1H26 results in line with our expectations

HBIS Company announced its 2Q26 results: Revenue rose 2.4% YoY and 10.5% QoQ to Rmb34.58bn, and net profit attributable to shareholders fell 14% YoY and 2.6% QoQ to Rmb315mn.

1) Sales volume and prices of the steel business are resilient. In 1H26, revenue of the steel industry grew 0.35% YoY to Rmb62.997bn, and gross margin rose 0.24ppt YoY to 8.91%. Revenue from flat products remained largely flat YoY, with gross margin rising 0.36ppt to 9.73%; revenue from bars & profiles, wire rods, and steel billets rose 20.9%, 35.1%, and 46.4% YoY. Crude steel output rose 4.5% YoY to 16.44mnt in 1H26. Based on crude steel output, the selling price per tonne of steel was about Rmb3,832 (-4.0% YoY) and the gross profit per tonne was about Rmb342 (-1.3% YoY). Cost per tonne of steel fell 4.2% YoY.

2) Core earnings improved QoQ. In 1H26, recurring net profit attributable to shareholders rose 6.95% YoY to Rmb380mn, operating cash flow rose 6.2% YoY to Rmb6.44bn, and nonrecurring gains and losses in 1H26 totaled Rmb257mn, mainly due to liquidated damages for city relocation; recurring profit grew YoY, bolstered by improving operations

Trends to watch

The firm's operating alpha gradually emerged in 1H26 despite industry-wide slowdown. In 1H26, China's crude steel output fell 3% YoY and traditional steel demand was weak, but the firm's comprehensive selling price and steel gross margin rose YoY thanks to marketing efficiency and product mix adjustment. We expect the spread between the firm's purchase and sales prices to improve further in 2H26, if charge prices fall.

Ramp-up of new products and in new areas to serve as medium-term growth drivers. The firm's high-end products have gradually moved from the product R&D stage to thedomestic production and mass supply stage, and the use of its vanadium-based new materials are increase in high-value application scenarios. Improving equipment efficiency at the new production bases in Tangshan and Handan should boost the proportion of high value-added products and earnings per tonne of steel.

About Rmb9.01bn of projects were converted into fixed assets in 1H26, leading to a net decline of only Rmb4.799bn in construction-in-progress at the end of the period compared with the beginning of the year. We expect the firm's product mix upgrade to further support its earnings, as production capacity ramps up in the new production bases and high-end products ramp up.

Financials and valuation

We keep our 2026 and 2027 attributable net profit forecasts unchanged at Rmb1.64bn and Rmb2.04bn. The stock is trading at about 13.3x 2026e and 10.7x 2027e P/E. We maintain an OUTPERFORM rating and our target price of Rmb3.2. Our TP implies 20.3x 2026e and 16.3x 2027e P/E, offering 53% upside.

Risks

Rising raw material prices; weaker-than-expected recovery of downstream demand; disappointing ramp-up of products.