Results Review

1Q26 results miss our expectations Valin Steel announced its 1Q26 results: Revenue fell 2.7% YoY to Rmb29.41bn (+10.2% QoQ), and net profit attributable to shareholders fell 64.8% YoY to Rmb198mn (+96.1% QoQ). The 1Q26 results missed our expectations, due to: 1) A narrowing price spread between steel purchases and sales; and 2) the overhauls at steelmakers.

1) The price spread between steel purchases and sales narrowed; profitability weakened. Gross margin fell 2.8ppt YoY and 3.5ppt QoQ to 6.3% in 1Q26, mainly due to falling steel prices and volatile raw material prices.

2) Overall expense ratio declined. In 1Q26, the expense ratio fell 0.73ppt YoY to 5.4%, with the financial expense ratio falling 0.14ppt YoY to -0.05%, mainly due to falling interest-bearing liabilities and rising interest income.

3) Cash flow fluctuates in the short term; asset quality remains solid. In 1Q26, operating cash flow was -Rmb1.65bn, mainly due to falling profit and lower discounted bills. Monetary funds increased by 26% YoY to Rmb12.73bn. The debt-to-asset ratio fell 2.1ppt YoY to 55.13%.

Trends to watch

Earnings to improve in 2Q26 due to gradual recovery across the industry. We estimate that blast furnace rebar continues to incur net losses (-Rmb69/t) given the latest prices. That said, net losses have narrowed quarter-on-quarter. Among the 247 steel mills monitored by Mysteel, 49.8% are generating earnings, with the proportion of profit-making steel mills increasing moderately.

Meanwhile, apparent demand for steel continues to recover, inventories steadily decline, and supply and demand marginally improve. Sector earnings are at low levels due to rising raw material prices and weak domestic demand.

Looking ahead, we expect easing cost pressure and the implementation of anti-involvement policies to support a gradual recovery in sector valuations and earnings.

High-end strategy is paying off. The company continues to improve its high-end product portfolio.

Silicon steel: The firm's silicon steel production line turned profitable in 2025. We expect its silicon steel output to continue increasing in 2026. Silicon steel may become an important earnings growth driver for the company, in our view.

Automotive sheets: The firm continues to improve automotive sheet technologies. Relying on the VAMA JV platform, the company may utilize ArcelorMittal's latest generation of high-strength steel technologies (e.g., Ductibor 1500 and Fortiform ). We expect the Phase III project to strengthen the firm's leading position in lightweight materials for new energy vehicles (NEV).

Capex and free cash flow: Capex peak has passed, and free cash flow may improve. With the completion of ultralow emission transformation, the firm's capex has fallen after peaking. We are upbeat on its dividend payout ability and shareholder returns.

Financials and valuation

We keep our 2026 and 2027 attributable net profit forecasts at Rmb3.4bn and Rmb3.82bn. The stock is trading at 9.9x 2026e and 8.8x 2027e P/E and 0.6x 2026e and 0.6x 2027e P/B. Given the continuous development of the firm's high-end strategy, we maintain an OUTPERFORM rating and our target price of Rmb7.6. Our TP implies 15.3x 2026e and 13.6x 2027e P/E and 0.9x 2026e and 0.9x 2027e P/B. Our TP offers 54% upside.

Risks

Falling downstream demand; disappointing export trade and/or policy implementation.