1H25 results beat our expectations

Valin Steel announced its 1H25 results: In 1H25, revenue fell 16.9% YoY t o Rmb63,092mn; net profit attributable to shareholders and recurring attrib utable net profit grew 31.31% and 30.85% to Rmb1,748mn and Rmb1,522 mn. In 2Q25, revenue was down 15.58% YoY to Rmb32,719mn; attributab le net profit and recurring attributable net profit rose 26.22% and 27.43% Y oY, exceeding our expectations as steel business earnings improved consi derably.

Sales volume fell due to overhauls; cost pressure eased notably and profitability rebounded markedly. In 1H25, the firm's sales volume of steel products fell 5.9% YoY and 19.17% QoQ to 11mnt, mainly because blast furnace overhauls in 1Q25 affected output. In 1H25, the firm's selling price per tonne, gross profit per tonne, and net profit per tonne were Rmb4,273, Rmb479, and Rmb159 (-Rmb137, +Rmb123, +Rmb54 YoY, +Rmb32, +Rmb180, and +Rmb104 HoH), mainly due to easing cost pressure.

The firm maintained effective expense control and its financial expenses continued to decline. In 1H25, financial, G&A and operating expenses combined per tonne rose by Rmb4.6/t YoY to Rmb94/t, with the financial expenses per tonne falling by Rmb9.4 YoY to -Rmb1.2 thanks to a YoY decline in interest-bearing debts. The firm's interest-bearing debt/asset ratio fell to 15.24% in 1H25.

Effective tax rate fell notably.The firm's income tax was Rmb270mn in 2Q20, with an effective tax rate of 17%, down markedly from 1Q25.

Other income declined considerably YoY. The firm's other income fell by Rmb298mn YoY to Rmb369mn in 2Q25 mainly due to a decline in value-added tax (VAT) deduction.

Trends to watch

High-quality fundamentals and earnings upside; upbeat on earnings growth and valuation expansion in 2025. We believe the firm is one of the few key names in the industry that can show earnings resilience amid industry cyclical fluctuations by leveraging its strong cost control ability, continuously optimized product mix, and lean management. The substantial improvement in the firm's operating performance in 1H25　demonstrates its strengthening product competitiveness and organic growth.

Looking ahead, we expect the firm's high-end products to continue growing: 1) In 1H25, key steel products accounted for 68.5% of its total sales volume, up 3.9ppt YoY; the firm developed 75 new products, with six products being the first of their kind in China or serving as import substitution. Specifically, sales volume of high-strength galvanized products increased 97.7% YoY to 259,000t.

2) The firm’s silicon steel project company has successfully developed 12 grades for high-grade non-oriented silicon steel and five grades for oriented silicon steel product YTD. The first batch of high magnetic induction oriented silicon steel was launched on June 27, and the sales volume of oriented silicon steel base materials increased 38% YoY to 475,000t, with market share exceeding 60%.

3) The firm’s parent company signed a comprehensive strategic partnership agreement with Anmi Group to facilitate the implementation of the Phase III VAMA project. It plans to introduce 24 new steel technology licenses, laying a foundation for strengthening the competitiveness and profitability of the firm's high-end steel products. As the central government attaches greater importance to anti-involution, we expect supply-side reforms in the steel industry to accelerate. As a core name with clear competitive advantages, the company could fully benefit, in our view. We are optimistic that the company's average ROE and valuation may continue to rise.

Financials and valuation

Considering that the price of blast furnace materials may be relatively strong in 2H25, we keep our 2025 and 2026 attributable net profit forecast unchanged. The stock is trading at 9.5x and 7.9x 2025e and 2026e P/E. We maintain our OUTPERFORM rating and target price of Rmb7.0 (implying 11.5x and 9.6x 2025e and 2026e P/E), offering 22% upside.

Risks

Real estate downturn; disappointing policy implementation.