Despite surging commodity prices and a weak dollar shares of China's largest aluminum and alumina maker, Aluminium Corp. of China or CHALCO, are down 16.57% year-to-date (YTD). The question is: what's wrong with Chalco?
Chinavestor asked different sources to find some clues. Here is Chalco's first quarter performance from a fundamental analyst's point of view.
Financial performance of Chalco
The revenue of Chalco in 2007 presents a growth of 23.08% from $61,896m to $76,168m, whereas the Total Operating expense has increased at a higher rate of 37.71%. The aggregate effects brought the Net Income down to $9,900m with a 15.58% decline. According to the MD&A in 2007 annual report, such increase of cost of sales was “mainly attributable to the growth in external sales volume of products and the increase in unit cost of sales of alumina”.
Regarding to the other expenses, Selling & Distribution expense has increased by $159m or 15.47% from $1,028m in 2006 to $1,187 million in 2007. This was primarily “attributable to the increase in the fees of transportation, loading/unloading and packaging resulted from the growth in sales volume of products”, explained in MD&A.
Roughly saying, Chalco was not very successful for controlling the increase of operating expenses along with the increased sales, which is reflected by the much operating expense incurred for a unit of sale in 2007.
To compare, the profitability of Chalco is far beyond the industry and sector averages, in terms of Gross Margin, Operating Margin, Net Profit Margin, ROE, ROA (www.reuters.com)
Financial position
At the first glance, the balance sheet of Chalco is healthy. The company does not currently hold much liabilities to finance its assets, both in terms of current and Non-current. The current ratio is 1.39, which represents a reasonable good liquidity. The LT debt to Equity and Total debt to Equity is 24.45% and 38.88% respectively, which indicates a reasonable good long-term solvency, compared with the industrial benchmark of 38.78% and 54.38% respectively.
However, it is notable that Cash has decreased significantly by almost 40%, which cause an unfavorable result in the quick ratio test—0.68 which is less than the benchmark of 0.73. At meantime, the Receivables have increased by roughly 30%. It is probably reasonable to conclude that Chalco might have experienced some collection problems in its working capital accounts during last 12 mouths.
Price of aluminum
Source: LME
This year, the Aluminum price in LME (cash buyer) has soared from monthly average $2444.64 in Jan to the peak of average $3004 in March, and slightly declined to $2958.26 in April.
Recently, the world’s biggest miner BHP Billiton is seeking the acquisition of its rivalry—Rio Tinto. The Chinalco—the parent of Chalco, who has bought 9% stake in Rio Tinto in Feb with Alcoa to try to prevent the merge, because of the concern on the new venture’s superior pricing power on the raw materials of primary aluminum production
However, from the latest sources, it is speculated that Chinalco has probably given up the prevention, but turned to alternative strategy—to “grab another piece of them” from the BHP’ acquisition over Rio. Afterwards, the “rumors” arose--Chinalco has teamed up with an Australian fund and an unnamed private-equity investor to acquire a 10% stake of BHP, so as to benefits from the potential merger, rather than detriment. The formal proposal of the take-over will be lodged in June to European regulators. If the merge is approved, we can reasonably expect the price of aluminum will increase because of the increased input price, which is dominated by BHP-Rio. As the result, the profitability of Chalco will be affected by rising costs. If Chalco gains a share of the take-over, the worries over the increase of aluminum price may be mitigated.
Capacity
On May 15, Chalco confirmed its take over of 6 production units of its parent. It is expected that the production capacity will increase significantly in the future. Consequently, because of the resultant economy of scale, Chalco may benefit substantially from the decreased average cost of production and obtain more market power.