HONGLU STEEL CONSTRUCTION(002541)：PRODUCTION AND ORDERS TO ACCELERATE;LOW VALUATION OFFERS A GOOD ENTRY POINT

　　What's new
　　We spoke with the management of Honglu Steel Construction recently. We believe the firm’s production and orders will accelerate in September, boosting market expectation for its earnings. Meanwhile, we expect the firm to continue to advance IT management and intelligent production to bolster medium-to-long-term growth. We believe the firm’s valuation is at a historical low, presenting a good investment opportunity.
　　Comments
　　Impact of high temperatures, power restrictions, and COVID-19 resurgence easing; demand and production to accelerate. In 1H22, output of steel structures rose 2% YoY, implying narrower growth vs. 2021 (+35% YoY). We believe COVID-19 resurgence weighed on downstream construction and logistics, and high temperatures since early-July in Anhui province also put the firm’s production under pressure. We expect the impact of these negatives (e.g., high temperatures, power restrictions, and COVID-19 resurgence) to gradually wane in September. Coupled with growing infrastructure investment amid pro-growth policy, this may accelerate recovery in demand from infrastructure construction projects, driving a rebound in the firm’s production and orders on a sequential basis, in our view.
　　Advancing IT management and intelligent production to strengthen competitive advantages. According to its interim results report, the firm believes advanced technologies such as welding and steel detailing play a key role in driving growth in orders and delivering quality projects in the steel structure industry. Since 2021, the firm has integrated its 3D modeling software with project management platform, and achieved building information modeling (BIM) management for its production process. We believe this may help the firm reduce costs and enhance efficiency, thereby improving the production quality. In addition, the firm continued to advance the smart transformation of its production lines, and has developed or introduced equipment such as automatic cutting machines, intelligent laser cutter, and welding and spray-painting robots. We expect the firm to expand the applications of its intelligent production equipment to strengthen its cost advantage and boost management efficiency, laying a solid foundation for its business expansion over the medium and long term.
　　Valuation at a 2-year low; upbeat on investment opportunity presented by recovery in the firm’s fundamentals. Since early 2021, the firm’s median 12-month forward P/E has been 18.7x, with its lowest level at 9.7x and highest at 26.7x. The firm’s current 12-month forward P/E stands close to its historical low of 11.7x, offering a margin of safety. We suggest that investors watch investment opportunities presented by recovery in the firm’s fundamentals amid low valuation.
　　Financials and valuation
　　We keep our earnings forecasts unchanged. The stock is trading at 14.4x 2022e and 10.7x 2023e P/E. We maintain our TP at Rmb31.4, implying 15.6x 2022e and 11.6x 2023e P/E, offering 8% upside.
　　Risks
　　Recovery in output disappoints; COVID-19 resurgence.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。