Results Review

2Q26 results missed our expectations

Valin Steel announced its 1H26 results: Revenue fell 2.99% YoY to Rmb61.20bn, and net profit attributable to shareholders fell 87.11% YoY to Rmb225mn. In 2Q26, revenue fell 3.26% YoY and rose 8.09% QoQ to Rmb31.79bn, and net profit attributable to shareholders fell 97.67% YoY and 86.04% QoQ to Rmb28mn.

1) Earnings of steel business under pressure. The firm's revenue from the steel business fell 5.1% YoY to Rmb44.63bn in 1H26, with gross margin down 2.5ppt YoY to 8.66%; revenue from long products, flat products, and steel pipes changed +2.8%, -7.3%, and -10.5% YoY respectively.

2) One-off tax back-payment weighed on short-term earnings. The firm's non-operating expenses rose 148.9% YoY to Rmb292mn, which was mainly caused by the surcharges on the overdue tax payment. After absorbing the impact of the tax back-payment, the firm’s internal production and operation improved QoQ in 2Q26.

Trends to watch

Premiumization strategy helps offset cyclical downturn; upgrading product mix to build alpha. In 1H26, key steel products accounted for 69.1% of the firm's sales volume, up 0.6ppt from 2025. Breakthroughs have been achieved in downstream applications: Usibor high-strength ultra-light automotive steel sheets have been supplied in batches to flagship models of AFV enterprises, and wind power-related steel products have been delivered to the world's first deep-sea floating wind power platform. We believe that with the continuous volume expansion of high value-added products such as silicon steel and automotive steel sheets, the firm’s product structure and per-tonne steel profitability will further improve.

Prices of furnace charge materials to decline; steelmakers' earnings to recover. We expect prices of furnace charge materials to trend downward in 2H26 and steel prices to stabilize. Coupled with the stabilization of steel prices, the profit distribution in the ferrous metal sector will likely tilt further towards finished steel products, and the purchase-sales price spread is likely to widen. We believe that the cost-side advantages will likely support the firm’s profit recovery in 2H26.

Capex cycle coming to an end; free cash flow to improve. As the firm has largely completed its ultra-low emission transformation, we expect its capex pressure to ease. In 1H26, the firm's investment fell 19.8% YoY to Rmb3.24bn, and its liability-to-asset ratio stayed at a historical low of 57.37%.

Financials and valuation

Considering the impact of one-off tax back-payment on the firm's short-term earnings, we lower our 2026 and 2027 attributable net profit forecasts 25.7% and 2.9% to Rmb2.53bn and Rmb3.71bn. The stock is trading at 9.7x 2026e and 6.6x 2027e P/E as well as 0.4x 2026e and 0.4x 2027e P/B. We maintain our OUTPERFORM rating. Given the near-term headwind from the tax back-payment, we lower our target price by 32% to Rmb5.20, implying 14.1x/9.6x 2026E/2027E P/E and 0.6x/0.6x 2026E/2027E P/B, offering about 45% upside.

Risks

Demand recovery disappoints; raw material prices fluctuate; anti-involution policies disappoint.