Summary of Shenhuo Co., Ltd. Conference Call Company Overview - Shenhuo Co., Ltd. operates primarily in the coal and electrolytic aluminum sectors, having transitioned from a pure coal company to include aluminum production since around 2010 [3][6]. Key Business Segments 1. **Electrolytic Aluminum** - Benefiting from low electricity costs in Xinjiang and hydropower resources in Yunnan, with capacities of 800,000 tons and 900,000 tons respectively [2][3]. - Profitability is at historical highs, with Xinjiang's net profit per ton nearing 3,000 RMB and Yunnan's around 2,000 RMB in the first half of 2025 [2][14]. - The industry is shifting from cyclical to dividend stocks, with expectations of stable profits and increased dividend payouts [2][20]. 2. **Coal Business** - Focused on smokeless coal in Henan, with a production capacity of approximately 7.2 million tons [2][15]. - Benefiting from a rebound in coking coal prices, maintaining profitability in 2025 [2][17]. - Plans to expand coal-electricity integration projects, which could significantly enhance profitability if the coal market remains bullish [2][15]. 3. **Aluminum Foil** - Facing challenges due to overcapacity, leading to average profitability [2][18]. - The company is cautious about expanding its aluminum foil project in Yunnan [2][18]. Financial Performance - The company achieved an annualized profit of approximately 5 billion RMB in the first half of 2025, with expectations to reach 6 billion RMB in 2026 [2][24]. - The 2022 peak profit was over 7 billion RMB, with significant contributions from both coal and electrolytic aluminum sectors [8][24]. - The potential for increased dividends to 50% could elevate the company's market value to between 50 billion and 60 billion RMB [4][24]. Market Dynamics - The electrolytic aluminum sector is experiencing a transition in valuation logic from PE to dividend yield, driven by reduced capital expenditures and stable cash flows [21]. - The market is increasingly recognizing the value of companies with high dividend payouts, as seen with peers like Zhongfu and China Hongqiao [21][23]. Geographical Advantages - Xinjiang's proximity to major coal sources and efficient transportation enhances coal supply [4][5]. - Yunnan's abundant hydropower resources provide a competitive edge for green aluminum production [4][9]. Future Outlook - The electrolytic aluminum sector is expected to continue its positive trajectory, with a focus on dividend yield rather than just price fluctuations [20]. - Shenhuo's strategic positioning and operational efficiencies suggest significant growth potential and investment attractiveness [24][25]. Additional Insights - The company is actively managing its supply chain, particularly in terms of self-sufficiency in anodes, which is expected to stabilize operations [12]. - The impact of alumina price fluctuations is significant, with expectations of recovery in 2025 as prices decrease from over 5,000 RMB to around 3,000 RMB [13]. This comprehensive overview highlights Shenhuo Co., Ltd.'s strategic positioning, financial performance, and market dynamics, indicating a favorable investment opportunity in the current landscape.

Investment Highlights - The company is rated as outperforming the industry with a target price of 6.85 CNY for A-shares and 5.61 HKD for H-shares, based on dividend yield valuation methods, corresponding to 4.5%/4.7% dividend yields for 2025/2026 for A-shares and 6.0%/6.4% for H-shares [1] - The company possesses core road assets in the Chengdu-Chongqing region, with strong profitability, backed by the Shudao Group, managing approximately 900 kilometers of road assets, primarily connecting Chengdu with major cities in Sichuan and serving as significant transit routes to other provinces [1] - The company has maintained an average gross margin of 52.8% over the past decade, indicating strong profitability within the industry [1] Sustainable Profit Growth - The company is actively investing in core road assets with short remaining toll collection periods through expansion and acquisitions, including the ongoing expansion of Chengle Expressway and the acquisition of Chengdu Second Ring West, which is expected to contribute 160 million CNY in profit by 2025 [2] - The company has a high dividend payout ratio, with a commitment to return at least 60% of profits to shareholders from 2023 to 2025, leading to a projected dividend yield of 5.2% in 2024, which is among the highest in the highway industry [2] - The company believes it can effectively extend the remaining toll collection periods and expand its highway business through strategic investments, despite market concerns regarding the short remaining periods of core road assets [2] Potential Catalysts - Key catalysts for growth include the completion of the Chengle Expressway expansion and ongoing asset acquisitions [3] Earnings Forecast and Valuation - The company is projected to have EPS of 0.51 CNY and 0.54 CNY for 2025 and 2026, respectively, with a CAGR of 6.3% from 2024 to 2026 [4] - Using a dividend yield approach, the target price for A-shares is set at 6.85 CNY, reflecting a 21.9% upside potential, while the target price for H-shares is 5.61 HKD, indicating a 14.5% upside potential [4]