Zhongjin: Production regulation improves industry structure, reiterates optimism on the steel sector market.

CICC released a research report stating that recently, the National Development and Reform Commission officially released the "Task List for China's Economic and Social Development in 2025" on its official public account. One of the tasks to promote the transformation and upgrading of traditional industries is to "continue to implement crude steel production control and promote the reduction and restructuring of the steel industry", proposed for the first time after the industry enters a downward cycle in 2021. Compared to the production control in 2021, the reduction intensity in 2025 may exceed that, but the demand may not reach the level of 2021. In summary, steel companies with strong performance elasticity are recommended, with a focus on MAANSHAN IRON (00323). It is also suggested to pay attention to Xinyu Iron & Steel (600782.SH). In the long term, core assets are expected to benefit from changes in the industry landscape, with a key recommendation for Hunan Valin Steel (000932.SZ) and Baoshan Iron & Steel (600019.SH). CICC's main viewpoints are as follows: The industry is at a historical cyclical bottom, and beginning to show positive marginal changes 1) The industry's profits began to plummet in the second half of 2021, with profits of key enterprises dropping by nearly 50% year-on-year in the third quarter of 2024, with an average sales profit margin of 0.71%. Loss-making enterprises accumulated losses exceeding 120 billion yuan in 2024, while the industry has not cleared out excess capacity, with a capacity of nearly 1.3 billion tons and a capacity utilization rate of 77%, leading to homogenization and intense industry competition. 2) Inventory levels continue to decline during the downward cycle, reaching a bottom in inventory turnover; 3) Financial leverage is rising, debt repayment capability is declining, with the industry's asset-liability ratio at 65.28% in 2024 (compared to 60.22% in 2021). 4) Trade frictions are intensifying, putting pressure on exports; 5) Some leading steel companies still have excess profits even during significant industry losses, but their valuations are below book value, with price-to-book ratios around the 25th percentile over the past 5 years. 6) Industry demand has been picking up since February, with manufacturing stronger than construction; 7) Finished steel prices have outperformed iron ore prices recently, leading to improving profits. Reiterating the bullish core logic 1) The sector currently has a low profitability, low valuation, and low allocation trifecta, with potential gains from a "high cut and low" strategy; 2) The catalyst is the implementation of production control; 3) With low inventories, production control is expected to improve the supply-demand balance and alleviate the erosion of profits by raw materials, with the prospect of profit cycle recovery worth looking forward to, supported by fundamentals; 4) The government's determination to resolve excess steel production capacity and industrial conflicts is clear, with clear goals. In the long term, continuous production control and differential management will accelerate industry consolidation towards leading companies, providing long-term investment logic, which is more important than short-term fundamental changes. In terms of pace, the current position of the sector is still sufficiently low, with marginal improvements in fundamentals, and expectations for supply-side pressure reduction are just beginning to take shape, highlighting the opportunity for steel sector layout. Risk factors Significant decline in demand in the construction industry chain below expectations; Exports decline beyond expectations.