3Q25 results in line with our expectations

Valin Steel announced its 3Q25 results: Revenue fell 10.53%YoY and 2.76% QoQ to Rmb31.96bn, and net profit attributableto shareholders rose 73.22% to Rmb762mn (-35.8% QoQ), inline with expectations.

Trends to watch

Earnings of the firm's steel products significantly improvedYoY. In 3Q25, the firm's GM rose 2.7ppt YoY to 9.6% (-0.8pptQoQ); gross profit of steel products improved significantlycompared to the same period last year, in line with our simulatedgross profit per tonne of rebar, hot-rolled, and cold-rolled steel(+Rmb194, +Rmb441, and +Rmb401 YoY and -Rmb18,+Rmb35, and -Rmb28 QoQ to Rmb76, Rmb116 and Rmb287).

Steady progress in high-end strategy; upbeat on organicgrowth. In recent years, the firm has started a new capex cyclebased on its transformation and upgrading strategy, and hascontinued to increase investment in product mix optimizationand upgrading.

We believe this is essentially a cost front-loading strategy tomaximize the firm's value, i.e., paying a certain amount of profitduring downturns and paving the way for excess profit duringthe gradual industry recovery. We note that the firm is graduallyimproving its high-end product portfolio.

Silicon steel: Orders for non-oriented silicon steel lines 1and 2 have been nearly saturated after they were put intooperation, and high-grade oriented silicon steel lines have ahigh hit rate. At present, the firm is capable of producing75–80HIB steel, and it is performing well as a new player insilicon steel.

Automotive plates: In March, VAMA signed an agreementto introduce technology licensing for 24 new steels,including high-strength steels such as Ductibor 1500.

Construction of Phase III is steadily advancing. In addition,ArcelorMittal plans to establish a global automotive steelR&D center in China to exclusively empower the firm'sautomotive high-strength steel technology and strengthenits automotive sheet products.

High-end bars and wires: Subsidiary Valin Xianggangplans to introduce advanced continuous casting equipmentto lay a solid foundation for the firm to develop large-sizeand high-quality bearing steel and wind power steel. We areupbeat on the firm's steady progress in its high-endstrategy, and are optimistic about its organic growth.

Long-term trend intact despite short-term fluctuations;upbeat on earnings and valuation recovery. As an inlandsteelmaker, the company suffered in 3Q25 due to high hot metaloutput and strong furnace charge prices, which eroded profit. Inthe long term, however, we expect industry leaders withcompetitive advantages to benefit from supply-side reformsamid China's efforts to control production capacity and output,eliminate obsolete production capacity, and accelerate M&A. Weexpect the firm to benefit from this trend, and its earnings andvaluation to both rise.

Financials and valuation

We leave our 2025 and 2026 attributable net profit forecastsunchanged. We maintain an OUTPERFORM rating. The stock istrading at 9.5x 2025e and 8.0x 2026e P/E. We maintain ourtarget price of Rmb7. Our TP implies 11.5x 2025e and 9.6x2026e P/E, offering 21.3% upside.

Risks

Sharper-than-expected decline in construction industry chain;sharper-than-expected declines in exports; disappointing policyi mplementation.