XinRen

Strong management team. We returned from plant visit confident on management, with XinRen guiding for stronger 4Q10 and FY11 results, tipping higher aluminum prices (Forecast Rmb16,000/t), demand outstripping supply (20m tpa vs 17m tpa in China) and increased production from fabrication, as key revenue contributors in the mid-term.

Increased output. Group has just completed phase 1 of its fabrication plant expansion, estimated to reach full utilization in 6mths. Expected completion date on phase 2 tipped by 3Q11, and will triple fabrication capacity to 150,000tpa, propelling XinRen as China’s top 5 aluminum fabricators by volume.

Debt structure. Initial concerns on group’s high net-gearing, weighed by China’s recent rate hikes were overdone, as 60% of short-term debts are notes payable, with no interest’s expense. Management has expressed intentions to utilize non-current liabilities in future to increase funding flexibility and has no near-term plans for equity raising.

Cost Efficiency. Group runs a competitive cost structure, having locked in Alumina prices at 17.1% (current average 17.5%) of Aluminum prices till 2014, and a lower than average electricity consumption due to operating efficiency. Proximity of plants to key transportation hubs and power stations ensures further cost savings in transportation and electricity costs.

Potential catalysts. XinRen is in preliminary negotiations to construct an aluminum smelting plant (100,000 tpa) in Jiamusi, and has an option to purchase an aluminum hydroxide plant from key Shareholders, which could see group become further integrated upstream, lowering group’s future costs of alumina.

Attractive valuations. At 8.9x FY10 P/E vs peers weighted average of 21.2xs and 5.9x FY10 EV/EBITDA vs 11.5x peers, XinRen trades at more than a 50% discount to peers, suggesting further potential upside to share price.