Core Viewpoint - The investment by Zhongfu Industrial in the aluminum alloy wheel project highlights the growing demand for lightweight materials in the electric vehicle market, despite the financial challenges faced by its subsidiary [1][2][5]. Investment Details - Zhongfu Industrial's wholly-owned subsidiary, Guangyuan Linfeng Aluminum Materials, plans to invest CNY 259 million to construct a project for producing 3 million aluminum wheels [1][3]. - The project will be executed in two phases: the first phase involves producing 2 million wheels with an investment of CNY 94.6 million, while the second phase will produce 1 million wheels with an investment of CNY 47.4 million [3]. - Upon full production, the project is expected to generate an annual sales revenue of CNY 1.182 billion (approximately CNY 1.046 billion excluding tax) and a profit of CNY 30.46 million [3]. Financial Performance - Zhongfu Industrial reported a 63.25% increase in net profit for the first three quarters of 2025, driven by improved profitability in its electrolytic aluminum business [2][6]. - Despite the profit increase, the company's cash flow from operating activities significantly declined by 59.69% to CNY 314 million, raising concerns about cash flow management amid large capital expenditures [6][7]. Market Context - The aluminum alloy wheel market is characterized by high order concentration and intense price competition, posing risks to the new investment project [2][6]. - The project aligns with Zhongfu Industrial's strategy to enhance its competitive edge in the aluminum wheel sector by leveraging its existing industrial synergies [4]. Subsidiary Challenges - Guangyuan Linfeng Aluminum Materials has faced continuous losses, with a net loss of CNY 9.67 million reported for 2024 and further losses in 2025 [5]. - The reliance on self-raised funds for the CNY 259 million investment raises concerns about the subsidiary's financial sustainability and ability to manage its cash flow effectively [5][6].

Core Viewpoint - The increasing penetration of electric vehicles is driving demand for aluminum alloy wheels, prompting companies to invest in production capacity, as exemplified by Zhongfu Industrial's recent announcement of a 259 million yuan investment in a new project for producing 3 million wheels [2][3]. Investment Details - Zhongfu Industrial's wholly-owned subsidiary, Guangyuan Linfeng Aluminum Materials, plans to invest 259 million yuan in the "Aluminum-based New Materials Green Intelligent Manufacturing 3 Million Wheel Collaborative Upgrade Project" located in Guangyuan Economic and Technological Development Zone, Sichuan Province [3]. - The total investment includes 142 million yuan for new construction and 117 million yuan for working capital, all funded through self-raised capital [3]. - The project will be executed in two phases: the first phase involves producing 2 million wheels with a construction period of 14 months, while the second phase will produce 1 million wheels over 12 months [3]. Financial Projections - Upon reaching full production, the project is expected to generate an additional annual sales revenue of 1.182 billion yuan (approximately 1.046 billion yuan excluding tax) and a total profit of 30.46 million yuan [4]. - The internal rate of return after tax is projected at 10.8%, with a payback period of about 10 years [4]. - The investment is seen as a strategic move to enhance the company's competitive edge in the aluminum alloy wheel market by leveraging industry synergies [4]. Company Performance - Zhongfu Industrial reported a significant increase in net profit by 63.25% year-on-year for the first three quarters of 2025, reaching 1.187 billion yuan, primarily driven by improved profitability in the electrolytic aluminum business [6]. - However, the company's net cash flow from operating activities decreased by 59.69% to 314 million yuan, raising concerns about cash flow management amid substantial capital expenditures [6]. Industry Context - The aluminum alloy wheel market is characterized by high order concentration and intense price competition, which poses risks to the new investment project [5]. - The company has established a "green hydropower aluminum" industrial layout in Guangyuan, utilizing sustainable energy sources to reduce carbon emissions [4].

Investment Rating - The investment rating for the company is "Outperform the Market" [2][4][22]. Core Views - The company reported a year-on-year net profit growth of 10% in the first half of 2025, with a net profit of 2.77 billion yuan, reflecting a 9.9% increase. The operating cash flow reached 3.72 billion yuan, up 35.5% year-on-year [1][5]. - The company has maintained full production capacity for four consecutive quarters, with an estimated aluminum output of approximately 1.57 million tons in the first half of 2025 [1][5]. - The company announced a mid-year dividend plan, distributing 3.2 yuan per 10 shares, totaling 1.11 billion yuan, which accounts for 40% of the net profit for the first half of the year [1][5]. Financial Performance - As of June 2025, the company has zero short-term loans and long-term loans of less than 500 million yuan, resulting in a debt-to-asset ratio of 21.9% [2][18]. - The company’s financial expenses have significantly decreased, with a financial cost of -8 million yuan in the first half of 2025, compared to 800-1,000 million yuan annually before 2020 [2][18]. - The projected net profits for 2025-2027 are 6.889 billion, 7.165 billion, and 7.169 billion yuan, with corresponding growth rates of 56.2%, 4.0%, and 0.1% respectively [2][22]. Production and Capacity - The company has an electrolytic aluminum capacity of 3.08 million tons, and the production of alumina and carbon products has met annual plans [1][5]. - The company benefits from a high proportion of green electricity in its production, exceeding 80%, which significantly reduces carbon emissions compared to coal-powered aluminum production [20][21]. Market Outlook - The company is positioned as a leading green hydropower aluminum supplier in China, benefiting from improved aluminum smelting dynamics and strong cash flow due to full production capacity [2][22]. - The sensitivity analysis indicates that for every 1,000 yuan increase in aluminum prices, the company's net profit increases by nearly 200 million yuan [21][23].

Investment Rating - The report assigns an "Accumulate" rating for the company with a target price of 5.2 CNY, based on a current price of 4.49 CNY [6]. Core Views - The company is positioned as a strong player in the electrolytic aluminum sector, with high profitability elasticity and increased shareholder returns expected to lead to a revaluation of its value [2]. - The company has successfully transitioned from a restructuring phase to a growth phase, significantly improving its operational status and financial health [1][14]. Summary by Sections Company Overview - The company, established in 1993, has developed a synergistic operating model focusing on aluminum and deep processing, supported by coal mining, thermal power generation, and carbon products [1]. - The current production capacity includes 690,000 tons of deep-processed aluminum, 750,000 tons of electrolytic aluminum, 150,000 tons of carbon products, and 90,000 kW of electricity [1]. Financial Performance - The company has shown a significant recovery post-restructuring, with a projected net profit of 1.83 billion CNY in 2025, reflecting a year-on-year increase of 159.7% [4]. - Revenue is expected to grow from 227.61 billion CNY in 2024 to 235.40 billion CNY in 2025, with a growth rate of 3.42% [5]. Industry Analysis - The electrolytic aluminum industry is experiencing a tightening supply-demand dynamic, with domestic production capacity nearing its ceiling at approximately 45 million tons [3]. - Demand for electrolytic aluminum is primarily driven by sectors such as construction, transportation, and renewable energy, with significant growth expected from photovoltaic and new energy vehicles [3]. Profitability and Cost Structure - The company has enhanced its electrolytic aluminum capacity to 750,000 tons per year, benefiting from cost reductions in alumina and electricity, which are expected to improve profit margins in 2025 [2][4]. - The average electricity price in the Guangyuan region is projected to decrease significantly in 2025, further enhancing profitability [2]. Shareholder Returns - The company has initiated a robust employee stock ownership plan, aiming to raise up to 1.25 billion CNY, and has committed to distributing at least 60% of its distributable profits as dividends over the next three years [2][25].