Damavac Q4 traditional Chinese materials: copper-gold coking coal leads China's Hongqiao (01378) target price to HK$29.7

The Zhitong Finance App learned that Morgan Stanley recently released a report on the traditional Chinese materials industry, focusing on the sector's fourth quarter outlook. It mainly recommends copper, gold, and coking coal, and gives separate industry judgments on aluminum, thermal coal, and steel. The bank covered the ratings and target prices of multiple stocks. Among them, the target price of China Hongqiao (01378) was raised from 28.60 HKD to 29.70 HKD, and the rating was “increased”.

Damo pointed out in the report that the copper sector has solid fundamentals and is the preferred target. After the recent stock price correction, the bank believes that Chinese copper companies' stocks have ushered in a buying opportunity. In particular, the fundamentals of commodities themselves are showing strong performance. The fundamentals of this sector continue to improve, and global copper supply continues to fall short of market expectations.

China's domestic spot supply also remained tight. Copper stocks on the Shanghai Futures Exchange (SHFE) fell back to about 55,000 tons in mid-September, the lowest level since January 2024.

Meanwhile, grid investment, electrification transformation, and global artificial intelligence/data center construction continue to drive demand. The bank preferred Zijin Mining, Luoyang Molybdenum Industry (CMOC), and Minmetals Resources Co., Ltd. (MMG).

The bank believes that gold is attractive in terms of risk and return, and that it is suitable for a low time layout. Affected by the US interest rate hike and the strengthening of the US dollar, there has been a recent correction in gold prices, creating an attractive time to enter the market.

With the support of central banks continuing to diversify foreign exchange reserves, the bank expects a gradual recovery in gold prices — the Central Bank of China has been increasing its gold holdings for 20 consecutive months. The bank chose Zijin Mining and Zijin Gold International.

The bank mentioned that the new supply of aluminum was postponed, delaying the arrival of the oversupply. The bank's recent channel research shows that projects outside of China face two major obstacles to implementation — a shortage of self-owned electricity and stricter regulatory scrutiny of China's outward direct investment (ODI).

Although these impediments will not eliminate the 2027-2028 supply release wave, they will delay its arrival, making the short-term supply situation more tight than previously anticipated by the market.

The bank believes that thermal coal prices will be supported in the short term. In the context of continuous safety inspections and the shutdown of coal mines, supply was tightened. Domestic thermal coal spot prices rose by RMB 110 per ton in September, reaching 991 yuan/ton at the end of the month. In mid-September, the National Development and Reform Commission, the National Energy Administration, and the State Mine Safety Supervision Administration jointly issued guidance to promote the resumption of work in discontinued coal mines and ensure a stable supply of coal.

Although the resumption of coal mine work will bring about an increase in production, the bank believes that thermal coal prices will still receive short-term support. The driving factors include three factors: 1) the resumption process is gradual, and production safety is still the primary consideration; 2) the Daqin Railway plans to carry out maintenance, and coal traffic to the port will decline; 3) the winter heating season is approaching, and power plants need to be stocked and stocked.

Furthermore, the bank believes that demand will weaken as steel costs rise. Higher coking coal/coke prices have raised production costs, but weak demand has limited room for steel prices to rise, and steel companies' profit margins have turned negative. Continued losses may force further production cuts, thus providing some short-term support for steel prices.

The new real estate pre-sale policy increases developers' funding requirements, further suppresses land purchases and new project development, and further worsens demand prospects. The bank expects the new real estate construction area to drop by about 20-22% in 2027-2028, which means demand for construction steel will continue to weaken.

Assuming commodity prices, the agency raised medium- to long-term price expectations for copper, gold, and thermal coal. The gold price and thermal coal forecasts were higher than the market's agreed expectations, and the lithium and cobalt price expectations were lower than the market average.

At the individual stock level, the report gave many leading copper-aluminum coal companies overallocation (OW). Most of the gold targets were standard (EW), and there were differences in the valuation of A-H shares, such as overallocation of H shares and standard A shares of China Coal Energy.

The bank combines commodity price predictions and changes in the supply and demand pattern to give individual stock ratings and risk-return judgments. The report mentioned that China Hongqiao raised the target price of the stock from 28.60 HKD to 29.70 HKD, and maintained “increased holdings” in the rating. The net profit for the full year of '26 is expected to be about 33.093 billion yuan.

Damo pointed out that China's Hongqiao has multiple core benefits: China's maximum production capacity of 45 million tons of electrolytic aluminum forms a hard constraint on domestic supply, compounding potential supply disruptions in the southwest region, and the overall supply side of the industry is tight. China's Hongqiao has benefited from the relocation of production capacity, and electricity prices and coal costs have been optimized, effectively boosting corporate profit margins.

At the same time, the company opened up an integrated layout of the entire industry chain from upstream raw materials to downstream deep processing, and consolidated the basic profit market. Despite a certain increase in the stock price in the previous period, the company's current valuation still has allocation value, and dividend returns are also very attractive.

When evaluating Hongqiao's long-term profit, the bank estimated using 11.2% equity cost (reference: beta coefficient 1.18, risk-free interest rate 2.3%, equity risk premium 7.5%) and assumed a revenue growth rate of 2% during the maturity period of the company.