Honglu Steel is a leading manufacturer of steel structures, focusing on fine steel structures for more than 20 years. The company was founded in 2002 and listed in 2011. Its main business is the production and sale of steel structures and related enclosure products. The products are mainly divided into heavy steel structures for construction, light steel structures for buildings, steel structures for bridges, space steel structures, equipment steel structures, etc.
In 2023, the company achieved operating income of 23.54 billion yuan (+18.6%), net profit to mother of 1.18 billion yuan (+1.4%), and sales volume of steel structure products of 4.257 million tons (+30.6%).
At the industry level, based on the industrial chain perspective, the core observations are three: 1) upstream steel prices affect the gross profit margin of steel structure enterprises; leading steel companies may use the “steel price × (1+ reasonable gross profit margin)” pricing mechanism to mitigate the risk of raw material price fluctuations; 2) Midstream steel structure enterprises are divided into manufacturers and contractors, and the market share of the top five enterprises is about 6.5%. As the market environment becomes stricter, high-end demand is released, capital strength supports capacity expansion and intelligent transformation, industry concentration slowly increases; 3) Downstream demand slowly increases; 3) With China's urbanization industrialization process slowing down, it has already experienced explosive growth During this period, policies such as BIPV (photovoltaic building integration) and prefabricated buildings promoted the steady release of support demand.
The steel structure industry ushered in a critical period of steady release of demand, intelligent upgrading, and “the stronger the stronger”.
Manufacturers should seek to expand production capacity, seize market share, and improve downstream bargaining power and risk control capabilities. Contractors should build differentiated brand competitiveness and work hard in emerging markets such as BIPV.
At the company level, production capacity advantages and intelligent advantages promote a “sharp rise in volume and price”: 1. Looking at production capacity advantages in the short term:
The company's production capacity reached 5 million tons in 2023, ranking first in the industry. The current scale effect of production capacity advantages, such as long-term strategic cooperation with high-quality suppliers and annual decline in cost per ton, is reflected in the expansion of production bases. Since 2016, the company has continued to acquire land nationwide, and capital expenditure has increased markedly, and now has ten major production bases. 2. In the medium to long term, intelligent advantages: The steel structure industry has the dual characteristics of manufacturing and construction engineering. The demographic dividend is declining, and the transformation of intelligent manufacturing is urgent.
The company is forward-looking at the core technology of intelligent manufacturing. According to our estimates, the welding process can save about 27.34 million yuan per year after the intelligent upgrade of a single production line. If the penetration rate of the Honglu steel intelligent welding robot reaches 15%, the gross margin can increase by at least 0.9 percentage points.
Profit prediction and valuation: As a leading steel structure manufacturer, the company previously expanded its production base to promote a decline in production capacity, and later, intelligent layout transformation promoted quality and efficiency. It ranked first in the industry in terms of production scale and operational quality and efficiency. The company's net profit for 2024-2026 is estimated to be RMB 12.03/1.58/ RMB 1,511 million, with earnings per share of RMB 1.74/1.97/2.19, corresponding to the current share price PE of 11.85/10.47/9.42X. Based on the absolute valuation and relative valuation mentioned above, the company's reasonable valuation was 25.75-27.28 yuan, a 25.75%-32.43% premium over the current stock price, which covered the “buy” rating for the first time.
Risk warning: risk that the penetration rate of steel structures falls short of expectations, risk of fluctuating raw steel prices, employment risk, risk of technology development falling short of expectations, risk of rising financing costs, etc.