1Q25 results in line with our expectations

Valin Steel announced its 1Q25 results: Revenue fell 18.4% YoY and 8.4% QoQ to Rmb30.23bn, and net profit attributable to shareholders grew +43.5% YoY and 115.5% QoQ to Rmb562mn. The firm’s earnings improved markedly in 1Q25, mainly driven by stronger steel prices than furnace charge prices.

1) Profitability recovered as the steel industry bottomed out and recovered in 1Q25 and the price spread between steel procurement and sales widened. In 1Q25, gross margin rose 3.3ppt YoY and 2.8ppt QoQ to 9.5%, mainly as industry profits improved amid fluctuations in raw material prices, with the average Platts 62% iron ore price index falling 14.7% YoY to US$102.7/t.

2) Financial expense ratio fell significantly. In 1Q25, financial expense ratio fell 0.1ppt YoY to 0.1%, mainly thanks to YoY growth in FX gains.

3) Operating cash flow improved. In 1Q25, operating cash flow rose 86.58% YoY to Rmb343mn, mainly due to enhanced profitability, a significant profit recovery, and YoY growth in rediscount and repurchase businesses.

4) Other income fell sharply. In 1Q25, other income fell 52.49% YoY to Rmb282mn, mainly due to the YoY decline in value-added tax (VAT) credits.

Trends to watch

Upbeat on earnings growth and a re-rating in 2025 backed by high- quality operations and resilient earnings. We believe the firm is one of the few core assets in the industry that can continuously improve its products through strong R&D, acquire clients with high-quality steel products, strengthen client stickiness with high-quality services, and earn excess profits through competitive differentiation. In 2023-2024, the firm adhered to its high-end strategy amid the industry downturn, increased capex, and optimized its product mix. We expect these efforts to pay off in 2025.

1) The high-quality high-speed wire rod project started production in 2024 and may add 200,000t in output in 2025. 2) The second phase of the cold- rolled silicon steel project will be put into operation in 3Q25, adding　　200,000t and 100,000t in annual non-oriented and oriented silicon steel production capacity. 3) Production of high-strength steel for automobiles could rise 100,000t in 2025 thanks to the commencement of VAMA Phase II.

In addition, the firm continued to improve operations at the bottom of the industry in 2024, having transformed its furnace charge structure, reduced hot metal costs, and overhauled blast furnaces in recent years. We expect the firm's earnings to bottom out and recover in 2025, and its valuation to recover.

Benefiting from the industry wide reform; upbeat on ROE and average valuation in the medium term. We note that for the first time, the National Development and Reform Commission (NDRC) identified output control as an important task for the development of the steel industry in 2025. The key is to adjust production capacity and output to cope with uncertainties in industry demand amid the long-term downturn in the real estate industry and the complex global trade environment, accelerate the survival of the fittest through differentiated management, increase market concentration ratio, and improve the profit of the steel industry along the ferrous metal value chain.

As a core asset, the company has industry-leading operating efficiency and strong competitive advantages in high-end, high-efficiency, and green products. We expect the company to fully benefit from the new round of changes in the industry. We are upbeat on the continued growth of the company's average ROE and valuation.

Financials and valuation

Given rising expectations for supply-side regulation, we keep our 2025e and 2026e attributable net profit forecasts unchanged. The stock is trading at 8.3x 2025e and 7.0x 2026e P/E. We maintain our OUTPERFORM rating and target price of Rmb7.0 (implying 11.5x 2025e and 9.6x 2026e P/E), offering 38.3% upside.

Risks

Sharper-than-expected decline in exports; disappointing policy implementation.