Zhang Fang of the China Securities Investment Research Institute pointed out that after 2008, with the end of the industry consolidation period and the complete implementation of national industrial policies, the development of electrolytic aluminum industry will enter an orderly, healthy and healthy development track, the capacity expansion rate It will keep pace with the growth of consumption.
Industry winter is passing
The domestic electrolytic aluminum production capacity has shown signs of rapid expansion in previous years. In response, the country has issued a series of policies to regulate the industry in a timely manner. These policies involve various aspects such as project approval, environmental protection, credit control, taxation adjustment, raw material supply, etc. The effect is very significant. It is estimated that by the end of 2005, China's electrolytic aluminum production capacity will reach 10.45 million tons, an increase of 6.96% over 2004. Capacity growth will slow down significantly.
We believe that 2001-2003 is a period of rapid expansion of the electrolytic aluminum industry; and 2004-2007 is the industry consolidation period, and the momentum of rapid expansion of production capacity will be effectively controlled. According to statistics, the phase-out of production capacity and the closure of production capacity are roughly in line with the new production capacity of the electrolytic aluminum projects in line with industrial policies started before 2004 in 2005 and 2006. Therefore, it is expected that China's electrolytic aluminum production capacity will remain basically stable in the next few years.
During this period, the consumption of electrolytic aluminum will maintain rapid growth due to the needs of the national economy. Here we consider the consumption growth rate forecast in two stages: In 2005-2008, the average annual growth rate was 12%; after 2008, aluminum consumption growth rate was 8%. The calculated domestic aluminum consumption in 2008 was 9.44 million tons, and the aluminum consumption in 2010 was 11.84 million tons. Judging from the current production capacity, by 2008, domestic production capacity will be basically balanced with demand, and the issue of overcapacity will be fundamentally resolved.
Industry consolidation is imperative
Looking at the history of the development of the world aluminum industry, joint mergers and acquisitions between companies and the globalization of operations are the inevitable trends in the development of the industry. The number of electrolytic aluminum companies in China is large and small, and the industry consolidation is imperative.
First of all, the competition has become increasingly fierce. China's electrolytic aluminum industry can be said to have developed under the protection of the government, and has not been completely market-oriented in raw material procurement, product sales, financing and investment. When the external environment changes (ie, alumina prices rise, power consumption is tight), the company's coping ability is relatively poor. As the profit space has been squeezed and even lost due to rising costs, the survival of the company has been threatened.
Enterprises that have survived crisis face two choices: one is to suspend production, and the other is to find a partner. If production is suspended, it is difficult to restart production in the current industry environment, which means that companies will exit the market. And looking for a partner, you can get low-cost alumina, and companies will continue to exist. Therefore, the shortage of alumina and the pressure of profits are currently important drivers of industry consolidation.
Second, speed up industrial upgrading and increase industrial concentration. From a worldwide perspective, scale and intensification are the main characteristics of the aluminum industry. Although the concentration of electrolytic aluminum industry in China has improved, there is still a big gap compared with the developed countries in the aluminum industry. Therefore, the integration of electrolytic aluminum industry is also an inevitable requirement for accelerating industrial upgrading and increasing industrial concentration.
Third, the need to participate in international competition. The aluminum industry is a highly international industry. Domestic aluminum prices have long been in line with international aluminum prices. International aluminum giants follow the globalization development strategy from raw materials to production and sales. At present, the international competitiveness of China's aluminum industry is still not strong, and large and strong aluminum electrolytic companies are seen as an inevitable choice to enhance their international competitive position.
Fourth, the inevitable choice for coordinating the profits of upstream and downstream industries. From the perspective of the domestic aluminum industry chain, the upstream alumina is mainly supplied by China Aluminum, and the electrolytic aluminum enterprises are numerous. As a result, the monopoly of the alumina industry and the excessive competition in the electrolytic aluminum industry have formed. Large-scale aluminum companies in the world are a combination of alumina and electrolytic aluminum. In addition to China Aluminum in China, other aluminum companies are independent electrolytic aluminum plants. From the perspective of international development experience, this situation is difficult to maintain for a long time.
Focus on M&A value
We believe that under the background of industry consolidation, investors can focus on electrolytic aluminum listed companies with mergers and acquisitions value. Such companies will have better performance in the industry consolidation. Companies with the following characteristics deserve the attention of investors.
Area selection. Electrolytic aluminum producers are more dependent on resources (bauxite) and energy (electricity). From the perspective of the production layout of the international aluminum industry, the electrolytic aluminum plants were built in areas rich in bauxite resources, and electrolytic aluminum plants are now selected in areas with sufficient energy (hydropower, thermal power). In recent years, many new construction projects have been selected in areas with rich water resources.
From a nationwide perspective, the areas with rich bauxite resources are Shanxi (41% of the country's reserves), Guizhou, Guangxi, and Henan (about 17% each). Therefore, combining the above two conditions, the regions with the advantages of developing electrolytic aluminum are: Jinnan, Yubei, Guixi, Guizhou, and Yubei. The electrolytic aluminum enterprises in these regions should have higher M&A value; conversely, the value of M&A of electrolytic aluminum enterprises that are not in the area of ​​electrolytic aluminum development is low.
Scale choice. The purchaser tends to choose more than 100,000 tons of electrolytic aluminum plant. The main reason is that large-scale enterprises generally use advanced electrolytic cells, and environmental protection facilities are also relatively complete, and they also meet the requirements of industrial adjustment and upgrading. From the policy point of view, as early as 1999, the State Economic and Trade Commission issued a document stating that the new construction of an electrolytic aluminum project of 100,000 tons/year or less will be stopped. Therefore, under normal circumstances, 100,000 tons should be the bottom of the scale of mergers and acquisitions.
The choice of asset quality. The methods for measuring the value of M&A companies include replacement cost method, market method and income method. Electrolytic aluminum enterprises are industrial product manufacturing enterprises, and fixed assets such as plant and equipment account for a large proportion of total assets. Therefore, it is reasonable to use the replacement cost method to assess the value of mergers and acquisitions (corporate value = value of assets - Valuation of liabilities).
Since many electrolytic aluminum projects have bank borrowings, in the two years in which the industry has experienced difficulties, the company's ability to repay has dropped significantly. During the industry consolidation period, the electrolytic aluminum plant's electrolytic tanks, plant and other fixed assets will also depreciate due to lack of negotiation advantages. Therefore, the acquirer will also focus on the evaluation of the target company's value, and choose companies with good asset quality and financial status to acquire.
Industry winter is passing
The domestic electrolytic aluminum production capacity has shown signs of rapid expansion in previous years. In response, the country has issued a series of policies to regulate the industry in a timely manner. These policies involve various aspects such as project approval, environmental protection, credit control, taxation adjustment, raw material supply, etc. The effect is very significant. It is estimated that by the end of 2005, China's electrolytic aluminum production capacity will reach 10.45 million tons, an increase of 6.96% over 2004. Capacity growth will slow down significantly.
We believe that 2001-2003 is a period of rapid expansion of the electrolytic aluminum industry; and 2004-2007 is the industry consolidation period, and the momentum of rapid expansion of production capacity will be effectively controlled. According to statistics, the phase-out of production capacity and the closure of production capacity are roughly in line with the new production capacity of the electrolytic aluminum projects in line with industrial policies started before 2004 in 2005 and 2006. Therefore, it is expected that China's electrolytic aluminum production capacity will remain basically stable in the next few years.
During this period, the consumption of electrolytic aluminum will maintain rapid growth due to the needs of the national economy. Here we consider the consumption growth rate forecast in two stages: In 2005-2008, the average annual growth rate was 12%; after 2008, aluminum consumption growth rate was 8%. The calculated domestic aluminum consumption in 2008 was 9.44 million tons, and the aluminum consumption in 2010 was 11.84 million tons. Judging from the current production capacity, by 2008, domestic production capacity will be basically balanced with demand, and the issue of overcapacity will be fundamentally resolved.
Industry consolidation is imperative
Looking at the history of the development of the world aluminum industry, joint mergers and acquisitions between companies and the globalization of operations are the inevitable trends in the development of the industry. The number of electrolytic aluminum companies in China is large and small, and the industry consolidation is imperative.
First of all, the competition has become increasingly fierce. China's electrolytic aluminum industry can be said to have developed under the protection of the government, and has not been completely market-oriented in raw material procurement, product sales, financing and investment. When the external environment changes (ie, alumina prices rise, power consumption is tight), the company's coping ability is relatively poor. As the profit space has been squeezed and even lost due to rising costs, the survival of the company has been threatened.
Enterprises that have survived crisis face two choices: one is to suspend production, and the other is to find a partner. If production is suspended, it is difficult to restart production in the current industry environment, which means that companies will exit the market. And looking for a partner, you can get low-cost alumina, and companies will continue to exist. Therefore, the shortage of alumina and the pressure of profits are currently important drivers of industry consolidation.
Second, speed up industrial upgrading and increase industrial concentration. From a worldwide perspective, scale and intensification are the main characteristics of the aluminum industry. Although the concentration of electrolytic aluminum industry in China has improved, there is still a big gap compared with the developed countries in the aluminum industry. Therefore, the integration of electrolytic aluminum industry is also an inevitable requirement for accelerating industrial upgrading and increasing industrial concentration.
Third, the need to participate in international competition. The aluminum industry is a highly international industry. Domestic aluminum prices have long been in line with international aluminum prices. International aluminum giants follow the globalization development strategy from raw materials to production and sales. At present, the international competitiveness of China's aluminum industry is still not strong, and large and strong aluminum electrolytic companies are seen as an inevitable choice to enhance their international competitive position.
Fourth, the inevitable choice for coordinating the profits of upstream and downstream industries. From the perspective of the domestic aluminum industry chain, the upstream alumina is mainly supplied by China Aluminum, and the electrolytic aluminum enterprises are numerous. As a result, the monopoly of the alumina industry and the excessive competition in the electrolytic aluminum industry have formed. Large-scale aluminum companies in the world are a combination of alumina and electrolytic aluminum. In addition to China Aluminum in China, other aluminum companies are independent electrolytic aluminum plants. From the perspective of international development experience, this situation is difficult to maintain for a long time.
Focus on M&A value
We believe that under the background of industry consolidation, investors can focus on electrolytic aluminum listed companies with mergers and acquisitions value. Such companies will have better performance in the industry consolidation. Companies with the following characteristics deserve the attention of investors.
Area selection. Electrolytic aluminum producers are more dependent on resources (bauxite) and energy (electricity). From the perspective of the production layout of the international aluminum industry, the electrolytic aluminum plants were built in areas rich in bauxite resources, and electrolytic aluminum plants are now selected in areas with sufficient energy (hydropower, thermal power). In recent years, many new construction projects have been selected in areas with rich water resources.
From a nationwide perspective, the areas with rich bauxite resources are Shanxi (41% of the country's reserves), Guizhou, Guangxi, and Henan (about 17% each). Therefore, combining the above two conditions, the regions with the advantages of developing electrolytic aluminum are: Jinnan, Yubei, Guixi, Guizhou, and Yubei. The electrolytic aluminum enterprises in these regions should have higher M&A value; conversely, the value of M&A of electrolytic aluminum enterprises that are not in the area of ​​electrolytic aluminum development is low.
Scale choice. The purchaser tends to choose more than 100,000 tons of electrolytic aluminum plant. The main reason is that large-scale enterprises generally use advanced electrolytic cells, and environmental protection facilities are also relatively complete, and they also meet the requirements of industrial adjustment and upgrading. From the policy point of view, as early as 1999, the State Economic and Trade Commission issued a document stating that the new construction of an electrolytic aluminum project of 100,000 tons/year or less will be stopped. Therefore, under normal circumstances, 100,000 tons should be the bottom of the scale of mergers and acquisitions.
The choice of asset quality. The methods for measuring the value of M&A companies include replacement cost method, market method and income method. Electrolytic aluminum enterprises are industrial product manufacturing enterprises, and fixed assets such as plant and equipment account for a large proportion of total assets. Therefore, it is reasonable to use the replacement cost method to assess the value of mergers and acquisitions (corporate value = value of assets - Valuation of liabilities).
Since many electrolytic aluminum projects have bank borrowings, in the two years in which the industry has experienced difficulties, the company's ability to repay has dropped significantly. During the industry consolidation period, the electrolytic aluminum plant's electrolytic tanks, plant and other fixed assets will also depreciate due to lack of negotiation advantages. Therefore, the acquirer will also focus on the evaluation of the target company's value, and choose companies with good asset quality and financial status to acquire.
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