Macquarie has initiated coverage on China Hongqiao (01378) with an Outperform rating and a 12-month target price of HK$29, implying approximately 37.7% upside from the September 29 closing price of HK$21.06, equating to a 12-month total shareholder return of about 49.1% including dividends, according to a research report.

The broker believes China Hongqiao has transformed from a cyclical electrolytic aluminum smelter into a global aluminum leader underpinned by four pillars: resource security, cost advantages, green energy transition, and high shareholder returns. After a recent share price pullback, the company trades at attractive valuations with an appealing dividend yield, and the re-rating story remains ongoing.

Capacity ceiling combined with new demand drivers pushes aluminum price center structurally higher

Macquarie notes that the 45 million ton electrolytic aluminum capacity ceiling established by the 2018 capacity replacement mechanism has evolved from policy text into a physical constraint. As of the end of 2025, industry built capacity reached 44.83 million tons with a utilization rate as high as 98.5%, leaving virtually no supply elasticity, and compliant capacity itself has become a scarce asset.

On the demand side, new energy vehicles, solar power, power grids, and power electronics have replaced real estate as the marginal driver. Aluminum usage per battery electric vehicle reaches 226.8 kilograms, about 26% higher than internal combustion engine vehicles, and is projected to rise to 283.5 kilograms by 2030. State Grid's 14th Five-Year Plan includes 24 ultra-high-voltage AC and 14 DC projects with total investment of 380 billion yuan, providing high visibility for power-sector aluminum demand over the next two to three years. The broker estimates that the domestic aluminum market will remain in deficit from 2026 to 2028.

Integrated cost moat that endures through cycles

China Hongqiao operates one of the industry's most complete value chains: Guinea bauxite, which accounted for 75.3% of ore consumption in the first half, alumina, self-owned power plants, 6.46 million tons of compliant electrolytic aluminum capacity representing about 14.5% of the national total and ranking second in the industry, and downstream processing. Alumina self-sufficiency exceeds 100%, with a theoretical rate as high as 171%, turning this key raw material from a cost item into a profit center. In 2025, external alumina sales reached 13.4 million tons, contributing revenue of 38.83 billion yuan with a gross profit of 643 yuan per ton. Shandong self-owned power and Yunnan hydropower form a dual power platform, with Yunnan's dry-season electricity price at 0.42 to 0.43 yuan per kilowatt-hour and wet-season price as low as 0.32 to 0.35 yuan per kilowatt-hour, effectively smoothing the cost curve. In 2025, the company's electrolytic aluminum gross profit reached 5,183 yuan per ton. Macquarie estimates that every 1,000 yuan per ton increase in aluminum prices boosts net profit by approximately 3.8 billion yuan.

High earnings and shareholder returns

The broker expects adjusted net profit to rise from 22.6 billion yuan in 2025 to 33.2 billion yuan in 2026, then 31.2 billion yuan and 29.8 billion yuan in 2027 and 2028 respectively. On the balance sheet, in November 2025 the company placed 400 million shares at HK$29.20, raising approximately HK$11.49 billion net in its largest refinancing since listing, reducing the debt-to-asset ratio to 42.2% and net debt to 19.9 billion yuan. Shareholder returns continue to increase: the full-year payout ratio in 2025 reached 65.4%, with dividends plus buybacks accounting for 88% of net profit attributable to shareholders. The company initiated buybacks for the first time in 2025, canceling 306 million shares at a cost of HK$5.58 billion, and buyback volume in the first half of 2026 has already approached the full-year level of last year. Management guides annual dividends plus buybacks of approximately HK$20 billion over the next one to two years. Based on the broker's forecasts, the 2026 dividend yield reaches as high as 11.4%.

Macquarie's target price is based on 4.7 times 2027 forecast EV/EBITDA, slightly above the company's historical average and in line with the average for Chinese aluminum companies listed in Hong Kong. Currently, China Hongqiao shares trade at just 3.6 times 2027 EV/EBITDA and 5.5 times 2027 price-to-earnings ratio.