2025 results miss our expectations

Valin Steel announced its 2025 results: Revenue fell 15.9% YoY to Rmb121.74bn, net profit attributable to shareholders rose 28.5% YoY to Rmb2.61bn, and recurring net profit grew 76.8% YoY to Rmb2.31bn, missing our expectations.

Sales volume and ASP of steel products fell slightly. The firm's full-year sales volume of long products, flat products, and pipes fell 13.8% and 10.1%, and rose 0.6% YoY to 7.39mnt, 13.42mnt, and 1.81mnt, and ASP per tonne dropped 8.2%, 5.2%, and 1.9% YoY to Rmb3,309, Rmb4,231, and Rmb6,368, mainly due to falling prices of furnace materials and weakening cost support for steel products.

Steady improvement in product mix drove up profitability of steel products. The firm's 2025 gross margins of long products, flat products, and pipes rose 2.6ppt, 3.8ppt, and 0.7ppt YoY to 4.7%, 14.1%, and 9.3%, thanks to product mix optimization, cost reduction, and efficiency enhancement.

Non-recurring expenses increased notably. In 4Q25, net profit attributable to shareholders was only Rmb101mn, and recurring attributable net profit was Rmb15mn, mainly due to one-off overdue fees of about Rmb400mn for environmental tax payment.

Effective tax rate remained high. The effective tax rate was 16.8% in 2025. Other income declined significantly. Other income fell 51.2% YoY to Rmb1.10bn in 2025, mainly due to a lower amount of valueadded tax credits incurred.

Trends to watch

Proportion of steel products rising; premiumization strategy paying off. Proportion of steel products in total sales volume rose to 68.5% in 2025. The second 200,000t/yr non-oriented silicon steel production line and 100,000t/yr oriented silicon steel production line started operation in 2025. Based on the VAMA JV platform, the firm is accelerating the introduction of high-end high-strength steel technologies such as ArcelorMittal's Ductibor 1500 and Fortiform . With the Phase III project and the global R&D center, we believe the firm is upgrading its product mix to ultra-high-strength and lightweight materials, strengthening its competitive advantage in profitability, and its premiumization strategy is paying off.

Capex declined; high dividend payout highlights investment value. With the completion of ultra-low emission transformation, the firm's capex has begun to decline. Meanwhile, the debt-to-asset ratio further dropped to 53.5% in 2025, and financial expenses plunged 62.77% YoY to Rmb33mn, implying continued optimization of financial structure. The firm's cash dividend payout ratio rose to 42% in 2025, implying a dividend yield of 3.2% at current stock price. We believe earnings of the firm's main business have proved resilient to cyclicality, and we expect its dividend payout ratio to rise further in the medium term.

Financials and valuation

Given the inflation in raw material prices due to geopolitical factors, we lower our 2026 and 2027 forecasts for attributable net profit by 32% and 29% to Rmb3.40bn and Rmb3.82bn. The stock is trading at 10x 2026e and 9x 2027e P/E, and 0.6x 2026e and 0.6x 2027e P/B. As the firm continues to advance its premiumization strategy, we maintain an OUTPERFORM rating and TP of Rmb7.6, implying 15x 2026e and 14x 2027e P/E and 0.9x 2026e and 0.9x 2027e P/B, offering 51% upside.

Risks

Disappointing steel export sales volume and/or policy implementation; volatile raw material prices.