Results Review

1Q26 results in line with our expectations

Honglu Steel Construction announced its 1Q26 results: Revenue rose 8.87% YoY to Rmb5,242mn, net profit attributable to shareholders rose 8.07% YoY to Rm148mn, and recurring net profit grew 21.65% YoY to Rmb140mn. The firm’s 1Q26 results are in line with our expectations. The rapid growth in recurring net profit was attributable to the decrease in R&D investment and the improvement in gross profit margin.

1) Output and new orders maintained solid growth; proportion of high-value orders expanded: In 1Q26, the firm's steel structure output rose 14.75% YoY to 1.20mnt, and its new steel structure material orders grew 5.1% YoY to Rmb7,412mn. Large orders with a value of more than Rmb100mn accounted for 42% of its total new orders, up 25.5ppt YoY;

2) Core profitability improved: We estimate gross profit per tonne of steel structure at Rmb429/t (-Rmb22 YoY), net profit per tonne at Rmb123/t (-Rmb8 YoY), and recurring net profit per tonne at Rmb116/t (+Rmb7 YoY), implying improved core profitability after excluding the impact of non-recurring gains and losses.

3) R&D spending intensity declined marginally: In 1Q26, the sum of the firm's four key expense ratios fell 0.6ppt YoY to 5.7%, with R&D expense ratio declining 0.5ppt to 2.1% and pertonne R&D intensity falling Rmb29 YoY to Rmb90/t.

4) Cash flow came under pressure: The firm's reported a net operating cash outflow of Rmb900mn in 1Q26 (up Rmb705mn YoY), mainly due to increased payments of accounts payable and payments for procurement.

Trends to watch

Watch cost reduction and efficiency improvement through intelligent transformation and the firm’s market share gains in the medium and long term. We believe the firm's processing fees are close to the bottom, its capex intensity will likely narrow in 2026, and the impact of depreciation and amortization on the cost side may marginally ease. We note that the ASP of hot-rolled coils has risen 1.5% YoY since 2Q26. If steel prices continue to recover amid a rebound in demand, we expect the firm's net profit per tonne to rise further. We remain upbeat about its market share expansion.

Financials and valuation

We keep our earnings forecasts unchanged and estimate 2026 and 2027 attributable net profit at Rmb744mn and Rmb827mn. The stock is trading at 18.8x 2026e and 16.9x 2027e P/E. As an industry leader, the firm is on track to build core competitive advantages through intelligent transformation. We maintain an OUTPERFORM rating and target price of Rmb24.0, corresponding to 22.3x 2026e and 20.0x 2027e P/E and implying 18.2% upside.

Risks

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