XINREN: On-the-ground insights into a top aluminum producer

Above: Power transmission cables right next to XinRen's smelting plant in Yichang tell an important fact: Smelting, a process of extracting aluminum from its ore alumina, uses a lot of electricity. XinRen's plant draws electricity from the Gezhouba hydroelectric power station nearby. XinRen enjoys a government subsidy of RMB 0.005 per kwh on top of preferred electricity rates it has negotiated with the power company. Photos by Leong Chan Teik

The massive bags contain alumina. Aluminum is extracted from alumina by a reaction with carbon anodes in a process called smelting. Alumina accounts for about 31% of cost of goods sold while electricity, 33%, and carbon 8%. XinRen has locked in supplies of alumina from Chalco and Minmetals, the PRC’s two largest alumina suppliers, for five years ending Dec 2014.

XinRen has 208 of these large, steel, carbon-lined 'pots' into which alumina is fed and dissolved in a liquid through which electric current is passed. This plant was completed in Feb 2007, employing energy-efficient and environment-friendly technology. The electricity consumption at XinRen’s smelters was 13,727 kwh in 2009 for each tonne of primary aluminum produced. This is efficient compared against the average of 14,171 kwh for smelters operating in the PRC, as estimated by Sunlight Metal, a top aluminum consultancy firm.

THE PERVASIVE and amazing uses of aluminum became abundantly clear to me as I flew in a SIA plane to Shanghai and an Air China plane from Shanghai to Yichang.

The main metal used in the planes' construction was aluminum. And the ice-cream that passengers were served came wrapped in aluminum foil (and paper) while the beer was downed from aluminum cans. 

Aluminum combined with small quantities of other metals form alloys, which are light yet strong - hence its use in constructing aircraft bodies, for example.

Aluminium in molten form sinks to the bottom and is siphoned out, and then transported to a holding furnace.

Aluminum is produced from its oxide, alumina, which is a powdery substance.

Last October, XinRen Aluminum became the first aluminum producer to list on the Singapore Exchange.

At its invitation, analysts, fund managers and the media last week visited its smelting plant in Yichang (Hubei province) and its fabrication plant in Jiangyin (Jiangsu province), about 2 hours’ drive from Shanghai.

XinRen has a market

Smelting produces gases which are harmful and need to be processed.

capitalization of about S$606 million and has delivered net profit of RMB 256.7 million (about S$50.3 m) in the first nine months of this year.

Its recent stock price was 55.5 cents, slightly above its IPO price of 55 cents, trading at a PE ratio of about 7.9X.

DBS Vickers has a ‘buy’ call on XinRen and a target price of 70 cents.


China's demand exceeds its production

As China’s economic growth continues strongly, its demand for aluminum exceeds supply.

China has over 100 smelting plants, of which 80 have annual capacity in excess of 100,000 tonnes.

Their total capacity is 17 million tons in 2010, while China’s demand is close to 20 million tonnes.

The capacity growth is 10% a year, while primary aluminum consumption is expected to grow at a CAGR of 17.6% between 2009 and 2012.

Aside from its plant in Yichang city, XinRen operates another smelting plant in Liupanshui City, in Guizhou Province.

From being molten, aluminum is eventually produced as solid ingots with purity of at least 99.7%. Ingots are subsequently processed to become aluminum foils, coils and sheets for use in the making of a wide variety of products.

The Yichang plant currently has a production capacity of 130,000 tonnes a year.

In aggregate, the two plants have an approved primary aluminum production capacity of 275,000 tonnes annually.

Smelting has a 12-13% gross profit margin while fabrication, 20%, as it is more value-added by turning aluminum into foils, coils and sheets.

For 9M2010, smelting contributed 67% of XinRen's RMB 4.2 b revenue while fabrication, nearly 10%. A third segment, trading, contributed the rest.

Dinner at Yichang, clockwise starting from Liang Ho Bo: Sandy Niu (Morgan Stanley), XinRen staff, David Low (Gazelle Capital), Leong Chan Teik (NextInsight), Lim Joo Seng (Group Financial Controller, XinRen), Kathy Zhang (Financial PR), Helena (XinRen), Adrian Seah (Financial PR), Lee Wen Ching (OCBC Investment Research), Wang Bin (Zana Capital), Bobby Lu (Kim Eng Research), and Leong Weihao (CIMB).

Look out for part 2 of our report later this week where we will cover our visit to XinRen's aluminum fabrication plant in Jiangyin, which currently has a production capacity of 50,000 tonnes annually.

Recent story: XINREN stock still 22% below IPO, but Jan-Sep Net Profit Up 452%