Deutsche Bank gives China Hongqiao (01378) a “buy”: the inflection point of free cash flow is approaching, and it is expected that the cumulative return over the next five years will exceed the current market value by 60% through dividends and stock repurchases

The Zhitong Finance App learned that Deutsche Bank recently released a research report to resume research covering China Hongqiao (01378), one of the world's largest aluminum groups, and gave it a “buy” rating, with a target price of HK$33. The report points out that although the company's stock price has been dragged down by sentiment in the Asian aluminum sector since this year, fundamentals are facing a significant inflection point in free cash flow (FCF), and the current valuation is already very attractive.

According to Deutsche Bank's analysis, after 20 years of rapid expansion, China's Hongqiao has now entered a mature stage of operation — the strategic focus is shifting to maximizing cash generation, maintaining stable aluminum output, and gradually moving production capacity to Yunnan to use renewable energy for electricity. The company expects EV/EBITDA of only 3.8 times in 2027, with a return on free cash flow of 16%. What is more noteworthy is that in the next five years, the company is expected to return cash equivalent to more than 60% of the current market value through dividends and share repurchases. As the balance sheet strengthens and cash returns continue to grow, China's Hongqiao is expected to attract a wider global investor base.

The report also pointed out that the Middle East conflict drove LME spot aluminum prices to peak at about 3,850 US dollars/ton in early June, and spot prices also rose sharply; however, with the initial cease-fire between the US and Iran, prices have fallen back to pre-war levels (currently about 3,200 US dollars/ton), reflecting factors such as the closing of positions in the Gulf region faster than expected, and strong production in China. Deutsche Bank still expects a market shortage in the second half of 2026, and aluminum prices are expected to rebound moderately to about 3,300 US dollars/ton in the fourth quarter; if geographical tension in the Middle East escalates again, there is an upward risk. At the same time, China's production capacity ceiling of about 45 million tons/year is expected to be maintained, but in the second half of the year, we need to pay close attention to domestic production capacity trends and supply progress in the Gulf and Indonesia.