Summary
From the annual income statement, Chalco achieved major improvement in revenue, increasing from 37,826.5 million RMB in 2005 to 76,180.4 million in 2007. This significant increase was mainly due to its several acquisitions during 2006 and increasing global commodity price. The acquisitions increased the production capacity dramatically.
Total revenue had increased 17.5% from 2006 to 2007. However, as the continuing strong demand from Asian countries especially from China had been pushing the sales price up, the global oil price had increased as well to push up the cost of the industry. Specifically, Chalco’s cost of revenue went up from 43,930.7 million in 2006 to 57,197.5 million in 2007, representing a 30% jump. The significant increase in cost resulted in the net income had dropped 15.6% from 11,726.5 million to 9,899.6 million. In addition, gross profit margin dropping from 32.2% in 2006 to 24.9% in 2007. Also, operating profit margin and net profit margin decreased 7.68% and 5.09% respectively during the period from 2006 to 2007.
Towards the first quarter of 2008, Chalco achieved 15,227.5million total revenue from operations while incurred a cost of operations of 13,387.7million. Net profit was 1,313.5 million, indicating a 41.8% decrease compared with net profit from the third quarterly report in 2007. Operating profit margin dropped from 17.7% to 12.5% and net profit margin dropped from 12.6% to 8.6% respectively.
On the other hand, from the annual balance sheet, Chalco had improved its current ratio from 1.14 to 1.39 during the period from 2006 to 2007, but still less than the industry average of 1.43. Regarding the profitability, the EPS had decreased from 1.03 to 0.79 as the common shares outstanding increased from 11,649.88 million to 13,524.48 million, but the drop of EPS was driven by the significant slump of net profit as well.
In 2008, Chalco continued its M&A strategy to increase its capacity further. In May, the company had taken over six units of plants belonged to its state-owned parental company worth 4.17 billion RMB. In detail, Chalco bought 56.86% of Huaxi Aluminum, 75% of Chinalco Ruimin, 60% of Chinalco SW Aluminum, 100% of CSWA Cold Rolling Co Ltd and 84.02% of Henan Aluminum. In addition, its purchase of 100% of Liancheng Longxing Aluminum could add more than 300,000 tonnes to its current annual primary aluminum capacity.
The Chinese domestic demand is still strong currently. The blizzard disaster in Jan and earthquake in May, although a lot of people suffered, are likely to push the demand further high as the rebuilt home programs begin. Chalco’s acquisition strategy could provide extra capacity to meet the increasing demand and in the meantime reduce the competition of the industry. However, the global oil price is continuing hitting new high, which could increase the cost of production significantly. On the other hand, since March 2008, the aluminum spot price decreased to nearly US$1.315/lb. the falling price is likely to affect Chalco’s PAL (primary aluminum segment) production and sales profit.
Chart from www.kitcometals.com
The price of spot alumina declined near 21% up till March this year, causing mounting pressure on Chalco, the world’s third-largest producer of alumina, to reduce its spot price which is 18% higher than its Chinese competitors. And unsurprisingly, Chalco slashed its spot alumina price by 16.7% in June 2008, which is likely to cause slump in profit of Chalco’s main revenue force—alumina segment.
From this point, whether the strong demand in China could offset the weakening alumina and aluminum prices is still unknown, but it is expected Chalco’s profit will be significantly affected by the weakening prices and Chalco’s profit margin will continue to be squeezed due to higher operating production cost.