As of May 15, 2017, China's approximately 2.236 million tons of electrolytic aluminum production capacity indicators have been completed, accounting for 90.3% of the total replacement capacity of 2.476 million tons. Capacity replacement is about to reach an orderly pace of reform.

Maintain the electrolytic aluminum sector holdings rating. We believe that China's electrolytic aluminum replacement target has reached 2.236 million tons, accounting for 90.3% of the total replacement capacity. The replacement of production capacity has been almost completed. Considering that many provinces such as Xinjiang, Shandong, Inner Mongolia, etc In order to rectify illegal production capacity, the supply-side reform is about to enter the second phase of “local verification”. There are signs that the reform of China's electrolytic aluminum supply side is continuing in an orderly manner. Related policies are being implemented on the ground. The risk appetite for aluminum prices and sectors is expected to continue to rise, maintaining the rating of electrolytic aluminum holdings.

Replacement of production capacity is an important way to strictly control new production capacity. At present, it is almost completed: We believe supply-side reform will probably start from the following aspects: 1 Strict control of new production capacity: The replacement of production capacity and the suppression of new production capacity under construction can be achieved; 2 Eliminating outdated production capacity: Either using energy consumption as a direct evaluation standard; 3 Environmental protection and restricting production: Implementing policies such as “2+26” to limit production. The strict control of new production capacity as the first priority, capacity replacement is an important way to achieve, is currently almost completed: According to Asian Metals data as of May 15, 2017, China's approximately 2.236 million tons of electrolytic aluminum production capacity indicators have been completed transactions This accounted for 90.3% of the total replacement capacity of 2.476 million tons. The replacement of production capacity is about to reach a conclusion that supply-side reform is progressing in an orderly manner, and it also lays a good foundation for subsequent reforms.

Many provinces formally issued documents to respond to illegal production rectification actions, and supply-side reforms are about to enter the local verification stage. As of May 9, 2017, the provinces and cities in Xinjiang, Shandong, Inner Mongolia, etc. have issued documents to respond to electrolytic aluminum production irregularities in succession. Companies are required to conduct self-examination work, report illegal production capacity accurately, and carry out rectification according to law. The first phase of the “Enterprise Self-inspection” will also be completed (as of May 15, 2017). We judge that the supply-side reform will enter the second phase of “local verification” (as of June 30, 2017), and verification and rectification will be conducted at that time. The standards may be more stringent, and supply-side reforms are expected to make substantial progress, reforms, policy speeds, or market expectations.

Investment suggestion: Based on the expectation that aluminum prices are expected to stabilize at supply-side reforms and the risk appetite of the electrolytic aluminum sector is expected to benefit from the continuous progress of reforms and the gradual decline of policies, we believe that the impact of environmental remediation is small and cost advantages are obvious. The relevant targets will benefit from reform and promotion first: recommended Shenhuo shares, Yunlv shares, China Aluminum, to benefit Nanshan Aluminum, Zhongfu Industry, and Xinjiang Zhonghe. Shenhuo Co., Ltd.: leveraging Xinjiang to release low-cost production capacity; Yunluo Group: the only domestic electrolytic aluminum company with hydropower concept; Aluminum Corporation of China: cost reduction and efficiency increase continue to advance, the turning point of performance has been reached; Nanshan Aluminum: aluminum alloy board for vehicles will be heavy Zhongfu Industry: The cost advantage of coal-electricity aluminum integration lock; Xinjiang Zhonghe: Will benefit from the rapid growth of military high-purity aluminum and “One Belt and One Road”.

Risk Warning: Electrolytic Aluminum Supply Side Reform Propaganda Less Than Expected Risk

1

Replacement of electrolytic aluminum production capacity as an important way to strictly control new production capacity

We believe that the electrolytic aluminum supply side reform is expected to start from the following aspects: 1 strict control of new production capacity: can be achieved through the replacement of production capacity, inhibit the construction of new production capacity, etc.; 2 eliminate backward production capacity: energy consumption as a direct assessment criteria; 3 environmental protection improvement Limited production: such as the implementation of "2+26" and other policies to limit production. The strict control of new production capacity as the first priority, and capacity replacement is an important way to achieve their attention. In April 2015, the Ministry of Industry and Information Technology issued the “Circular on Implementing the Replacement of Production Capacity for Some Industrial Industries with Serious Overcapacity” (Ministry of Industry and Information Industry [2015] No. 127), stating clearly that the production of steel, cement, electrolytic aluminum, etc Requires equal or reduced replacement, especially in sensitive areas such as Beijing, Tianjin and Hebei.

2

China's electrolytic aluminum capacity replacement has reached 90%, almost completed

According to Asian Metals, as of May 15, 2017, China's approximately 2.236 million tons of electrolytic aluminum production capacity indicators have been completed, accounting for 90.3% of the total replacement capacity of 2.476 million tons. The remaining Qinghai Jinyuan and Shandong Qixing plans to sell a total of 240,000 yuan. Ton capacity (accounting for 9.7%). The replacement of production capacity is about to reach a conclusion that supply-side reform is progressing in an orderly manner, and it also lays a good foundation for subsequent reforms.

The 2.236 million tons traded index can be roughly divided into the following categories: Trans-provincial transactions accounted for 21.9%, intra-provincial transactions accounted for 23.9%, and intra-group transactions accounted for 54.2%.

(1) Inter-provincial transactions amounted to 491,000 tons (21.9% of the total): Oriental Hope Baotou Rare Earth Aluminum is constructing an electrolytic aluminum project with an annual production capacity of 500,000 tons in Guyang. The plant has already purchased Hunan Chuangyuan and Taishan Aluminum Co. 391,000 tons of electrolytic aluminum production replacement index. Inner Mongolia Mengtai Aluminum purchased Jiangsu Datun 100,000 tons electrolytic aluminum replacement index.

(2) Intra-provincial transaction 534,500 tons (accounting for 23.9%): mainly involved in Henan Province, the province's electrolytic aluminum indicators can only be sold in the province, most of the indicators have been eliminated by Henan Yugang Longquan Aluminum.

(3) The Group's internal transactions amounted to 1.21 million tons (accounting for 54.2%): Qinghai Xinheng/Sichuan Qia/Fushun Aluminum/Zhejiang East China respectively traded 35/38/33/150,000 tons.

3

Investment suggestion: recommend Shenhuo shares, Yunlu shares, China Aluminum, to benefit Nanshan Aluminum, Zhongfu Industry, Xinjiang Zhonghe

The replacement of electrolytic aluminum production capacity was almost completed. Considering that as of mid-May 2017, many provinces and cities in the country, such as Xinjiang, Shandong, and Inner Mongolia, have officially issued documents to respond to electrolytic aluminum regulations for rectification of production capacity. The supply-side reform is about to enter the second phase. The verification phase (as of June 30, 2017) shows that there are signs that the reform of the electrolytic aluminum supply side in China is proceeding methodically and continuously, relevant policies are being implemented continuously, and the aluminum price and sector risk appetite are expected to continue to increase.

We believe that the underlying targets that are less affected by the environmental renovation and have obvious cost advantages will benefit from the reforms. We recommend Shenhuo, Yunlu, and China Aluminum to benefit Nanshan Aluminum, Zhongfu Industry and Xinjiang Zhonghe. Shenhuo Co., Ltd.: leveraging Xinjiang to release low-cost production capacity; Yunluo Group: the only domestic electrolytic aluminum company with hydropower concept; Aluminum Corporation of China: cost reduction and efficiency increase continue to advance, the turning point of performance has been reached; Nanshan Aluminum: aluminum alloy board for vehicles will be heavy Zhongfu Industry: The cost advantage of coal-electricity aluminum integration lock; Xinjiang Zhonghe: Will benefit from the rapid growth of military high-purity aluminum and “One Belt and One Road”.

4

Risk Warning: Reform Pushes Less Than Expected Risk

As the electrolytic aluminum supply side involves a wide range of reforms, the interests of related parties are complex and complicated. The reform will face many obstacles. If the measures are not properly implemented, the progress of the reform will not be as expected.