1Q25 results in line with our expectations

The firm announced its 1Q25 results: Revenue rose 8.78% YoY to nearly Rmb4.82bn, and attributable net profit fell 32.78% YoY to Rmb137mn. The 1Q25 results were in line with our expectations.

1) Output growth supports earnings. The firm's output of steel structure products rose 14.29% YoY to nearly 1.05mnt in 1Q25, and the rapid output growth significantly supported the firm's earnings in 1Q25 (revenue rose 8.78% YoY in 1Q25).

2) GM fell slightly. Due to falling steel prices, the firm's GM fell 0.8ppt YoY to 9.8% in 1Q25. We estimate that gross profit per tonne of steel structure products fell Rmb60 or 11.7% YoY to Rmb451/t in 1Q25.

3) Comprehensive expense ratio fell; selling and R&D expenses per tonne dropped notably. In 1Q25, the firm's four-item comprehensive expense ratio fell 1.0ppt YoY to 6.2%, and its four-item expense per tonne fell Rmb61 or 17.7% YoY to Rmb285. Specifically, the selling, R&D, and financial expenses per tonne fell 21.2%, 30.1%, and 6.3% YoY to Rmb19, Rmb119, and Rmb77, while the G&A expenses per tonne rose 0.7% YoY to Rmb70.

4) Profit is slightly under pressure; core net profit gradually rising. The firm's net profit per tonne fell Rmb91 YoY to Rmb130/t in 1Q25, but recurring net profit per tonne rose Rmb14 YoY to Rmb109/t.

5) Capital chain remains tight. The firm's operating cash flow reported a net outflow of Rmb195mn in 1Q25 (vs. a net inflow of Rmb84mn in the same period last year), mainly due to a QoQ decline of Rmb0.78bn in payables and an increase of Rmb0.53bn in inventories.

Trends to watch

Positive policy signals; smart transformation to boost long-term high-quality growth. In 1Q25, the firm's new contracts rose 1.25% YoY to over Rmb7.05bn. Recent policy signals have been positive. The Politburo meeting on April 25 stressed the need to strengthen unconventional counter-cyclical adjustment, focus on stabilizing employment, enterprises, markets, and expectations, continue to implement a package of debt swap policies (for local government), and increase efforts to conduct urban renewal. If fiscal and real estate policies continue to take effect, the　construction sector and steel structure demand may improve, and the steel structure sector's profit per tonne will likely rebound. In the long term, we are upbeat on the firm's economies of scale and improving production efficiency thanks to its intelligent transformation.

Financials and valuation

We maintain our 2025 and 2026 attributable net profit forecasts at Rmb1.05bn and Rmb1.14bn. The stock is trading at 12x 2025e and 11x 2026e P/E. We maintain an OUTPERFORM rating and target price of Rmb24, implying 16x 2025e and 14x 2026e P/E, offering 31.7% upside.

Risks

Weaker-than-expected demand; sharp fluctuations in steel prices; disappointing progress of intelligent transformation.