Non-ferrous metals are on the rise, with the aluminum industry leading the way. TF SECURITIES states that "electrolytic aluminum is the perfect blend of resilience and dividends."

The traditional cyclical industry of electrolytic aluminum is completing its strategic transformation into a dividend asset. The latest research report from TF SECURITIES points out that the electrolytic aluminum industry is undergoing a transformation from a traditional strong cyclical product to a "price elastic above and dividend-supported below" high-quality scarce asset, referring to it as "the perfect fusion of elasticity and dividends."

On November 6, the non-ferrous metal sector continued its strong performance, with the non-ferrous leader ETF up 3.22% in intraday trading, marking two consecutive days of gains. Data from the Shenzhen Stock Exchange shows that this ETF has attracted a total of 25.79 million yuan in the past four days. According to Wind data, the non-ferrous leader ETF has accumulated a rise of over 70% year-to-date.

In terms of constituent stocks, aluminum industry leaders significantly led the gains, with Nanshan Aluminum hitting the daily limit, China Aluminum rising over 4%, and stocks like Yun Aluminum and SHENHUO COAL&POWER also following suit.

Regarding the surge in aluminum stocks, Citigroup stated that aluminum supply will remain tight, primarily due to China reaching its production capacity limit and limited capacity growth in Indonesia, which will boost the industry's long-term gross profit levels. The next two years are a critical period for China's electrolytic aluminum production to peak, with domestic electrolytic aluminum production expected to reach around 44.2 million tons by 2025, already hitting the capacity limit of 45.43 million tons. In the context of full domestic capacity, the current electrolytic aluminum market is in a "fragile balance" state.

At the same time, TF SECURITIES also pointed out in its latest research report that the traditional cyclical industry of electrolytic aluminum has gradually transformed into a "price elastic above and dividend-supported below" high-quality scarce asset. By the end of 2024, the weighted average dividend yield of the electrolytic aluminum sector is as high as 6.0%, ranking first among major high-dividend industries, with the leading China Hongqiao's dividend yield reaching an astonishing 13.7%.

TF SECURITIES stated that the underlying logic of this transformation lies in the dual improvement of supply-side and capital structure. Domestic electrolytic aluminum capacity has approached the policy red line of 45 million tons, with a capacity utilization rate of 97.5%, and the supply ceiling is beginning to exert real constraints. Meanwhile, the peak of industry capital expenditure has passed, and free cash flow has significantly improved, laying the foundation for sustained high dividends. Under the pricing logic of supply and demand, the industry's high profits are expected to be maintained in the long term.

Dividend Yield Dominates the Market: From Cyclical Stocks to Dividend Assets

The dividend yield performance of the electrolytic aluminum sector has surpassed traditional high-dividend sectors such as coal, oil and petrochemicals, and banking.

According to calculations by TF SECURITIES, the weighted average dividend yield of the sector in 2024 is 6.0%, significantly higher than coal's 4.6%, oil and petrochemicals' 4.2%, and banking's 4.7%. Even after experiencing a significant rise in 2025, as of September 30, the sector's dividend yield remains around 5%, continuing to rank among the top in the entire market.

Leading companies are performing more prominently. China Hongqiao's dividend yield for 2024 is 13.7%, with a high dividend payout ratio maintained at 62%. Assuming the future payout ratio remains unchanged, the company's dividend yields for 2025 to 2027 are expected to be 6.5%, 6.8%, and 7.2%, still ranking among the leaders in high dividend yields.

The overall trend of increasing dividends in the industry is very evident. Zhongfu Industrial, after not paying dividends for the past decade, announced in April 2025 that it would distribute no less than 60% of the current year's distributable profits in dividends over the next three years. Yun Aluminum's interim dividend guidance has increased by 8 percentage points from last year's total to 40%, while Tianshan Aluminum's dividend guidance has risen by 9 percentage points to 50%. This collective increase in dividends reflects a fundamental shift in the industry's strategic focus from scale expansion to shareholder returns.

Restructuring Supply and Demand Patterns: Ceiling Constraints and Demand Resilience

2025 is a critical turning point for the supply pattern of electrolytic aluminum. As of the end of September, the domestic electrolytic aluminum installed capacity and operating capacity were 45.72 million tons and 44.56 million tons, respectively, with a capacity utilization rate reaching 97.5%, and the operating capacity is just one step away from the policy ceiling of 45 million tons. This is the most significant difference between this cycle and previous ones.

The systematic decline in production growth has already become apparent. In 2024, domestic electrolytic aluminum production is expected to grow by 4.1% year-on-year, with production from January to September 2025 at 33.07 million tons, with the year-on-year growth rate dropping to 2.7%. Steel Union predicts that the total production for 2025 will be 44.34 million tons, a year-on-year increase of 2.6%, far below last year's level.

The uncertainty of overseas supply also provides support for the supply side. According to Aladdin statistics, the planned new overseas capacity from 2025 to 2027 totals 25.18 million tons, with Indonesia accounting for 45%, reaching 11.23 million tons. However, these projects face two major constraints: relatively poor infrastructure conditions and power shortages. Based on the consumption of 13,500 kWh per ton of aluminum, Indonesia's planned capacity at full production would require 15.16 billion kWh, accounting for 44.2% of Indonesia's electricity generation in 2024.

The demand side is showing structural optimization. In 2024, transportation has replaced real estate as the largest downstream sector for aluminum, accounting for 24.8%, while electricity accounts for 18.5%, with the two combined reaching 43.3%, an increase of 3 percentage points year-on-year.

From January to September 2025, the domestic production of new energy vehicles increased by 34.8% year-on-year, and the increase in aluminum usage per vehicle supports the demand for automotive aluminum materials. The "Implementation Plan for High-Quality Development of the Aluminum Industry (2025-2027)" clearly requires "expanding key directions for aluminum consumption," and the application scenarios for aluminum are expected to continue to expand.

The tight supply and demand have led to a fundamental change in the pricing mechanism of electrolytic aluminum. Reviewing the trends since 2020, starting in 2022, the price of aluminum has significantly diverged from cost trends. In the fourth quarter of 2024, alumina prices experienced severe fluctuations, while aluminum prices remained relatively stable, reflecting the dominant position of supply and demand pricing logic.

Under this logic, the price center of aluminum is expected to rise steadily, and volatility may converge. Currently, the average profit per ton of aluminum in the industry remains at the level of 4,000 to 5,000 yuan, and high profits are expected to be maintained in the long term.

Capital Structure Optimization: Peak Spending Ends, Releasing Cash Flow

Since 2021, the capital expenditure intensity of the electrolytic aluminum sector has generally been at a relatively low historical level. Due to constraints from domestic capacity red lines and uncertainties in overseas expansion, the peak of large capital expenditures for electrolytic aluminum companies has passed. Currently, capital expenditures are mainly concentrated in integrated layout, green electricity construction, and relocation technical upgrades, with the future expenditure center expected to show a gradual downward trend.

With the improvement of cash flow and the decline in capital expenditures, the free cash flow of major electrolytic aluminum companies has significantly improved. Using a simple calculation of net cash flow from operating activities minus capital expenditures, the free cash flow of major electrolytic aluminum companies has remained positive and expanded in recent years, creating conditions for enhancing shareholder returns.

The electrolytic aluminum sector has entered a deleveraging cycle since 2021. Most companies have seen both their asset-liability ratios and interest-bearing debt ratios decline, with a significant decrease in financial expense ratios. Taking China Hongqiao as an example, in the first half of 2025, the asset-liability ratio was 49.1%, the interest-bearing debt ratio was 33.1%, and the financial expense ratio was 1.6%, all at healthy levels.

Asset quality has also significantly improved. The leading company, China Aluminum Corporation, has seen a noticeable decline in impairment scale since 2023 compared to the peaks of previous years, and other electrolytic aluminum companies have returned to relatively low levels of asset impairment since 2022. From the perspective of depreciation and amortization, the proportion of depreciation and amortization to total profit has shown a downward trend in recent years, and with the decline in the capital expenditure center, this ratio is expected to decrease further.

Tianfeng Securities particularly emphasizes that the stability of ROE is a necessary condition for dividend value. The institution reviewed the dividend market of the coal sector:

From November 2023 to June 2024, the coal sector diverged from coal prices, entering an independent dividend market, with the price-to-earnings ratio rising from 7.8 times to 12.2 times. However, due to subsequent deterioration in fundamentals, coal returned to a cyclical phase.

Compared to coal, the electrolytic aluminum sector has a better structure under the support of rigid supply, and the price center of aluminum is expected to rise steadily, with high profits likely to be maintained over a long cycle. In recent years, the volatility of ROE for electrolytic aluminum companies has narrowed, and under the expectation of stable and rising aluminum prices and converging volatility, the stability of ROE is expected to extend, meeting the necessary conditions for dividend value