2024 results miss our expectations

Valin Steel announced its 2024 results: Revenue fell 12.0% YoY to Rmb144.69bn, and attributable net profit declined 60.0% YoY to Rmb2.03bn. Due to the industry downturn, the results missed our expectations.

Production, sales, and steel prices declined due to sluggish demand. The firm’s sales volume of long products, flat products, and pipes fell 17.6%, rose 4.33%, and fell 0.55% YoY in 2024 to 8.57mn, 14.93mn, and 1.80mn tonnes, with steel prices of these products falling 8.1%, 8.7%, and 6.0% YoY to Rmb3,606, Rmb4,462, and Rmb6,493 per tonne.

Expense ratio edged higher. In 2024, the firm’s expense ratio rose 0.23ppt YoY to 2.04%, with G&A expense ratio rising 0.13ppt YoY to 1.52%.

Free cash flow remained solid. According to our calculations, the firm’s free cash flow was Rmb22.62bn in 2024, demonstrating the firm’s strong industry position during cyclical downturns.

Effective tax rate rose visibly. In 2024, the firm’s effective tax rate rose 11.4ppt YoY to 22.7%.

Other income increased. In 2024, the firm’s other income rose 117% YoY to Rmb2.26bn, thanks to VAT credits.

Trends to watch

Core competitiveness strengthened through building a solid foundation; expecting breakthroughs in 2025. We note that the firm continued to implement its transformation and upgrading strategy for special steel despite cyclical downturns. The proportion of R&D employees and those with doctoral degrees continued to rise in 2024, and the proportion of specialty steel also increased steadily. In addition, production lines for silicon steel, special steel long products, automotive high-strength steel, and high-end wide and thick plates have been put into operation, which may contribute additional earnings in 2025, in our view. We believe that the firm’s improving R&D and product competitiveness will be important drivers of its average ROE growth in the medium and long term.

In addition, the firm actively adjusted its furnace charge structure in 2024 and reduced costs through major repairs of blast furnaces nearing the end of their service life. The ultra-low emission renovation is now in its final stages. The firm has front-loaded some expenses to strengthen its long- term cost competitiveness.

We believe the firm has improved its core competitiveness and is well on its way to transforming itself from a steel producer into a manufacturer and service producer. We are upbeat on the firm’s excess profit growth compared with the industry average in 2025.

Positive changes in market cap management; upbeat on Davis Double Play in 2025. In 2024, the firm’s dividend payout ratio rose 2.7ppt YoY to 34.0%. The firm has stepped up its efforts to repurchase shares and plans to use Rmb200-400mn for the buyback. Cash dividends and proposed share buyback amount to Rmb890mn to Rmb1.09bn, accounting for 43.83-53.68% of attributable net profit in 2024, underscoring the management’s confidence in future growth and its emphasis on shareholders’ returns. In addition, the output control proposed by the National Development and Reform Commission1 in 1Q25 will likely improve the industry landscape, and we believe the firm’s earnings cycle may gradually bottom out. We are optimistic about the firm’s earnings and valuations in 2025.

Financials and valuation

Taking into account the rising proportion of specialty steel and the potential bottoming out of the firm’s earnings cycle, we raise our 2025 net profit forecast 3.2% to Rmb4.19bn and introduce 2026 net profit forecast of Rmb5.01bn. The stock is trading at 8.7x 2025e and 7.3x 2026e P/E. Given improving market expectations amid output control measures, we maintain an OUTPERFORM rating and raise our target price 39.7% to Rmb7.0, implying 11.5x 2025e and 9.6x 2026e P/E and offering 32.1% upside.

Risks

Disappointing demand from the value chain in construction; sharper-than- expected decline in exports.