中国铝业（02600） 　　Earlier this week, we visited Chalco’s bauxite and alumina plant in GuangxiPingguo and Chinalco’s high-end aluminium products manufacturer SouthWest Aluminium Group in Chongqing. The following are our key takeaways. 　　Bauxite and alumina unit cost of RMB155/t and RMB1400/t at Pingguo 　　Pingguo, with 6mt bauxite output, 2.5mt alumina capacity, potentially 400ktaluminium alloys capacity, and 3*350MW power plants, is one of the mostcost-competitive branches within Chalco. According to management, the unitcost of bauxite in the Pingguo mine is around RMB155/t (VAT exclusive), andthe all-in cost of alumina is around RMB1,400/t (VAT exclusive). Managementexpects limited room for further cost cuts given raw material price hikes insoda and coal. Per tonne, alumina normally consumes one tonne of coal(4,000kcal+) and 87kg soda. Given its cost competitiveness, Pingguo is nowworking on business integration to bring in aluminium alloys, which areexpected to come into commission in the middle of next year. 　　South West Aluminium Group 　　We also visited South West Aluminium Group, which belongs to the parentcompany rather than the listed company. South West Aluminium, with 830ktof aluminium products output this year and 900kt next year, is well known forits high-end military-related aluminium products. Other than military usage, thecompany is also focusing on civil-use aluminium product, including vehicles,packaging, electronics, etc. Although management is optimistic aboutaluminium adoption in vehicles, it expects a meaningful absolute volume ofaluminium auto sheets until 2019 at around 150kt. 　　Stronger 4Q16 on alumina price hike; muted on aluminium sector 　　We expect a stronger 4Q16 mainly owing to recent alumina price hikes, withthe current price at RMB2,700/t+ vs. the 3Q average at RMB1,900/t+, despitehigher input cost from recent coal and soda price increases. Profit from thealuminium sector should be relatively moderate on a QoQ basis, as Chalco didsome hedging in October and potentially November/December. With a tonneof aluminium requiring c.5 tonnes of coal, we expect a RMB400/t+ increase toits overall aluminium unit cost, considering its 40%- captive power plants and60%+ external direct power purchase. 　　Company outlook �C cost and capacity 　　In the first nine months this year, Chalco achieved 16% yoy and 21% yoy costreductions for alumina and aluminium, respectively, and it is now in the c.50%quantile of industry cost curve. Into 2017, Chalco is considering consolidatingits raw materials demand and doing bulk procurement for all its subsidiariesand regional branches, which could make it easier to achieve a good bargain.Also, for the capacity that is about to undergo maintenance, Chalco will adoptadvanced technology to lower energy consumption. The company expectsmore cost-competitive capacity in Inner Mongolia, Shanxi, Guangxi, andGuizhou to replace the outdated capacity in the coming two years.