1H26 results beat our expectations

Honglu Steel Construction announced its 1H26 results: Revenue rose 10.3% YoY to Rmb11.64bn, net profit attributable to shareholders grew 52.2% YoY to Rmb438mn, and recurring net profit grew 69.9% YoY to Rmb405mn. In 2Q26, revenue rose 11.6% YoY to Rmb6.399bn, and attributable net profit rose 92.0% YoY at Rmb291mn. 1H26 results beat our expectations thanks to expense dilution and better-than-expected gross profit per tonne.

Intelligentization efforts boosted growth in sales volume and profit: Total output and new orders increased 14.3% and 12.4% YoY in 1H26. The firm's steel structure output rose 13.9% YoY to 1.5mnt in 2Q26, and new orders for steel structure materials increased 19.4% YoY to Rmb8,747mn.

Economies of scale further strengthened. Gross margin rose 2.6ppt YoY to 12.9% in 2Q26, and we estimate gross profit per tonne of steel structure at Rmb550/t (+Rmb104 YoY) and recurring net profit per tonne at Rmb177/t (+Rmb83 YoY), implying significant improvement in core profitability.

Expense ratios continued to decline: In 2Q26, the firm's four total expense ratio fell 0.6ppt YoY to 6.4%, with R&D expense ratio falling 0.4ppt YoY to 2.8% and R&D intensity per tonne falling Rmb20 YoY to Rmb122/t.

Cash flow improved in 2Q26: The firm's operating cash flow reported a net outflow of Rmb206mn in 1H26 and a net inflow of Rmb694mn in 2Q26, improving markedly QoQ.

Trends to watch

Intelligent transformation to reduce costs and improve efficiency; earnings to turn around in 2026. On the supply side, the firm's investment in smart technologies further increased output and decreased expenses in 2Q26, with monthly average output exceeding 500,000t and annualized capacity utilization rate reaching 115%. We expect capex intensity to decline in the future, and the impact of depreciation and amortization on costs to ease marginally. We believe net profit per tonne still has large upside potential.

On the demand side, we believe capex in the manufacturing industry may gradually diverge, and demand for industrial plants such as high-end manufacturing still has large growth potential. We remain upbeat on the firm's market share expansion.

Financials and valuation

As the firm's earnings recovery may beat expectations, we raise our 2026 and 2027 attributable net profit forecasts 9.2% and 17.5% to Rmb812mn and Rmb972mn, implying 17.2x 2026e and 14.4x 2027e P/E. We maintain an OUTPERFORM rating and raise our TP 8.3% to Rmb26.0 (considering the firm is an industry leader and we expect its intelligent transformation to strengthen core competitive advantages), implying 22.1x 2026e and 18.5x 2027e P/E and 28.6% upside.

Risks

Sharp fluctuations in steel prices; disappointing improvement in profit per tonne; weaker-than-expected demand growth.