Aluminum Corporation of China (ACH)

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Aluminum Corporation of China, Ltd. (Chalco), incorporated as a joint stock limited company in the People's Republic of China in 2001 and headquartered in Beijing, is the main producer of alumina and the largest producer of primary aluminum in terms of production and sales in China. Chinalco, a state-owned enterprise, currently owns 40.46% of Chalco's issued share capital, and it is Chalco's largest shareholder. As of September, 2007, the company's assets totaled approximately $10.7 billion and are expected to continue to grow rapidly.

Chalco organizes and manages its operations mainly through the following two business segments: Alumina and Primary Aluminum. External sales of the Alumina and Primary Aluminum segments accounted for approximately 44.3% and 54.5%, respectively, of Chalco's total 2006 revenue. Revenues from Primary Aluminum segments are expected to contribute larger ratio of the company's revenue.

Chalco sells a small portion of the alumina it produces to its own primary aluminum smelters and a majority to external customers, mainly smelters throughout China. In 2006, Chalco produced 8.83 million tons of alumina products, and that amount accounted for about 64.5% of all alumina products produced in China, making Chalco the second-largest producer of alumina in the world. The company's alumina production has grown about 14.6% per year from 2001 to 2006.

Primary aluminum is a widely used metal and the key raw material for aluminum fabrication. Chalco sells most of its primary aluminum products to China's customers, and transports most of its primary aluminum products by rail. Chalco's primary aluminum production was 1.93 million ton in 2006, and that amount accounted for 20.6% of all primary aluminum products produced in China, making Chalco the fourth-largest producer of alumina in the world. The company's primary aluminum production has grown about 27.4% per year from 2001 to 2006.

Currently its stock price in China's A share market is around 130% higher than that of Hong Kong's H share market. As the Chinese government lets Chinese investors invest in overseas market, it is expected that price of a company in different markets will converge in the future.

Chalco announced strong financial results for the first three quarters of 2007 mainly due to production increases of primary aluminum products. However, its profit margins declined in the third quarter due to a slip in aluminum and alumina prices. The company should continue to benefit from strong alumina and aluminum demand in China, as the company has the best balanced value chain of aluminum industry in China. Moreover, it plans to continue to increase its production capacity aggressively. Chalco has finished six aluminum acquisitions since March 2006, and three offshore alumina projects are on the right track. In addition, Chalco pays very generous dividend. Given its overall positive prospects, we are maintaining our Buy recommendation on Chalco shares.

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