Results Review

2025 results miss our expectations

Honglu Steel Construction announced its 2025 results: Revenue rose 2.57% YoY to Rmb22.07bn and net profit attributable to shareholders fell 18.27% YoY to Rmb631mn. In 4Q25, revenue rose 9.31% YoY to Rmb6.15bn, and net profit attributable to shareholders grew 15.52% YoY to Rmb135mn. The 2025 results missed our expectations, mainly due to higher income tax expenses resulting from lower deductions for deferred income tax expenses in 2025, and a decline in profitability due to weak gross profit per tonne in 4Q25.

Output and sales volume maintained steady growth: In 2025, the firm's output and sales volume rose 11.3% and 12.9% YoY to 5.02mnt and 4.89mnt, and its full-year capacity utilization rate was 96.6% (up 8.1ppt YoY). Notably, its output reached 1.41mnt in 4Q25 (up 23.2% YoY and up 13.0% QoQ).

Gross profit declined due to fiercer competition: We estimate gross profit per tonne of the firm's steel structure business at Rmb344/t (down Rmb50 YoY) and net profit per tonne at Rmb129/t in 2025 (down Rmb49 YoY). In 4Q25, gross profit per tonne fell by Rmb164 YoY and Rmb116 QoQ to Rmb365/t. We attribute this to: 1) Pressure on processing fees due to intensifying competition; and 2) increased costs due to investment in smart transformation.

Investment in smart transformation; rising output further diluted expenses: In 2025, the firm's investment in smart transformation and capex intensity slowed. R&D expenses per tonne fell to Rmb118/t in 2025, while G&A and selling expenses per tonne dropped by Rmb5 and Rmb3 YoY to Rmb73/t and Rmb30/t.

Cash flow improved notably; income tax expenses eroded part of profit: Net operating cash flow rose 138.17% YoY to Rmb1.37bn in 2025, and income tax expenses rose 179.67% YoY to Rmb160mn in 2025. Specifically, the deductible amount of deferred income tax expenses fell from Rmb80mn to Rmb10mn, resulting in increased income tax expenses and eroding part of the firm’s profit.

Trends to watch

Watch cost reduction and efficiency improvement amid smart transformation and market share gains in the medium and long term. We believe the firm's processing fees are close to the bottom, its capex intensity may narrow in 2026, and the impact of depreciation and amortization on costs may marginally weaken. If steel prices recover and demand improves, we expect the firm's net profit per tonne to maintain large upside and we remain upbeat on its market share expansion.

Financials and valuation

Considering the pressure from fiercer competition, we lower our 2026 and 2027 attributable net profit forecast 34.9% and 29.0% to Rmb744mn and Rmb827mn. The stock is trading at 18.6x 2026e and 16.7x 2027e P/E. As an industry leader, the firm is likely to build core competitive advantages through smart transformation. Given rising market risk appetite, we maintain an OUTPERFORM rating and target price of Rmb24.0, implying 22.3x 2026e and 20.0x 2027e P/E, offering 20.0% upside.

Risks

Sharp fluctuations in steel prices; disappointing improvement in earnings per tonne; disappointing smart transformation.