The ambitious manufacturer has been a significant winner of the mainland spending spree on infrastructure When the central government forecasts 7 per cent economic growth year after year - and consistently delivers on that promise - a safe wager might be to bet with the house. To hit its growth target, the mainland government for the past two years has turned to the public coffers, pouring money into fixed-assets and public infrastructure. Provincial and city governments have also joined the spending binge, along with state-run banks and private money to finance companies such as toll-road operators. And despite signs the building boom may be overdone - and warnings that a public debt crisis is looming - the spending looks set to continue, especially in the lead up to the 2008 Olympic Games. One of the winners of the public infrastructure largesse has been Asia Aluminium Holdings, the mainland's largest maker of aluminium extrusion products. Over the past year, Asia Aluminium shares have climbed 61.84 per cent to a three-year high of $1.23 yesterday. The Hang Seng Index, meanwhile, is down 2.06 per cent over the same period. Despite the gains, analysts believe Asia Aluminium still has further to climb. A consensus survey of brokers by Thomson First Call found a 'buy' recommendation, with the company's shares trading at a forward price-to-earnings ratio of 11.18. On valuation basis, this might seem expensive; analysts generally recommend investors buy shares with a multiple of less than 10. But in the case of Asia Aluminium, the counter is worth consideration given its growth prospects. The company manufactures and sells aluminium extrusion products, which accounted for 80.1 per cent of operating profit in the year to June. About 87.7 per cent of its products were sold into the mainland market to satisfy demand from the construction sector. Mainland demand for aluminium is about 4.5 million tonnes annually, and some estimates put the growth rate in the double-digits in the coming years. But there is more than just a growth story here, as Asia Aluminium is expected to benefit as the mainland market matures. 'We see a consolidation trend in the industry in China, giving more advantage to Asia Aluminium,' said Kenny Tang Sing-hing, an associate director at Tung Tai Securities. Smaller players have not been able to match the prices or quality of their larger rivals, and many have been acquired. Asia Aluminium made its last acquisition in late 2001, picking up to two extrusion plants in Nanhai and boosting its annual capacity to 120,000 tonnes at the time. More consolidation is expected. 'We plan to speed up our acquisition moves in the second half and hope to achieve annual capacity of 200,000 tonnes by 2004,' said Benby Chan, managing director of Asia Aluminium. In addition to extrusion products, the company is eyeing new products which offer higher margins. On Sunday, Asia Aluminium said it would set up a $3 billion plant to make high-grade aluminium panels and plates. The facility, located in Zhaoqing, Guangdong, is expected to start operation by 2005 and reach full capacity of 400,000 tonnes in 2007. Mr Chan said aluminium panels and plates - which are used in the construction, transportation and consumer markets - had a gross profit margin of about 30 per cent, compared with 23 per cent for aluminium extrusion products. Analysts welcomed the move. 'The new venture certainly provides another growth driver,' said Russell Young, an analyst at Nomura Securities. Mr Young said the new plant would cater to demand for high-end aluminium panels and plates on the mainland, which suffers from a shortfall in domestic production. 'And locally produced panels and plates will be cheaper than imports ... given lower transportation costs and import duties,' he said. Last year, demand for panels and plates hit 960,000 tonnes, of which 650,000 tonnes were sourced from mainland suppliers and the remainder overseas. Estimates put the domestic production shortage at 650,000 tonnes by 2005. According to the China Non-Ferrous Metal Industrial Association, aluminium panel and plate demand is expected to growth 9.6 per cent annually through 2010. Mr Young forecast core earnings from extrusion products would grow at a 17.6 per cent compounded annual growth rate between 2004 and 2007. Including panels and plates, he estimated the figure would be 29.4 per cent. But with Asia Aluminium's plans for rapid expansion and acquisitions, some analysts have raised concerns over its cash-flow and gearing. Mr Young said the company would have a slightly higher gearing of 40 per cent in the coming two years. Still, he believed it would not be a worry given its cash holdings of about $80 million. But Mr Tang is concerned about financing arrangements for the new panel and plate venture. 'Judging from the recent performance of its share price and its financing needs for the new plant, there is a possibility Asia Aluminium will place new shares ... putting short-term selling pressure on the counter,' he said.