The strong resilience of the leading steel structure management shows the consolidation of internal strength, and the leading edge continues to expand. Honglu Steel is the leading domestic steel structure manufacturer. In 2024, the company's annual production capacity reached 6 million tons, ranking first in the industry. In recent years, new production capacity has been released in an orderly manner. Production/sales volume in 2023 was 4.49/4.26 million tons, respectively, +28%/31% year-on-year, and capacity utilization rate/production and sales rates reached 90%/95%, respectively. Relying on large-scale procurement, intelligent production and fine management capabilities, the company continues to expand cost advantages, improve production efficiency and optimize product quality, and its competitiveness is constantly increasing. Benefiting from large order fulfillment and rapid delivery capabilities, the company has formed in-depth cooperation with large-scale downstream construction central state-owned enterprises and high-quality manufacturing customers, and customer stickiness and order stability continue to improve.

There is plenty of room to increase the penetration rate of domestic steel structures, and leaders are expected to enjoy the dividends of industry expansion+integration. The country's steel structure production in 2023 was 0.117 billion tons, up 11% year-on-year, and the CAGR reached 11% in 2016-2023. According to the industry's “14th Five-Year Plan” and long-term goals for 2035, steel structure usage will reach 0.14/0.2 billion tons in 2025/2035, accounting for 15%/25% or more of crude steel production (14% in 2023). Based on this calculation, the 2023-2025 steel structure production CAGR will exceed 9%, and the industry is expected to continue to expand. The current competitive pattern of the industry is highly fragmented. The output of listed companies in 2023 is only 7% (Honglu Steel Structure 3.8%). Under the trend of large-scale projects combined with industry transformation and upgrading, backward small and medium-sized production capacity is being cleared up at an accelerated pace, and the leading share is expected to continue to rise.

Overseas markets have broad space, and use ships to expand incremental markets. The process of urbanization and industrialization in emerging countries is speeding up, and domestic manufacturing and engineering enterprises are speeding up the process of going overseas. The company actively accepts orders from customers for overseas projects, and the indirect product export business is gradually growing. Overseas projects such as Thailand, Indonesia, and Mexico have been successfully delivered one after another in 2024. The company's steel structure products have been included in the designated procurement list by many owners and general contractors, and it is expected that it will continue to accept orders from customers for overseas projects in the future. Indirect overseas risk is manageable, and the added value of overseas orders is expected to be higher, which is expected to increase the company's overall profitability.

Intelligent transformation is advancing at an accelerated pace, expanding production, improving quality, reducing costs, increasing efficiency and multi-dimensional empowerment. The company continues to promote the intelligent transformation of production lines, focusing on the three core links of cutting, welding and spraying. Cutting: More than 500 laser cutting machines are now equipped to greatly improve cutting efficiency and accuracy, and the utilization rate of raw materials can be increased by 0.9%. Welding: Welding robots have achieved an important breakthrough from outsourcing to independent integration, and procurement costs have been drastically reduced. It is expected that in the future, they will further break through complex process software research and development with rich data accumulation and practical scenarios. Welding robots can increase capacity utilization by extending operating time and greatly reduce labor costs. Spraying: Intelligent spraying can save 20% of paint, and spraying efficiency and quality are also significantly improved. According to estimates, at a welding robot replacement rate of 25%/50%/80%, gross margin can be increased by 0.9/1.3/1.8 pct; considering the impact of increased capacity utilization, gross margin can be increased by 2.4/3.8/4.8 pct, with remarkable results in cost reduction and efficiency.

Investment advice: Weak demand in the early stages combined with increased investment in R&D has put pressure on short-term performance. Currently, PE is at the bottom of history. Looking ahead, we believe that valuation suppression factors are expected to be resolved, the domestic manufacturing industry boom will pick up and the overseas incremental market will provide sufficient demand. At the same time, the effects of intelligent transformation are gradually realized to further enhance competitive advantage, and the company's performance and valuation are expected to experience an upward double blow. We estimate that the company's net profit due to mother in 2024-2026 will be 0.86/0.97/1.07 billion yuan, a year-on-year change of -26.9%/+12.3%/+11.0%, EPS will be 1.25/1.40/1.56 yuan/share, respectively. The current stock price will correspond to PE 13.4/11.9/10.7 times, respectively.

Risk warning: Intelligent transformation falls short of expectations, risk of demand recovery falling short of expectations, risk of steel price fluctuations, risk of measurement errors, etc.