
Hongqiao
Unit: RMB/ton
Hongqiao’s Capacity Expansions
(2011–2014)
Aluminum
strips and
plates
AluminumAluminaElectricity
Units: MW for electricity, ‘000 tons for other items
9
12,931
6,362
-9,055
3,265
12,358
2014E
Cash flow from
operating
activities
Unit: RMB MN
10,827
17,650
19,221
-12,398
Hongqiao’s 2014 cash-flow situation is positive; in 2015, at
least RMB 5,753 MN in cash is needed to balance its cash flow
-15,251
-5,753
12,931
-11,839
8,406
14,000
2015F
Cash flow from
financing
activities
CAPEX
Cash and cash
equivalents as of
1 January
Cash and cash
equivalents as of
31 December
Hongqiao’s total credit line is RMB BN; therefore, its
remaining credit is enough to cover the RMB 5,753 MN cash-
flow gap
Cash from bank
borrowings
Repayment of
bank borrowings
Bank borrowings
as of 1 January
Bank borrowings
as of 31
December
Remaining credit
9,390
17,650
-8,260
0
22,260
2014E 2015FUnit: RMB MN
Summary: Hongqiao has a positive cash flow in 2014, and its
remaining credit in 2015 will be enough to cover its cash-flow gap;
therefore, cash flow should not be a big problem for thepany in the
short term
Summary: Gaoxin’s cumulative gross profit from sales of alumina
and electricity to Hongqiao in the past three years is around RMB
BN, and the sales volume has showed a declining trend. Therefore,
It is highly possible that Gaoxin’s cash flow is in a healthy condition
10
Electricity
Alumina
2013
787
520
266
2012
222
152
70
2011
423
178
246
Unit: RMB MN
Volume of Alumina Sold by Gaoxin to Hongqiao
Volume of Electricity Sold by Gaoxin to HongqiaoGaoxin's Gross Profits from Selling Alumina and
Electricity to Hongqiao
%
2012 20132011
11,130
20132012
10,325
2011
12,082
%
Unit: MN tons
Unit: MN KW
11
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
• Cash-Flow Analysis
Summary: The market has been recovering since 2Q 2014, and, as a
leading aluminum manufacturer (ranked second as of 2014),
Hongqiao is impacted only mildly by newly released government
regulations
• Primary-aluminum consumption reached MN tons per annum (tpa) in 2013 and is
expected to expand at a % CAGR to MN tons by 2018.
• After a three-year decline, aluminum prices he been rising since 2Q 2014 and the trend is
continuing into 3Q 2014.
12
Market
analysis
Government
policy
Aluminum
consumption
Aluminum
prices
petitive
landscape
• Shandong is the biggest aluminum-production center in China. According to Antaike,
Hongqiao ranked third nationwide on production capacity in 2013 and advanced to second
in 1H 2014 with a capacity of 3,136,000 tpa.
Rising
electricity
prices
Regulations on
production
capacity
Industry
consolidation
• Central and local government he imposed hikes in electricity prices and also launched a
new multitiered price policy for aluminum manufacturers. While this may largely reduce the
profitability of smallpanies, big manufacturers like Hongqiao will not be affected as they
can supply some of their own power and buy the rest from private providers.
• Regulators issued new policies to eliminate outdated capacity and limit capacity expansion.
While the elimination policy does not currently affect Hongqiao as it meets the new
standard, the limitations on expansion may stop it from adding capacity in the future.
• The central government is promoting the consolidation of the aluminum industry; as a
leading localpany, Hongqiao gained support from the government of Shandong and may
therefore benefit from the consolidation process.
13
China’s primary-aluminum consumption will expand at a CAGR of
% from MN tons in 2014 to MN tons in 2018, according
to Antaike’s estimates
Source: Antaike
Unit: MN tons
+%
+%
2018F2017F2016F2015F2014E2013201220112010
China’s Primary-Aluminum Consumption
(2010–2018F)
Aluminum prices he undergone significant fluctuations in the past; in
1H 2014, with the economy steadily recovering, domestic aluminum
prices began to rise sharply and he continued to climb in 3Q
14
201420132012201120102009
10,963
200820072006
+12% 12,623
Monthly erage price
Source: Shanghai Changjiangmodity Exchange (SCCE)
Aluminum-Price (including VAT) Trend,
2006–August 2014
Unit: RMB/ton
According to Antaike, Hongqiao was the third-largest aluminum
manufacturer as of 31 December 2013 and recently became the
second-largest manufacturer with a capacity of 3,136,000 tons
• According to Antaike, as of 31
December 2013, there were a total of
91 aluminum manufacturers spread over
21 provinces in China, of which
Shandong, Henan, and Xinjiang were
the top three, accounting for %,
%, and % of domestic capacity,
respectively.
15Source: Antaike andpany information
Rank pany
Design capacity
(‘000 tpa)
Nature of
ownership
1 Chalco () 4,790 State-owned
2
China Power International Development
Ltd. () 2,960 State-owned
3 China Hongqiao Group () 2,956 Privately owned
4
Shandong Xinfa Aluminum & Electricity
Group 2,870 Privately owned
5 Name unknown 1,300 Privately owned
6 Name unknown 1,000
Local government-
owned
Total (As a percentage of total domestic capacity) 15,876 (%)
Top Aluminum Manufacturers in China
(2013)
13% Henan
12%
Xinjiang
QinghaiInner Mongolia
Gansu
Others
18%
Shandong
Breakdown of Aluminum-Production
Capacity by Province
(2013)
Shandong is China’s biggest aluminum
-production center
Hongqiao ranked third in aluminum-production capacity as of 31 December
2013
• Six manufacturers in China he production capacities above 1,000,000 tpa, with
Aluminum Corporation of China Ltd. (Chalco) the clear leader. Hongqiao ranked
third with a production capacity of 2,956,000 tpa in 2013.
• As of June 2014, the production capacity of Hongqiao had reached 3,136,000 tpa,
which made it the second-largest aluminum manufacturer in China.
16
As the aluminum industry consumes a lot of energy and has a
utilization rate of less than 70% in China, the central government
has issued several policies to regulate it
• As aluminum is an energy-intensive industry with a low
capacity-utilization rate, the National Development and
Reformmission (NDRC), together with other national
governmentmissions, has issued several policies to
regulate the industry:
Source: China Nonferrous Metals Industry Association, NDRC
China’s Aluminum Capacity and Production
Unit: ‘000 tons
Production
Excess
capacity
2013
32,900
22,04620,267
10,854
2012
27,650
7,383
2011
26,400
18,062
8,338
Capacity
Utilization rate
73%
67%68%
Industry consolidation
Regulations on production capacity
Higher electricity prices for the industry
• These policies further limit the profitability of small producers.
– Most small aluminum factories source power from the state-
owned electricity network and he outdated facilities. These
policies will further increase their cost of goods sold and
damage their profitability.
Policies regarding electricity prices he been imposed on aluminum
factories since 2010, which has limited the profitability of
small factories…
• Electricity-price adjustments
– Eliminate discounted electricity prices for aluminum factories
i. In May 2010, the NDRC and two other
governmentmissions published Notice about eliminating
electricity-price discounts for energy-intensivepanies ,
which canceled the previous, forable price policy for
aluminum factories.
ii. In 2011, the local government of Shandong enacted a
policy eliminating the discount and imposing a price hike
of RMB on industrialpanies.
– Impose a multitiered electricity-price policy in order to
punish factories with excessive power consumption
i. In December 2013, the NDRC published Notice about
imposing a multitiered electricity-price policy for
aluminum factories, which says that aluminum factories
with unit electricity consumption of less than 13,700
kWh/ton of aluminum will continue to enjoy the current
price policy but that a RMB price hike will be
imposed on those with unit electricity consumption of
13,700–13,800 kWh/ton and a RMB price
increase will be levied on those with unit electricity
consumption above 13,800 kWh/ton.
17
Electricity Costs for Aluminum Factories in Shandong
(2013)
+
13,850 kWh
13,750 kWh
13,650 kWh
+
Unit: RMB ‘000/ton
Government’s Policy Impact on Small Factories
Previous costIncremental cost
Source: NDRC, Shandong Price Bureau, BDA interviews and analysis
• These policies he a limited influence on major factories.
– Most leading aluminum factories, including Chalco, Nanshan
Aluminum, and Henan Zhongfu Industrial, can supply part
of their own electricity.
– Meanwhile, as bigpanies enjoy higher production efficiency
and he facilities that are more advanced, it is easier for
them to reduce their unit electricity costs to 13,700 kWh or
less.
pany
Electricity cost
(kWh/ton)
Shandong Yili Aluminum and Power (A&P,
controlled by Nanshan) 12,744
Shandong Nanshan Aluminum (top A&Ppany) 12,776
Shandong Xinfa Aluminum & Electricity (top
A&Ppany) 12,939
China Hongqiao Group 13,474
Huayu A&P (controlled by Chalco) 13,561
Chalco Shandong Branch 13,567
Yancon Group (stated-owned A&Ppany) 13,686
…but had a minor impact on leadingpanies; in particular, they
currently he no influence on Hongqiao as it sources all its
power from its own factories and privatepanies
18
• The price hikes he no negative impact on Hongqiao as thepany
does not purchase electricity from the state grid.
– Hongqiao supplied over 60% of its own electricity as of 2013
and is further expanding its electricity capacity.
– It purchases power externally only from Gaoxin A&P, a
supposedly third-party supplier controlled by Mr. Zhang
Shiping (who is also Hongqiao’s controlling shareholder), at
off-grid, forable prices without wheeling charges.
Self-supplied
Purchased
2013
32,892
21,762
(%)
11,130
2012
24,941
14,616
(%)
10,325
2011
21,586
9,504
(%)
12,082
Hongqiao’s Electricity-Supply Structure
Unit: MN KWh
Impact on Leadingpanies Impact on Hongqiao
Unit Electricity Costs of Leading Aluminumpanies
(2013)
Source: Shandong Price Bureau,pany information, BDA interviews and analysis
The government raised production standards to eliminate outdated
capacity, which will not affect Hongqiao due to its advanced
machinery; however, thepany may find itself restricted by the
capacity limitations in 2015 or 2016
• Elimination of outdated capacity
– In October 2013, the State Council published Guidance
for cleaning up excess capacity in certain industries, in
which it announced that aluminum electrolytic
capacitors with capacities of less than 160,000 A should
be eliminated by 2015.
• Restrictions on capacity expansion
– In 2011, the Ministry of Industry and Information
Technology (MIIT), NDRC, and seven other
governmentmissions issued Notice to constrain excess
capacity in the aluminum industry, forbidding local
governments from officially approving any proposals for
new aluminum capacity.
• The policy regarding production standards has no influence on
Hongqiao at present.
– The aluminum electrolytic capacitors adopted by Hongqiao
he capacities of 400,000 A and thus meet the standard and
will not be eliminated.
• However, the capacity limitation may prevent Hongqiao from
further expanding in the long run.
– Through our channel check, we found that Hongqiao
received some regulatory permits for capacity expansion in
2008 (Zhengtong project) and 2010 (aluminum-alloy
project), before the new policies were released; as such,
the construction of this capacity is unaffected.
– However, we doubt that Hongqiao will receive approval for
future expansions as the central government is leading a
shift of aluminum-production capacity to the Northwest
(Shaanxi, Gansu, Qinghai, Ningxia, and Xinjiang), where
electricity costs are much lower; in 2012, around 64% of
newly approved aluminum-production capacity was located
in the Northwest, with 26% in Xinjiang, and in 2013 these
proportions increased to 65% in the Northwest and 48% in
Xinjiang.
19
Government’s Policy
Impact on Hongqiao
“Local government shall dismiss any propositions
regarding aluminum-capacity expansion as per this
notice. Meanwhile, any forable price policy regarding
aluminum production shall be eliminated.”
- MIIT, NDRC, and seven other governmentmissions
Source: MIIT, State Council, BDA interviews and analysis
Meanwhile, the central government is promoting the consolidation of
the aluminum industry; as Hongqiao has the support of its
local government, it may benefit from the process
• In January 2012, the MIIT published The 12th five-year
development plan for the aluminum industry , promoting the
consolidation of the industry.
• The Shandong government enacted 2013 Document Number
37 and 2014 Document Number 4 to support the leading local
aluminum factories, including Weiqiao Alumina & Power (a
subsidiary of Hongqiao).
• As a leadingpany, it is easier for Hongqiao to get government
resources, including government approvals, than it is for its
peers.
• Hongqiao may get discounts on local resources as it boosts
the local economy and provides job opportunities.
20
“We should support the leading localpanies in Shandong
and cultivate a batch ofpetitivepanies to promote the local
economy…panies including Weiqiao Alumina & Power,
Shandong Xinfa Aluminum & Electricity, Nanshan
Aluminum, and Chalco Shandong Branch are supported to
be the leading aluminum productionpanies.”
- Announcement of Document Number 4, Shandong
government
Government’s Policy
Impact on Hongqiao
Source: MIIT, Shandong government, BDA interviews and analysis
“By 2015, the aluminum production of the top tenpanies
will account for over 90% of total production versus the
current 67%.”
- The 12th five-year development plan, MIIT
panies like Hongqiao he an easier time meeting the
government’s standards for production expansion, and,
given twopanies with the same project, it is easier for the
biggerpany to get approval.”
- Industry expert
panies like Hongqiao can enjoy big discounts on land-use
permissions from the local governments as their new
projects will drive the local economies and increase
employment rates.”
- Industry expert
21
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
• Cash-Flow Analysis
Summary: BDA has a high level of confidence regarding Hongqiao’s
aluminum capacity and ownership but relatively lower confidence
with respect to alumina and electricity
22
Aluminum
Alumina
Electricity
pany information and BDA’s channel check
• Hongqiao claims that it has been expanding its aluminum capacity over the past
three years. Most of the new capacity is located at its Zouping production base.
Based on the findings from our truck counts and site visit, we do believe production
at the Zouping base is almost in line with thepany’s reported volume, and the
MN tons of capacity added in 1H 2014 is located in Zouping. Our site visits also
showed that the Weiqiao, Huimin, and Binzhou production bases are well operated.
• Hongqiao claims that its annual alumina-production capacity reached MN tons by
the end of 2013. BDA believes that thepany supplied MN tons of its own alumina
in 2013. Hongqiao announced that it would expand its alumina capacity by 1 MN
tons in 2014. In our site visit, we found that an alumina plant is now under
construction in Beihai and that it belongs to a subsidiary of Hongqiao.
• BDA suspects that Hongqiao shifted this asset from a relatedpany to the listedpany
via CAPEX. We looked into Hongqiao’s past construction projects and found only one
to be suspicious.
• The total installed capacity of Hongqiao’s power generators rose rapidly in 2013,
and thepany’s proportion of self-supplied electricity reached 71% in 1H 2014 with a
unit cost of RMB In our site visits, we found that there is a power-
supply facility near each of Hongqiao’s aluminum plants. Thepany has never used
any electricity from the state grid.
• Some new power plants are now under construction in Zouping, Beihai, Huimin, and
Binzhou, but we are not able to verify whether these power plants belong to
Hongqiao Group or Gaoxin A&P. Hongqiao has been buying a smaller proportion of
its electricity from Gaoxin A&P in the past two years, which could mean Gaoxin has
not expanded its electricity capacity; therefore, we think it ispletely possible that the
new power plants belong to the listedpany.
Confidence level:
Capacity
High confidence
Low confidence
Confidence level:
Owned by
listedpany
23
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
– Verification of Aluminum Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
• Cash-Flow Analysis
Hongqiao claims that it has been expanding its aluminum capacity
over the past three years; most of the new capacity is located at its
Zouping production base
24
Hongqiao’s Production Capacity for Aluminum Products
Unit: ‘000 tons
Source:pany information
1,780
636
300
2012
2,016
1,140
636
0
2011
1,566
690
636
0
636
300
2013
2,956
Zouping
Weiqiao
Huimin
Binzhou
1H 2014
3,136
1,960
Incremental capacity
2012 2013
Total
1H 2014
450 940 180
0 0 0
0 300 0
0 0 0
450 640 180
Based on the findings from our truck counts and site visit, we do
believe production at the Zouping base is almost in line with the
volume disclosed by thepany, and the MN tons of capacity added
in 1H 2014 is located in Zouping
25
Truck-Tracking Results from Zouping Production Base parison of Capacity-Utilization Rates
pany-
disclosed
%
BDA-verified
%
• BDA’s estimated capacity-utilization rate
is % (based on thepany’s statement
that the Zouping facilities would he a
capacity of MN tons by 1H 2014),
which is very close to thepany’s reported
utilization rate of % for 1Q 2014.
Source:pany information, BDA site visit
Number of
trucks
Estimated number
of trucks/day
Tons/truck
Estimated annual
production (‘000 tons)
Factory 1 25 106 8 309
Factory 2 49 178 8 520
Factory 3 71 275 10 1,003
Total 145 559 N/A 1,833
pany data 1,960
Findings from BDA’s Site Visit and Channel Check
“Plant 3 and 4 in factory 3 were finished and put
into operation in 1H 2014.”
- Local worker in Zouping
Newly built aluminum plant in ZoupingChannel-check findings
“The MN tons of newly added capacity is
located in Zouping.”
- Investor-relations manager at China Hongqiao
Based on BDA’s site-visit results, Hongqiao’s Weiqiao, Huimin, and
Binzhou production bases are all well operated
26
Channel-check findings
“The Weiqiao production base is the
oldest of Hongqiao’s bases. There are
two aluminum factories in Weiqiao,
and it is the biggestpany here.”
- Local resident in Weiqiao
Source: BDA site visit and channel check
Production base Status
Weiqiao Well operated
“The old aluminum factory is in the
center of Weiqiao. There is also a new
aluminum factory located in the north,
beside Chuangxin Metal Group.”
- Local resident in Weiqiao
“The Huimin production base is newly
built. It is very close to the Binzhou
production base. It provides molten
aluminum alloy for two metal-
processingpanies nearby.”
- Local resident in Huimin
Huimin Well operated
“It is a newly built production base. It
still has a lot of space to expand.”
- Local worker in Huimin
“The Binzhou production base has two
aluminum factories and a large
industrial park. It is very famous here
in Binzhou.”
- Local worker in Binzhou
Binzhou Well operated
“New factories are under construction
in Binzhou. They still need some time
to be put into operation.”
- Local worker in Binzhou
27
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
– Verification of Alumina Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
• Cash-Flow Analysis
Hongqiao claims that its annual alumina-production capacity reached
MN tons by the end of 2013; BDA believes that Hongqiao
supplied MN tons of its own alumina in 2013
28
53%
4%
1H 2014
56%
44%
0%
2013
63%
37%
0%
2012
43%
1H 2014
2,939
2013
4,532
2012
3,468
Unit: ‘000 tons
Self-supplied
Purchased from Gaoxin
Purchased from others
Proportion of Self-Supplied Alumina
Volume of Alumina Used in Production
Volume of alumina used in
production = Sales volume of
aluminum products ×
Volume of alumina used per
ton of aluminum produced
( tons)
Volume of Self-Supplied Alumina
1H 201420132012
Unit: ‘000 tons
3,000 3,000 4,000
Annual production capacity
Source:pany data, BDA channel check
Hongqiao announced that it would expand its alumina capacity by 1
MN tons in 2014; in our site visit, we found that an alumina plant is
now under construction in Beihai and that it belongs to
Huihongpany, a subsidiary of Hongqiao
29
Findings from BDA’s Site Visit Channel-Check Findings
“The newly built 1 MN tons of alumina capacity is located at the
Beihai production base. More capacity will be put into use there in
the near future.”
- Investor-relations manager at China Hongqiao
“Those factories on the north side of the road all belong to
Huihongpany. Huihong is the biggestpany here in Beihai, and it is
said that Huihong will build more factories at its Beihai production
base.”
- Local worker in Beihai
• Hongqiao announced an alumina-capacity expansion of 1 MN tons
in 2014. We saw on our site visit that an alumina plant is being
built in Beihai and that some of the facility’s capacity has already
begun production.
The new alumina plant
in Beihai is still under
construction.
One alumina factory in
Beihai is already
operational.
• We checked with locals and understand that the alumina facility
belongs to Huihongpany, a subsidiary of Hongqiao.
Source:pany information, BDA channel check
“Huihong has one alumina factory, one power plant, and one
aluminum factory here in Beihai. Huihong has a large area of
undeveloped land, and I believe they will build more factories
here.”
- Local worker in Beihai
BDA suspects that Hongqiao shifted this asset from a relatedpany to
the listedpany via CAPEX
• BDA believes that Hongqiao might
he had the listedpany buy the asset
from a relatedpany using CAPEX
funds.
– Building a new alumina-production
plant was only a potential plan at the
end of 2013, but the plant was put
into use in 1H 2014. Taking the
necessary construction time into
consideration, BDA suspects that the
alumina plant was built by a
relatedpany first and that Hongqiao
then brought it into the listedpany
after considering the market situation
and its production demand.
30
“Depending on market situation and production demand, a new alumina
production plant with annual production capacity of 1,000,000 tons may be
built in 2014.”
- Hongqiao’s 2013 annual results presentation
pany information BDA’sments
Source:pany information
pleted construction andmenced operation of a new production line
capable ofprehensive utilization of coal fly ash in producing alumina and
with a designed annual production capacity of 1,000,000 tons.”
- Hongqiao’s 2014 annual results presentation
BDA looked into Hongqiao’s past construction projects and found
only one to be suspicious: Zhengtong project phase III
31
pany information BDA’sments
Source:pany information
• We checked Hongqiao’s
historical list of projects
under construction and find
only Zhengtong project
phase III odd.
– According to the auditor’s
report, in 2011, Hongqiao
started a project valued at
RMB 2 BN, all of which was
transferred to its fixed assets
by the end of the year. Since
it is hard to imagine that
such a large project could
bepleted within one year,
BDA suspects that this might
he been an existing project
built by a relatedpany rather
than a newly built project.
Unit: RMB MN 1 Jan 2011
Increase in
2011
Transferred
to fixed
assets
31 Dec 2011 1 Jan 2012
Increase in
2012
Transferred
to fixed
assets
31 Dec 2012
Zhengtong
project phase
III
2, -2,
Zouping
production base
factory 2
1, -1,
Weiqiao
production
project
Weiqiao power-
plant project
1, -1,
Coal-fly-ash
project
1, 1, 1, -2,
Continuation of
coal-fly-ash
project
-1,
Power-plant
project
2, -1, 1, -2,
Zhengtong
project phase I
32
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
– Verification of Electricity Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
• Cash-Flow Analysis
The total installed capacity of Hongqiao’s power generators rose
rapidly in 2013, and thepany’s proportion of self-supplied electricity
reached 71% in 1H 2014 with a unit cost of RMB
33
Hongqiao Group’s Production Capacity
Source:pany information
59%
1H 2014
71%
2013
66%
2012
Power generators’ capacity
Proportion self-supplied
Unit: MW
1H 201420132012
Price of electricity purchased from Gaoxin1
Cost of self-supplied electricity
Unit: RMB/kWh
Note:
1. Gaoxin started to supply electricity to Hongqiao in July 2008 and has been
thepany’s sole external electricity supplier since January 2010.
Hongqiao Group’s Unit Cost of Electricity
(Excluding VAT)
Based on BDA’s site-visit findings, there is a power-supply facility
near each of Hongqiao’s aluminum plants; thepany has never used
any electricity from the state grid
34
Findings from BDA’s Site Visit Channel-Check Findings
• In our site visit, we found a power-supply facility located close to
each of Hongqiao’s aluminum plants.
• Hongqiao has never used any electricity from the state grid as its
electricity capacity is big enough to meet its aluminum plants’
needs.
This is one of
Hongqiao’s newly built
power plants. One in
Binzhou has not been
finished yet.
There is a new power
plant beside the
aluminum plant in
Huimin.
“Hongqiao has been increasing its electricity capacity. It will be
100% self-sufficient on electricity in the future.”
- Investor-relations manager at China Hongqiao
“There is a power plant near each of Hongqiao’s aluminum plants.
I am sure that Hongqiao has never bought any electricity from the
state grid.”
- Local worker in Beihai
“There is a large-scale power plant near Hongqiao’s aluminum
plant. I believe its capacity is enough for Hongqiao’s aluminum
business.”
- Local worker in Binzhou
Source: BDA site visit and channel check
Some new power plants are now under construction in Zouping,
Beihai, Huimin, and Binzhou, but we are not able to verify whether
these power plants belong to Hongqiao Group or Gaoxin A&P as they
are all named simply ‘A&Ppany’
35
Findings of BDA’s Site Visit Channel-Check Findings
There are power plants
under construction in
Beihai…
…and in Binzhou.
• Hongqiao claimed that there are four power plants currently under
construction and that another two will be built and put into
operation in 2015. According our site visit, there are some new
power plants now under construction in Zouping, Beihai, Huimin,
and Binzhou.
• Because all the power plants are called only ‘A&Ppany’, we do not
know for sure whether they belong to Hongqiao Group or Gaoxin
A&P.
“These power plants he no names on their gates. I am not sure
whether they belong to the listedpany or not, but I do know that
all the electricity is provided only to Hongqiao’s aluminum plants.”
- Local worker in Beihai
“There is a large-scale power plant near Hongqiao’s aluminum
factory. It is still under construction, but five out of six chimneys
he been finished. I know it belongs to Weiqiao Alumina & Power,
but I am not sure if it is the listedpany’s asset.”
- Local worker in Binzhou
Source: BDA site visit and channel check
Hongqiao has been buying a smaller proportion of its electricity from
Gaoxin A&P in the past two years, which could mean Gaoxin has not
expanded its electricity capacity; therefore, we think it ispletely
possible that the new power plants belong to the listedpany
36
2012
24,941
2011
9,504
(44%)
21,586
14,616
(59%)
11,130
(34%)
2013
Purchased from Gaoxin
21,762
(66%)
12,082
(56%)
10,325
(41%)
Self-supplied
32,892
Hongqiao’s Total Electricity Consumption
Unit: MN kWh
Source:pany information
Annual growth rate
16%
54%
-15%
2012
32%
49%
8%
2013
37
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
• Cash-Flow Analysis
Summary(1/3): BDA believes it is most likely that thepany’s gross
margin in 2013 amounted to %, slower than the % thepany
disclosed; this means that 81% of Hongqiao’s reported gross profit
can be confirmed
38
• We might overestimate the cost
of raw materials (coal and
alumina).
– According to the auditor’s
report, the cost of Hongqiao’s
raw materials other than coal
and alumina is found using the
first-in-first-out method while
the cost of coal and alumina is
calculated using the weighted
erage method. In our model,
we use each year’s erage
market price when estimating
the cost of coal and alumina.
– Hongqiao’s actual costs might
be lower than our estimates as
some of the raw materials
consumed in a given year
might he been purchased
before. As alumina price has
been increasing in the past two
years, this could cause us to
overestimate the cost of raw
materials.
pps
pps
%
%
%
2013 1H 2014Gross margin
pany
information
2012
pps
pps
%
%
%
%
%
pps
pps
%
Scenario 1
(most-likely
case)
Scenario 2
(pessimistic
case)
Scenario
1pany
information
Scenario 2pany
information
• 80%
• 73%
• 81%
• 71%
• 79%
• 66%
BDA’sments
Summary(2/3): In the most-likely case, the unit cost of alumina
reported by thepany in 2013 is very close to BDA’s estimate while
the unit cost of electricity in 2013 is 20% higher than reported
39
Unit 2012 2013 1H 2014
Unit cost of electricity
Volume of coal consumed per kWh of electricity produced
Scenario 1 (most-likely case) [g/kWh] 350 350 350
Scenario 2 (pessimistic case) [g/kWh] 400 400 400
Unit cost of alumina
Volume of bauxite consumed per ton of alumina produced
Scenario 1 (most-likely case) [Tons]
Scenario 2 (pessimistic case) [Tons]
Proportion of Indonesian bauxite used
Scenario 1 (most-likely case) 100% 100% 100%
Scenario 2 (pessimistic case) 70% 70% 70%
Unit 2012 2013 1H 2014
Unit cost of electricity
Price of Qinhuangdao coal (5,500 kcal/kg) [RMB/ton] 600 504 458
YoY growth N/A -16% -9%
Unit cost of alumina
Price of bauxite imported from Indonesia
(cost, insurance, and freight – CIF)
[RMB/ton] 249 268 270
YoY growth N/A 8% 1%
Price of bauxite imported from India (CIF) [RMB/ton] 274 308 297
YoY growth N/A 13% -4%
Price of 100% sodium hydroxide [RMB/ton] 2,360 1,802 1,543
YoY growth N/A -24% -14%
2012
1H 2014
2013
pany informationScenario 1Scenario 2
1,879
1,793
2013
1,763
1,6721H 2014
2012
1,828
1,664
1,726
1,634
Unit Cost of Electricity
Unit Cost of Alumina
Key Assumptions
Key Inputs
Unit: RMB/kWh
Unit: RMB/ton
N/A
As a percentage ofpany
information
142%
129%
100%
131%
120%
100%
134%
124%
100%
115%
110%
100%
110%
104%
100%
N/A
N/A
N/A
input
assume
calculate
% % % % 15%
Summary (3/3): Gross margin could certainly improve in 2H
2014pared with 1H as aluminum prices continued to ascend and coal
prices maintained their downward trend in July and August 2014 and
as Hongqiao still has bauxite s from last year
% % % % %
% % % % %
% % % % %
% % % % %
% % % % %
40
Growth of aluminum price versus 1H 2014
%
%
%
%
%
Gross
margin,
2H 2014E
Data from July–August 2014Gross margin in 1H 2014
• It is very possible that gross
margin will improve in 2H
2014pared with 1H 2014.
– In July and August, the
price of aluminum was
still rising while that of
coal was falling.
– BDA assumes that other
costs, including that of
alumina, will remain flat
in 2H 2014. Hongqiao
expanded its bauxite
purchases in 2013 to
relieve the pressure
stemming from
increasing production
costs caused by
restrictions on bauxite
exports that came into
effect in Indonesia on 12
January 2014; the
inventory will be
sufficient for current
capacity until the end of
1H 2015, according to
Hongqiao’s investor-
relations manager.
G
ro
w
th
o
f
co
al
p
ri
ce
v
er
su
s
1H
2
01
4
• The volume of coal consumed per kWh of
electricity produced is generally 300–400 g in the
industry; considering thepany’s installed generation
capacity, industry experts believe that 350 g/kWh
is the most-likely case for Hongqiao.
• According to Antaike, the price of Qinhuangdao
coal is the benchmark quoted most frequently in
Shandong’s coal market and includes the cost of
transporting coal to Qinhuangdao port but
excludes VAT.
• The discount rate is based on our channel-check
findings.
2012Items
Scenario 1 (most-likely case): The unit cost of electricity decreased
at a CAGR of -11% from RMB in 2012 to RMB
in 1H 2014, due mainly to the falling price of coal
41
Unit cost of
electricity
Coal cost
Labor cost
Depreciation
Other costs
Unit-Economics (UE) Analysis of Electricity
(8%)
(14%)
(6%)
(72%)
(100%)
Source:pany information, Zhengzhoumodity Exchange, BDA interviews and analysis
2013 1H 2014
Unit 2012 2013
1H
2014
Coal cost [RMB/kWh]
Unit consumption
volume
[g/kWh] 350 350 350
Price of coal [RMB/ton] 570 478 436
Market price [RMB/ton] 600 504 458
YoY growth N/A -16% -9%
Discount rate 95% 95% 95%
• The unit cost of electricity does not include VAT.
Notes
Unit: RMB/kWh Unit: RMB/kWh Unit: RMB/kWh
(100%)
(16%)
(69%)
(6%)
(9%)
(7%)
(67%)
(10%)
(17%)
(100%)
Scenario 1 (most-likely case): For labor cost, depreciation, and other
costs, we use the erage of nine listed thermoelectricitypanies’ costs
from 2013 and assume that these costs did not change between
2012 and 1H 2014
42
Costs of Listed Thermoelectricitypanies in 2013
Top Energy Shanxi ()
Guodian Changyuan Electric Power ()
Henan Yuneng ()
Huadian Power International ()
Shanxi Zhangze Electric Power ()
erage:
Guangdong Electric Power Development ()
Jiangxi Ganneng ()
Jinshan Energy ()
Power International ()
erage:
erage:
Labor cost Depreciation Other costs
Source:pany information
Unit: RMB/kWh
Scenario 1 (most-likely case): The unit cost of alumina decreased at
a CAGR of -3% from RMB 1,793/ton in 2012 to RMB 1,672/ton in 1H
2014…
43
2012Items
Unit cost of alumina
(excluding VAT)
Bauxite cost
100%-sodium-hydroxide
cost
Electricity cost
Other costs
UE Analysis of Alumina
55 (3%)
450 (25%)
472 (26%)
1,793 (100%)
816 (46%)
Unit: RMB/ton
2013 1H 2014
Unit: RMB/ton Unit: RMB/ton
49 (3%)
450 (26%)
360 (21%)
1,726 (100%)
867 (50%)
46 (3%)
450 (27%)
309 (18%)
1,672 (100%)
867 (52%)
Source: General Administration of Customs, CEIC Data, BDA interviews and analysis
Scenario 1 (most-likely case): …as the unit costs of sodium
hydroxide and electricity continued to decline in 2013 and 1H 2014
44
Analysis of Key Cost Items for Alumina Production
Unit 2012 2013 1H 2014 Source
Unit cost of bauxite imported from Indonesia a = b × e [RMB] 816 867 867 Calculation
Volume of Indonesian bauxite consumed per ton of alumina
produced
b = c × d [Tons] Calculation
Volume of bauxite consumed per ton of alumina produced c [Tons] Key assumption
Proportion of Indonesian bauxite used d 100% 100% 100% Key assumption
Price of Indonesian bauxite (excluding VAT) e = f × g + h [RMB/ton] 291 310 310 Calculation
Price of bauxite imported from Indonesia (CIF)1 f [RMB/ton] 249 268 268 Customs
YoY growth N/A 8% 0% Calculation
Discount rate for Hongqiao g 95% 95% 95% BDA channel check
Delivery costs h [RMB/ton] 55 55 55 BDA channel check
Unit cost of 100% sodium hydroxide i = j × k [RMB] 472 360 309 Calculation
Volume of 100% sodium hydroxide consumed per ton of
alumina produced
j [Tons] BDA channel check
Market price (excluding VAT) k [RMB/ton] 2,360 1,802 1,543 CEIC Data
YoY growth N/A -24% -3% Calculation
Electricity l = m × n [RMB] 55 49 46 Calculation
Volume of electricity consumed per ton of alumina produced m [kWh] 200 200 200 BDA channel check
Unit cost of electricity (excluding VAT) n [RMB/kWh] UE of electricity
YoY growth N/A -12% -6% Calculation
Note:
1. Indonesia stopped exporting bauxite as of January 2014; however, as Hongqiao is storing bauxite from 2013, we use the 2013 price for 1H 2014.
Source: General Administration of Customs, CEIC Data, BDA channel check and analysis
Scenario 1 (most-likely case): Hongqiao’s gross margin on aluminum
declined from % in 2012 to % in 1H 2014…
45
2012Items
Sell-in price of aluminum
(excluding VAT)
Alumina cost
Carbon-anode cost
Other costs
UE Analysis of Aluminum
1,223 (%)
3,800 (%)
3,446 (%)
13,297 (%)
3,428 (%)
1,400 (%)
Unit: RMB/ton
2013 1H 2014
Unit: RMB/ton Unit: RMB/ton
Gross profit
Electricity cost
2,745 (%)
1,400 (%)
1,213 (%)
3,504 (%)
3,390 (%)
12,252 (%)
1,932 (%)
1,400 (%)
1,154 (%)
3,347 (%)
3,351 (%)
11,184 (%)
Source:pany information, BDA analysis
Scenario 1 (most-likely case): …mainly because its proportion of self-
supplied, low-cost alumina and electricity increased
46
Analysis of Key Cost Items for Aluminum Production
Notes:
1. The price thepany pays for carbon anodes is quite close to the market price.
2. The volume of electricity consumed per ton of aluminum produced is generally 13,000–13,800 kWh/ton in the industry.
Source:pany information, BDA analysis
Unit 2012 2013 1H 2014 Source
Alumina a = b × g [RMB] 3,446 3,390 3,351 Calculation
Unit cost of alumina (excl. VAT) b = c× d + e × f [RMB/ton] 1,813 1,784 1,763 Calculation
Unit cost of self-supplied alumina (excl. VAT) c [RMB/ton] 1,793 1,726 1,672 UE of alumina and electricity (scenario 1)
Self-supplied proportion d % % % pany information
Unit cost of purchased alumina (excl. VAT) e [RMB/ton] 1,829 1,880 1,880 pany information
Purchased proportion f % % % Calculation
Volume of alumina consumed per ton of
aluminum produced
g [Tons] BDA channel check
Carbon anodes h = i × j [RMB] 1,223 1,213 1,154 Calculation
erage price of carbon anodes (excl. VAT)1 i [RMB/ton] 2,308 2,289 2,178 pany information
Volume of carbon anodes consumed per ton
of aluminum produced
j [Tons] pany information and key assumption
Electricity l = m × r [RMB] 3,800 3,504 3,347 Calculation
Unit cost of electricity (excl. VAT) m = n × o + p × q [RMB/kWh] Calculation
Unit cost of self-supplied electricity (excl. VAT) n [RMB/kWh] UE electricity (scenario 1)
Self-supplied proportion o % % % pany information
Unit cost of purchased electricity (excl. VAT) p [RMB/kWh] pany information
Purchased proportion q % % % Calculation
Volume of electricity consumed per ton of
aluminum produced2
r [kWh] 13,456 13,474 13,532 pany information
Others s [RMB] 1,400 1,400 1,400 pany information
• The volume of coal consumed per kWh of
electricity produced is generally 300–400 g in the
industry; therefore, for this scenario, we assume
that Hongqiao’s unit consumption of coal is 400
g/kWh.
• According to Antaike, the price of Qinhuangdao
coal is the benchmark quoted most frequently in
Shandong’s coal market and includes the cost of
transporting coal to Qinhuangdao port but
excludes VAT.
• The discount rate is based on our channel-check
findings.
2012Items
Scenario 2 (pessimistic case): As the volume of coal consumed per
kWh of electricity produced is generally 300–400 g in the industry,
for the pessimistic case, we assume the value is 400 g/kWh and that
other costs are the same as in scenario 1
47
Unit cost of
electricity
Coal cost
Labor cost
Depreciation
Other costs
UE Analysis of Electricity
(7%)
(13%)
(5%)
(75%)
(100%)
Source:pany information, Zhengzhoumodity Exchange, BDA interviews and analysis
2013 1H 2014
• The unit cost of electricity does not include VAT.
Notes
Unit: RMB/kWh Unit: RMB/kWh Unit: RMB/kWh
(100%)
(15%)
(71%)
(6%)
(8%)
(6%)
(69%)
(9%)
(16%)
(100%)
Unit 2012 2013
1H
2014
Coal cost [RMB/kWh]
Unit consumption
volume
[g/kWh] 400 400 400
Price of coal [RMB/ton] 570 478 436
Market price [RMB/ton] 600 504 458
YoY growth N/A -16% -9%
Discount rate 95% 95% 95%
Scenario 2 (pessimistic case): With respect to the UE of alumina, the
difference between scenarios 1 and 2 is in the costs of bauxite and
electricity
48
2012Items
Unit cost of alumina
(excluding VAT)
Bauxite cost
100%-sodium-hydroxide
cost
Electricity cost
Other costs
UE Analysis of Alumina
61 (3%)
450 (24%)
472 (25%)
1,879 (100%)
896 (48%)
Unit: RMB/ton
2013 1H 2014
Unit: RMB/ton Unit: RMB/ton
54 (3%)
450 (25%)
360 (20%)
1,828 (100%)
964 (53%)
50 (3%)
450 (26%)
309 (18%)
1,763 (100%)
954 (54%)
Source: General Administration of Customs, CEIC Data, BDA interviews and analysis
Scenario 2 (pessimistic case): The unit cost of bauxite is higher than
in scenario 1 as we assume that higher-priced bauxite imported from
India accounts for 30% of the total volume of bauxite consumed
49
Analysis of Unit Cost of Bauxite and Electricity for Alumina Production
Source: General Administration of Customs, CEIC Data, BDA interviews and analysis
Unit 2012 2013 1H 2014 Source
Unit cost of bauxite a = b + j [RMB] 896 964 954 Calculation
Unit cost of bauxite imported from Indonesia b = c × f [RMB] 612 650 650 Calculation
Volume of Indonesian bauxite consumed per ton of alumina produced c = d × e [Tons] Calculation
Volume of bauxite consumed per ton of alumina produced d [Tons] Key assumption
Proportion of Indonesian bauxite used e 70% 70% 70% Key assumption
Price of Indonesian bauxite (excluding VAT) f = g × h + i [RMB/ton] 291 310 310 Calculation
Price of bauxite imported from Indonesia (CIF)¹ g [RMB/ton] 249 268 268 Customs
Discount rate for Hongqiao h 95% 95% 95% BDA channel check
Delivery cost i [RMB/ton] 55 55 55 BDA channel check
Unit cost of bauxite imported from India j = k × n [RMB] 284 313 303 Calculation
Volume of Indian bauxite consumed per ton of alumina produced k = l × m [Tons] Calculation
Volume of bauxite consumed per ton of alumina produced l [Tons] Key assumption
Proportion of Indian bauxite used m 30% 30% 30% Calculation
Price of Indian bauxite (excluding VAT) n = o × p + q [RMB/ton] 315 348 337 Calculation
Price of bauxite imported from India (CIF) o [RMB/ton] 274 308 297 Customs
Discount rate for Hongqiao p 95% 95% 95% BDA channel check
Delivery cost q [RMB/ton] 55 55 55 BDA channel check
Electricity r = s × t [RMB] 61 54 50 Calculation
Volume of electricity consumed per ton of alumina produced s [kWh] 200 200 200 BDA channel check
Unit cost of electricity (excluding VAT) t [RMB/kWh] UE of electricity
Note:
1. Indonesia stopped exporting bauxite as of January 2014; however, as Hongqiao is storing bauxite from 2013, we use the 2013 price for 1H 2014.
Scenario 2 (pessimistic case): Hongqiao’s gross margin on aluminum
declined from % in 2012 to % in 1H 2014
50
2012Items
Sell-in price of aluminum
(excluding VAT)
Alumina cost
Carbon-anode cost
Other costs
UE Analysis of Aluminum
1,223 (%)
4,025 (%)
3,515 (%)
13,297 (%)
3,134 (%)
1,400 (%)
Unit: RMB/ton
2013 1H 2014
Unit: RMB/ton Unit: RMB/ton
Gross profit
Electricity cost
2,412 (%)
1,400 (%)
1,213 (%)
3,717 (%)
3,510 (%)
12,252 (%)
1,627 (%)
1,400 (%)
1,154 (%)
3,555 (%)
3,447 (%)
11,184 (%)
Source:pany information, BDA analysis
Scenario 2 (pessimistic case): Carbon-anode and other costs are the
same as in scenario 1, while alumina and electricity costs are higher
51
Analysis of Key Cost Items for Aluminum Production
Notes:
1. The price thepany pays for carbon anodes is quite close to the market price.
2. The volume of electricity consumed per ton of aluminum produced is generally 13,000–13,800 kWh/ton in the industry.
Source:pany information, BDA analysis
Unit 2012 2013 1H 2014 Source
Alumina a = b × g [RMB] 3,515 3,510 3,447 Calculation
Unit cost of alumina (excl. VAT) b = c × d + e × f [RMB/ton] 1,850 1,847 1,814 Calculation
Unit cost of self-supplied alumina (excl. VAT) c [RMB/ton] 1,879 1,828 1,763 UE of alumina and electricity (scenario 2)
Self-supplied proportion d % % % pany information
Unit cost of purchased alumina (excl. VAT) e [RMB/ton] 1,829 1,880 1,880 pany information
Purchased proportion f % % % Calculation
Volume of alumina consumed per ton of
aluminum produced
g [Tons] BDA channel check
Carbon anodes h = i × j [RMB] 1,223 1,213 1,154 Calculation
erage price of carbon anodes (excl. VAT)1 i [RMB/ton] 2,308 2,289 2,178 pany information
Volume of carbon anodes consumed per ton
of aluminum produced
j [Tons] pany information and key assumption
Electricity l = m × r [RMB] 4,025 3,717 3,555 Calculation
Unit cost of electricity (excl. VAT) m = n × o + p × q [RMB/kWh] Calculation
Unit cost of self-supplied electricity (excl. VAT) n [RMB/kWh] UE of electricity (scenario 2)
Self-supplied proportion o % % % pany information
Unit cost of purchased electricity (excl. VAT) p [RMB/kWh] pany information
Purchased proportion q % % % Calculation
Volume of electricity consumed per ton of
aluminum produced2
r [kWh] 13,456 13,474 13,532 pany information
Others s [RMB] 1,400 1,400 1,400 pany information
% % % % 15%
Gross margin could certainly improve in 2H 2014pared with 1H…
% % % % %
% % % % %
% % % % %
% % % % %
% % % % %
52
Growth of aluminum price versus 1H 2014
%
%
%
%
%
Gross
margin
(2H 2014E)
Data in July–August 2014
Source: BDA assumptions and analysis
Gross margin in 1H 2014
G
ro
w
th
o
f
co
al
p
ri
ce
v
er
su
s
1H
2
01
4
Jan 2015Jul 2014Jan 2014Jul 2013Jan 2013Jul 2012Jan 2012
Jan 2015Jul 2014Jan 2014Jul 2013Jan 2013Jul 2012Jan 2012
…as aluminum prices continued to ascend and coal prices maintained
their downward trend in July and August 2014 and as Hongqiao has
enough bauxite in inventory to make it to the end of 1H 2015
53
• BDA assumes that other costs, including that of alumina, will remain
the same in 2H 2014.
• Hongqiao expanded its bauxite purchases in 2013 to relieve the
pressure stemming from increasing production costs caused by
restrictions on bauxite exports that came into effect in Indonesia on
12 January 2014; the inventory will be sufficient for current capacity
until the end of 1H 2015, according to Hongqiao’s investor-relations
manager.
In July and August, the price of aluminum was still rising while
that of coal was falling…
Monthly erage
price of aluminum
(excluding VAT) +%
Jul–Aug 2014 11,866
1H 2014 11,231
Unit: RMB/ton
Monthly erage price of coal
(excluding VAT)
Unit: RMB/ton
%
Jul–Aug 2014 416
1H 2014 458
…and Hongqiao’s bauxite s will last until the end of 1H
2015
%
+%
06/30/2014
9,361
12/31/2013
10,136
12/31/2012
3,111
Unit: RMB MN
Value of Hongqiao’s bauxite inventory
(31 December 2012–30 June 2014)
Source: Zhengzhoumodity Exchange, SCCE, BDA assumptions and analysis
54
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
• Cash-Flow Analysis
Chalco’s
2012
project
Chalco’s
2011
project
Chalco’s
2011
project
Hongqiao
(erage)
Summary: Hongqiao rapidly expanded its production capacity in
recent years; however, according to BDA’s channel check, its unit
CAPEX investments are around or below industry erages
55
Unit CAPEX Budgets for Electricity
Hongqiao Jiaozuo
Wanfang
GD PowerJilin Power
Share
Unit: RMB/W
Unit CAPEX Budgets for Alumina
Unit: RMB/ton
Unit CAPEX Budgets for Aluminum
Chalco’s
2007 project
Chalco’s
2007 project
Hongqiao’s
2011 project
Unit: RMB/ton
Unit CAPEX Budgets for
Aluminum Strips and Plates
Yunnan
Aluminum
Nanshan
Aluminum
Henan
Zhongfu
Industrial
Hongqiao
Unit: RMB/ton
Source:pany information, BDA interviews and analysis
Hongqiao’s Capacity Expansions
(2011–2014)
Aluminum
strips and
plates
AluminumAluminaElectricity
Units: MW for electricity, ‘000 tons for other items
56
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
– Analysis of Electricity CAPEX
• Cash-Flow Analysis
Hongqiao has increased its power-generation capacity by about
3,960 MW since 2011, and its unit CAPEX is below the industry erage
57
Jiaozuo
Wanfang²
GD Power¹Jilin Power
Share¹
Hongqiao
Power-Generation Capacity Expansions
CAPEX Budgets for Power Plants
Jiaozuo
Wanfang²
GD Power1Jilin Power
Share1
Hongqiao
Unit: MW
Unit: RMB MN
Unit CAPEX Budgets for Electricity
Jiaozuo
Wanfang²
GD Power1Jilin Power
Share1
Hongqiao
Unit: RMB/W
Notes:
1. Jilin Power Share and GD Power are listed electricitypanies.
2. Jiaozuo Wanfang is a listed aluminumpany.
Source:pany bond-issuance reports (2013–14) and annual report
58
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
– Analysis of Alumina CAPEX
• Cash-Flow Analysis
Chalco’s
2012
project
Chalco’s
2011
project
Chalco’s
2011
project
Hongqiao’s
2012
project²
Hongqiao’s
Indonesia
project1
The unit CAPEX for Hongqiao’s alumina project is lower than the
erage level as benchmarked against Chalco, China’s largest
aluminum producer
59
Chalco’s
2012
project
Chalco’s
2011
project
Chalco’s
2011
project
Hongqiao’s
2012
project²
Hongqiao’s
Indonesia
project¹
Alumina Capacity Expansions
CAPEX Budgets for Alumina
Chalco’s
2012
project
Chalco’s
2011
project
Chalco’s
2011
project
Hongqiao’s
2012
project²
Hongqiao’s
Indonesia
project1
Unit: ‘000 tons
Unit: RMB MN
Unit CAPEX Budgets for Alumina
Unit: RMB/ton
Notes:
1. Hongqiao announced that it would make a USD 1,000 MN (RMB 6,200 MN)
capital investment in Indonesia to expand its alumina capacity by 2 MN tons.
2. This is Hongqiao’s Zouping project; the capacity is the incremental capacity for
2012 as disclosed by thepany, and the CAPEX is the amount of the ‘under
construction’ value that was transferred to fixed assets in 2012.
Source:pany bond-issuance reports (2011–13), presentation (2012), and annual report
60
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
– Analysis of Aluminum CAPEX
• Cash-Flow Analysis
Hongqiao posted an aluminum-production capacity increase of
approximately MN tons with a total budget of around RMB 17
BN; the erage cost is lower than Chalco’s
61Source:pany bond-issuance reports (2013–14) and annual report
Chalco’s
2007
project
Chalco’s
2007
project
Hongqiao’s
2014
project
Hongqiao’s
2012
project
Hongqiao’s
2011
project
Aluminum Capacity Expansions
CAPEX Budgets for Aluminum
Chalco’s
2007
project
Chalco’s
2007
project
Hongqiao’s
2014
project
Hongqiao’s
2012
project
Hongqiao’s
2011
project
Unit: ‘000 tons
Unit: RMB MN
Unit CAPEX Budgets for Aluminum
Chalco’s
2007
project
Chalco’s
2007
project
Hongqiao’s
2014
project
Hongqiao’s
2012
project
Hongqiao’s
2011
project
Unit: RMB/ton
Hongqiao’s erage
CAPEX
We suspect that Hongqiao may he overstated its CAPEX
in 2011; however, its current CAPEX is at a reasonable
level.
Hongqiao’s actual cumulative unit CAPEX for aluminum is lower at
around RMB 5,300/ton
62
2010 and 2011 20132012
CAPEX Transferred to Fixed Assets
(2010–2013)
Unit: ‘000 tons
Unit: RMB MN
2010 and 2011
erage:
5,325
20132012
Unit: RMB/ton
Incremental Aluminum Capacity
(2010–2013)
201320122010 and 2011
Unit CAPEX for Incremental Aluminum Capacity¹
Source:pany bond-issuance reports (2013–14) and annual report
Note:
1. As this is calculated using incremental capacity and CAPEX transferred
to fixed assets, it could be an overestimate if the newly added fixed
assets he not yet been put into production.
63
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
– Analysis of Aluminum-Strip/Plate CAPEX
• Cash-Flow Analysis
Hongqiao will increase its aluminum-strip/plate capacity by 760,000
tons with a moderate unit capital investment in 2012–2014
64
Yunnan
Aluminum¹
Nanshan
Aluminum¹
Henan
Zhongfu
Industrial¹
Hongqiao
Aluminum-Strip/Plate Capacity Expansions
CAPEX Budgets for Aluminum Strips and Plates
Hongqiao Yunnan
Aluminum¹
Nanshan
Aluminum¹
Henan
Zhongfu
Industrial¹
Unit: ‘000 tons
Unit: RMB MN
Unit CAPEX Budgets for Aluminum Strips and Plates
Yunnan
Aluminum¹
Henan
Zhongfu
Industrial¹
Nanshan
Aluminum¹
Hongqiao
Unit: RMB/ton
Note:
1. These are all aluminumpanies listed on the Shanghai or Shenzhen
Stock Exchanges.
Source:pany bond-issuance report (2012) and annual report
65
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
– Possibility of Tunneling
• Cash-Flow Analysis
As Gaoxin’s gross margin has recently climbed to the industry erage,
we believe there is currently little possibility of tunneling between
Gaoxin and Hongqiao
66
Electricity Cost and Sales Price
Unit: RMB/kWh
Gaoxin’s Gross Margin on Electricity¹
Industry
erage²
23%
1H 2014
21%
2013
16%
2012
5%
Unit: RMB/ton
Gaoxin’s Gross Margin on Alumina
1H 201420132012
1H 201420132012
Sales price to HongqiaoCost
Chalco
3%
1H 2014
11%
2013
8%
2012
2%
Notes:
1. As Gaoxin is controlled by Mr. Zhang
Shiping and located near Hongqiao, we
assume Gaoxin has the same cost
structure as Hongqiao.
2. This is the erage gross margin of the
nine listed thermoelectricity
manufacturers mentioned earlier.
• Tunneling is unlikely at the
moment.
− Electricity: Though Gaoxin’s
gross margin was very low in
previous years, it was nearing
the industry erage as of 1H
2014.
− Alumina:pared with Chalco,
Gaoxin is much more profitable
at present.
Source:pany information, BDA interviews and analysis
Alumina Cost and Sales Price
Ownership of Hongqiao Group
(11 September 2014)
Dividends Distributed by Hongqiao Group
(2011–2013)
Although Hongqiao has distributed significant dividends every year
since its IPO, most of them he returned to Mr. Zhang Shiping’s own
pocket due to his large stake in thepany
67
Institutions
Public and others
661,688,746
(11%)
5,000,000,000
(85%)
Zhang Shiping
223,311,254
(4%)
2012 20132011
22%
26%
22%
As a percentage of net ie Dividends
Unit: RMB MN
Source: Capital IQ,pany information
• As of September 2014, the controlling shareholder has not
reduced his stake in Hongqiao Group. Mr. Zhang Shiping and
his family he maintained an equity interest of around 85%
since thepany’s IPO.
68
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
• Cash-Flow Analysis
– Analysis of Hongqiao’s Cash Flows
69
12,931
6,362
-9,055
3,265
12,358
2014E
Cash flow from
operating
activities
Unit: RMB MN
10,827
17,650
19,221
-12,398
Hongqiao’s 2014 cash-flow situation is positive; in 2015, at
least RMB 5,753 MN in cash is needed to balance its cash flow
-15,251
-5,753
12,931
-11,839
8,406
14,000
2015F
Cash flow from
financing
activities
CAPEX
Cash and cash
equivalents as of
1 January
Cash and cash
equivalents as of
31 December
Hongqiao’s total credit line is RMB BN; therefore, its
remaining credit is enough to cover the RMB 5,753 MN cash-
flow gap
Cash from bank
borrowings
Repayment of
bank borrowings
Bank borrowings
as of 1 January
Bank borrowings
as of 31
December
Remaining credit
9,390
17,650
-8,260
0
22,260
2014E 2015FUnit: RMB MN
Summary: Hongqiao has a positive cash flow in 2014, and its
remaining credit in 2015 will be enough to cover its cash-flow gap;
therefore, cash flow should not be a big problem for thepany in the
short term
Hongqiao will he net operating cash flows of RMB 12,358 MN in
2014E and RMB 8,406 MN in 2015F (1/3)
70
6,869
-1,717
4,890
12,358
2,317
2014EItems
Profit before
tax (PBT)
Unit: RMB MN
Notes
Net Operating Cash Flow
Depreciation
on property,
plant, and
equipment
Increase in
inventories
Ie tax paid
Net
operating
cash flow
PBT in 1H
2014
• 2,824
PBT increase in 2H
2014pared with 1H 2014
• 1,220
PBT in 2014E
6,869
2
Unit 2H 2014 Source
PBT increase in 2H 2014pared with 1H 2014 [RMB MN] 1,220 Calculation
Contributed by price hike [RMB '000] 982,822 Calculation
Unit price hike (excluding VAT)1 [RMB/ton] 635 SCCE and BDA estimate
Sales volume2 [‘000 tons] 1,547 pany information and BDA estimate
Contributed by capacity expansion [RMB '000] 237,325 Calculation
erage price (excluding VAT)1 [RMB/ton] 11,866 SCCE and BDA estimate
Incremental sales volume3 [‘000 tons] 100 pany information and BDA estimate
PBT margin4 20% BDA estimate
Notes:
1. BDA uses the erage SCCE aluminum spot price from January–June 2014 as the sales price for 1H 2014. BDA
estimates that the future price will remain the same as the erage price in July–August 2014.
2. Based on Hongqiao’s historical sales performance, BDA estimates that the old capacity will contribute the same
sales volume in 2H 2014 as in 1H 2014.
3. Hongqiao plans to add another MN tons of aluminum capacity by the end of 2014. Since it will be some time
before all of the capacity is put into operation, BDA estimates that the actual increase in production volume will be
MN tons in 1H 2014.
4. BDA assumes that the unit cost of goods sold will remain the same in 2H 2014. The unit price hike will increase
gross margin by 4 pps, so we add 4 pps to 1H 2014’s PBT margin to find 2H 2014’s.
Source:pany information, SCCE, BDA channel check
Hongqiao will he net operating cash flows of RMB 12,358 MN in
2014E and RMB 8,406 MN in 2015F (2/3)
71
9,038
-2,260
-1,234
8,406
2,862
2015FItems
PBT
Unit: RMB MN
Notes
Net Operating Cash Flow
Depreciation
on property,
plant, and
equipment
Increase in
inventories
Ie tax paid
Net
operating
cash flow
PBT in 2014E
• 6,869
PBT increase in
2015Fpared with 2014E
• 2,169
PBT in 2015F
9,038
Unit 2015F Source
PBT increase in 2015Fpared with 2014E [RMB MN] 2,169 Calculation
Contributed by price hike [RMB '000] 982,822 Calculation
Unit price hike (excluding VAT)1 [RMB/ton] 635 SCCE and BDA estimate
Sales volume2 [‘000 tons] 1,547 pany information and BDA estimate
Contributed by capacity expansion [RMB '000] 1,186,625 Calculation
erage price (excluding VAT)1 [RMB/ton] 11,866 SCCE and BDA estimate
Incremental sales volume3 [‘000 tons] 500 pany information and BDA estimate
PBT margin4 20% BDA estimate
Notes:
1. BDA uses the erage SCCE aluminum spot price from January–June 2014 as the sales price for 1H 2014. BDA
estimates that the future price will remain the same as the erage price in July–August 2014.
2. BDA estimates that the sales price in 2015 will remain the same as in 2H 2014. We can consider this to constitute a
price hike of RMB 635/ton for the volume sold in 1H 2015 versus that sold in 1H 2014 but no price hike for the
volume sold in 2H 2015 versus that sold in 2H 2014. Since the hike again applies to only half of the year, the
volume to which the price hike is applied for 2015 is the same as for 2H 2014 (1,547,000 tons).
3. Hongqiao plans to add another MN tons of aluminum capacity in 2015. Since it will be some time before all of
the capacity is put into operation, BDA estimates that the actual increase in production volume will be MN tons
in 2015. The MN tons of capacity added in 2H 2014 should all be in operation as of 2015, so we add the MN
tons we left out in 2H 2014 as well, for a total of MN tons.
4. BDA assumes that the unit cost of goods sold will remain the same in 2015. The unit price hike will increase gross
margin by 4 pps, so we add 4 pps to 1H 2014’s PBT margin to find 2015’s.
Source:pany information, SCCE, BDA channel check
Hongqiao will he net operating cash flows of RMB 12,358 MN in
2014E and RMB 8,406 MN in 2015F (3/3)
72
12,358
-1,717
2,317
4,890
6,869
2014EItems
PBT
Unit: RMB MN
• In our channel check, we found that Hongqiao accumulated a large amount of inventory in
2013 in response to policy risk in Indonesia.
• Based on our channel check, we believe the inventory/capacity ratio will return to normal at the
end of 2014 or 2015.
Notes
Net Operating Cash Flows
Depreciation on
property, plant,
and equipment
Increase in
inventories
Ie tax paid
Net operating
cash flow
2015F
8,406
-2,260
2,862
-1,234
9,038
• Thanks to Hongqiao’s high capacity-utilization rate, its depreciation on property, plant, and
equipment is closely related to its capacity.
• Hongqiao’s ie tax rate is very stable at about 25%.
Unit 2012 2013 2014E 2015F Source
Inventory [RMB MN] 3,111 10,136 5,246 6,481
pany information and
calculation
Capacity [‘000 tons] 2,016 2,956 3,400 4,200
pany information and
interview
Inventory/Capacity BDA estimate
Unit: RMB MN
Unit 2012 2013 2014E 2015F Source
Depreciation on property,
plant, and equipment
[RMB MN] 1,340 2,063 2,317 2,862
pany information and
calculation
Capacity [‘000 tons] 2,016 2,956 3,400 4,200
pany information and
interview
Depreciation/Capacity Calculation
Source:pany information, BDA channel check
Hongqiao’s CAPEX will amount to RMB 9,055 MN in 2014 and RMB
11,839 MN in 2015
73
800
444
A
lu
m
in
um
Unit cost
7,822
2015F 7,822
2014E
Capacity expansion
1,000
1,000
A
lu
m
in
a
3,2852015F
3,2852014E
660
660E
le
ct
ri
ci
ty 2014E
2015F
Unit: RMB/ton of aluminum
Unit: RMB MN/MW of electricity
Unit: RMB/ton of alumina
Unit: ‘000 tons
Unit: MW
Unit: ‘000 tons
Cash outflow due to capacity expansions
3,285
3,473
2,297
Alumina
Electricity
2015F
9,055
6,258
Aluminum
11,839
3,285
+31%
2,297
2014E
• Hongqiao’s aluminum capacity will
reach MN tons in 2014 and MN
tons in 2015.
• Hongqiao is going to add MN tons
of alumina capacity each year in 2014–
2015. Thepany’s production capacity in
Indonesia will not need additional
CAPEX in the near future.
• Hongqiao plans to add 660 MW of
electricity capacity each year in 2014–
2015. Thepany will keep increasing its
electricity capacity until it is 100% self-
sufficient on electricity.
Unit: RMB MN
Source:pany information, BDA channel check
− 10 Apr 2012 • Convertible bond • 930 • % • To increase liquidity for capital
investment
− 10 Dec 2012 • Medium-term bond • 1,500 • % • To increase liquidity, repay debt, and
optimize debt structure
− 28 Jan 2013 • Medium-term bond • 1,500 • % • To increase liquidity
− 8 Apr 2013 • Weiqiao Alumina &
Power short-term bond
(phase 1)
• 1,000 • % • To increase cash flows for operating
activities
− 10 Apr 2013 • Weiqiao Alumina &
Power medium-term
bond (phase 1)
• 1,500 • % • To increase cash flows for operating
activities and debt repayment
− 27 Apr 2013 • Weiqiao Alumina &
Power short-term bond
(phase 2)
• 1,000 • % • To increase cash flows for operating
activities
− 9 May 2013 • Weiqiao Alumina &
Power medium-term
bond (phase 2)
• 1,500 • % • To increase cash flows for operating
activities and debt repayment
− 23 Jul 2013 • Short-term bond • 1,000 • % • To increase liquidity
− 25 Oct 2013 • Short-term bond • 1,000 • % • To increase liquidity
Hongqiao raised RMB 19,705 MN in cash by issuing bonds in 2012–
2014 (1/2)
74
2012
2013
Type
Issuance
value（RMB
MN） PurposeYield
Source:pany information
− 2 Feb 2014 • Hongqiao New Material
Co., Ltd. corporate bond
(phase 1)
• 1,200 • % • To raise funds for capital investment
and increase liquidity
− 1 Apr 2014 • Short-term bond • 1,000 • Unknown • To repay secured syndicated loans
− 9 Jun 2014 • Weiqiao Alumina &
Power short-term bond
• 1,000 • % • To increase cash flows for operating
activities
− 11 Jun 2014 • Weiqiao Alumina &
Power short-term bond
• 1,000 • % • To increase cash flows for operating
activities
− 20 Jun 2014 • Senior notes • 2,480 • % • To repay debt and increase liquidity
− 1 Aug 2014 • Hongqiao New Material
Co., Ltd. corporate bond
(phase 2)
• 1,100 • % • To raise funds for capital investment
and increase liquidity
− 1 Sep 2014 • Hongqiao short-term
bond
• 1,000 • Unknown • To increase cash flows for Weiqiao
Alumina & Power’s operating activities
Hongqiao raised RMB 19,705 MN in cash by issuing bonds in 2012–
2014 (2/2)
75
2014
Type
Issuance
value（RMB
MN） PurposeYield
Source:pany information
76
Hongqiao’s net cash from financing activities now stands at RMB
3,265 MN in 2014, but Hongqiao will repay RMB 15,251 MN in 2015
Cash outflows from financing activities
Bonds
Bank borrowings
Equity funding
Total cash inflows from financing activities
Cash inflows from financing activities
2015F
2014 8,760 • RMB 4,000 MN is in the form of
short-term bonds with repayment
periods of one year.
• RMB 10,827 MN of bank
borrowings were raised in 1H
2014, equal to nearly half of
thepany’s total bank borrowings
in 2013.
• Hongqiao issued RMB 1,337 MN
worth of shares in 1H 2014. Its
investor-relations manager said it
will not issue any more new
shares in the near future.
• Total cash inflows from financing
activities stand at RMB 20,925
MN.
Source:pany information, BDA channel check
Net cash flows
• 2014: RMB 3,265 MN
• 2015F: RMB -15,251 MN
2015F 5,500
2014 4,000 • RMB 4,000 MN worth of bonds
should be repaid in 2014 and
RMB 5,500 MN in 2015.
2015F
1H 2014 10,827
8,260
1H 2014 12,398
2015F
• Hongqiao repaid RMB 12,398 MN
worth of bank borrowings in 1H
2014, which dramatically
decreased its overall bank
borrowings.
2015F
1H 2014 1,337
2015F 1,491
2014 1,261
• Thepany’s dividend rate is quite
stable at about 22%.
2015F
2014 20,925
2015F 15,251
2014 17,659 • Total cash outflows from
financing activities amount to
RMB 17,659 MN in 2014 and
RMB 15,251 MN in 2015.
N/A
N/A
N/A
Bank borrowings
Dividends
Bonds
N/A
Total cash outflows from financing activities
Unit: RMB MN
Hongqiao has a positive cash flow in 2014; in 2015, its cash needs
will amount to RMB 5,753 MN, which should not be a big problem as
thepany will he RMB 22,260 MN of credit remaining
77
Hongqiao’s cash-flow gap in 2015 will be RMB 5,893
MN…
…which it could easily raise via bank borrowings or
bonds as it will he RMB 22,260 MN of credit left
Unit: RMB MN 2014E 2015F
Cash flow from operating activities 12,358 8,406
Cash flow from financing activities 3,265 -15,251
CAPEX -9,055 -11,839
Net cash flow 6,569 -18,684
Cash and cash equivalents as of 1 Jan 6,362 12,931
Cash and cash equivalents as of 31 Dec 12,931 -5,753
Unit: RMB MN 1H 2014 2015F
Cash from bank borrowings 10,827 0
Repayment of bank borrowings 12,398 8,260
Net cash flow -1,571 -8,260
Bank borrowings as of 1 Jan 19,221 17,650
Bank borrowings as of 31 Dec 17,650 9,390
Remaining credit 14,000 22,260
“Since aluminum prices are rising, Hongqiao is not under
much pressure with respect to cash flows.”
- Industry expert
“Hongqiao’s cash flow decreased in 2013, mainly because
it bought so much bauxite that year. Hongqiao’s inventory
keeps decreasing, which will he a positive influence on
thepany’s cash-flow situation.”
- Industry expert
Source:pany information, BDA interviews
“The total credit line for Hongqiao is RMB
BN, of which RMB BN has been used. Generally
speaking, Hongqiao has a very strong debt-paying
ability.”
- Credit report for Hongqiao corporate bond (phase 2)
“Since we repaid about RMB 10 BN worth of bank
borrowings in 1H 2014, we now he a credit line of around
RMB 10 BN to use in the future.”
- Investor-relations manager at China Hongqiao
78
Table of Contents
• Executive Summary
• China’s Aluminum Industry
• Verification of Hongqiao’s Production Capacity
• Verification of Hongqiao’s Gross Margin
• CAPEX Analysis and Possibility of Tunneling
• Cash-Flow Analysis
– Analysis of Gaoxin A&P’s Cash Flows
Unit 2011 2012 2013 Source
Revenue from selling
alumina to Hongqiao
[RMB MN] 5,697 3,621 3,253 Calculation
Price (excluding VAT) [RMB/ton] 1,874 1,829 1,880 pany information
Volume [MN tons] pany information
Cost of goods sold of
alumina
[RMB MN] 5,451 3,550 2,987 Calculation
Unit cost [RMB/ton] 1,793 1,793 1,726 Most-likely case
Sales volume [MN tons] pany information
Gross profit [RMB MN] 246 70 266 Calculation
Revenue from selling
electricity to Hongqiao
[RMB MN] 3,516 3,005 3,239 Calculation
Price (excluding VAT) [RMB/kWh] pany information
Volume [MN kWh] 12,082 10,325 11,130 pany information
Cost of goods sold of
electricity
[RMB MN] 3,338 2,853 2,718 Calculation
Unit cost [RMB/kWh] Most-likely case
Sales volume [MN kWh] 12,082 10,325 11,130 pany information
Gross profit [RMB MN] 178 152 520 Calculation
Gaoxin A&P’s cumulative gross profit from sales of alumina and
electricity to Hongqiao in the past three years is around RMB
BN…
79
Electricity
Alumina
2013
787
520
266
2012
222
152
70
2011
423
178
246
Gaoxin's Gross Profits from Selling
Alumina and Electricity to Hongqiao
Source:pany information, BDA analysis
Unit: RMB MN
…and the sales volume has showed a declining trend, which could
indicate that Gaoxin A&P has not expanded its electricity capacity;
therefore, BDA thinks it is highly possible that Gaoxin’s cash flow is
in a healthy condition
80
%
2012 20132011
11,130
20132012
10,325
2011
12,082
%
Source:pany information
Unit: MN tons Unit: MN KW
Volume of Alumina Sold by Gaoxin to Hongqiao Volume of Electricity Sold by Gaoxin to Hongqiao
