VALIN STEEL(000932)：CORE ASSET IN THE STEEL SECTOR TO SEE DAVIS DOUBLE PLAY IN 2023

　　Investment positives
　　We initiate coverage on Hunan Valin Steel Co., Ltd. (Valin Steel) with an OUTPERFORM rating and a target price of Rmb6.20 (implying 0.77x 2023e and 0.68x 2024e P/B), with 28.6% upside. We expect the firm to see a Davis Double Play in 2023.
　　Why an OUTPERFORM rating?
　　Comprehensive reform creating a core asset in the steel sector. Valin Steel’s actual controller is Hunan province’s State-owned Assets Supervision and Administration Commission (SASAC). After the industry-wide downturn in 2015, the firm significantly changed its incentive mechanism and steadily improved operating efficiency. It recruited talent to enhance its R&D strength, continued to upgrade its product mix, and optimized its sales model, creating solid competitive advantages.
　　Thanks to Valin Steel’s comprehensive reform, we note that its operating and management efficiency, asset quality, costs and expenses, and earnings stability have improved markedly during the current industry downturn. The firm has become a state-owned core asset in the steel sector, which has not been fully recognized by the market, in our opinion.
　　Product mix optimization well on track; organic growth to continue through cycles. In recent years, Valin Steel has closely followed the trend of upgrading demand for steel materials in downstream industries such as automobiles and alternative energy. It has continued to upgrade production lines, develop high value-added products, and increase the proportion of direct supply and sales proportion of special steel. It has obtained a high market share and gained notable competitive advantages in many steel segments.
　　Looking ahead, we expect sales of the firm’s high-end steel products (i.e., ultra-high-strength automotive sheets, silicon steel, and long special steel products) to increase due to their strong competitiveness, and to become drivers of new earnings growth.We are upbeat on the firm’s sustained organic growth through cycles.
　　How do we differ from the market? We think the market has underestimated Valin Steel’s potential to benefit from the building of a valuation system with Chinese characteristics, and we expect a valuation re-rating in 2023. Although the firm is not a central state-owned enterprise (SOE), it is a local SOE with high asset quality, good profitability, and strong R&D capabilities, and most of its core steel products are strategic steel materials. As of May 2023, Valin Steel’s P/B ratio (most recent quarter) is only 0.65x (at the 10.6th historical percentile), indicating that the firm is undervalued by the market, in our view.
　　Given the firm’s sound cash flow, we expect its dividend payout ratio to rise further, offering a high margin of safety. We expect Valin Steel to see a valuation re-rating as its solid profitability is proven and recognized by the market, and as its growth potential materializes amid internal reform. Hence, we believe Valin Steel represents a Davis Double Play, based on value investor Shelby Davis’ investment model of picking low-priced stocks with the potential for above-average earnings growth.
　　Potential catalysts: 1) Valin Steel’s phase II high-end automotive sheet project ramps up faster than expected, and its revenue and gross profit from high-end steel products grow notably. 2) The firm’s profit recovery beats expectations thanks to industry recovery.
　　Financials and valuation
　　Our EPS forecast is Rmb1.03 in 2023 and Rmb1.33 in 2024, a CAGR of 20.2%. We expect the firm’s net profit to be Rmb7.10bn in 2023 and Rmb9.16bn in 2024. We initiate coverage with an OUTPERFORM rating and a target price of Rmb6.20 (implying 0.77x 2023e and 0.68x 2024e P/B), with 28.6% upside. The stock is trading at 0.6x 2023e and 0.53x 2024e P/B.
　　Risks
　　Global economic downturn deteriorates; real estate market recovery disappoints; raw material prices rise by more than expected.
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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。