Hongqiao Gets to Top of the World and Sinks Most Since IPO

  • China's biggest aluminum producer becomes world's No. 1
  • Shares slump 25 percent in two days to lowest since 2012

China Hongqiao Group Ltd. just discovered that becoming the biggest can be punishing.

Hongqiao leapfrogged United Rusal Co. and Rio Tinto Plc to become the world’s biggest aluminum producer in the first half, lifting net income by about a third. Investors rewarded it with the steepest slump in its shares since going public in Hong Kong in 2011.

Chief Executive Officer Zhang Bo is embarking on an expansion spree as a deepening economic slowdown in China, the world’s biggest metal consumer, sends prices to a six-year low. Zhang spent more on new smelters in the first six months than what analysts surveyed by Bloomberg had expected for the full year.

“The company wanted to seize the opportunity of low prices to take market share,” Kevin Guo, an analyst at Guotai Junan International Holdings, said by phone from Shenzhen. “But aluminum prices are still going down and many investors are not positive about the development of the industry.”

Hongqiao plunged 20 percent in Hong Kong trading on Monday, and another 8.4 percent to close Tuesday at HK$3.40. The stock has lost 35 percent in the year to date and is trading at its lowest since October 2012.

Aluminum Rebound

Aluminum prices will rebound in the second half of September as the Chinese government bolsters support for the economy, Zhang told reporters Monday, while explaining the company’s strategy to gain market share as low prices force competitors to reduce output.

“We also took advantage of lower raw material prices in the first half to ramp up production,” Zhang said.

The company produced about 2.1 million metric tons of aluminum in the first six months, ahead of Russian firm Rusal, which was the world’s biggest producer last year.

Hongqiao’s net income jumped to 2.7 billion yuan ($423 million) for the six months ended June, from 2 billion yuan a year earlier. Earnings will remain the same in the second half should aluminum prices remain around 12,000 yuan a ton, Zhang said.

Cash Flow

“We expect the company’s cash flow leverage to deteriorate over the next 12-18 months,” analysts Jian Cheng and Apple Lo from Standard & Poor’s Rating Services said in a note after lowering their rating of Hongqiao’s long-term corporate credit. Hongqiao’s construction of captive power plants and an alumina refinery in Indonesia could “mitigate the negative impact from sliding aluminum prices to some degree,” they said.

Aluminum on the Shanghai Futures Exchange fell 0.6 percent on Tuesday to 11,825 yuan a ton. Prices dropped to their six-year low last week amid speculation that an expanding glut and weak demand will weigh on the Chinese market.

Hongqiao is among Chinese aluminum companies adding new plants this year as lower raw material and other input costs help them compete against higher-cost producers. The country will add about 3.9 million tons of annual production capacity in 2015, according to Bloomberg Intelligence.

The increase in supply while Chinese demand declines has fueled a surge in Chinese exports to record levels, helped to push global prices downwards this year and prompted complaints from global producers including Alcoa Inc., the biggest in the U.S..

“What’s important is that the laws of economics are valid all over the world,” Eivind Kallevik, chief financial officer of Europe’s third-largest aluminum producer Norsk Hydro ASA, said in an interview on August 29. “So that production that’s not economical will be removed over time and that viable producers from a cost perspective will produce over time. That’s valid in China and in the rest of the world.”

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