CICC: Focus on the ALPHA in the bottom reconstruction of the steel industry, with expectations for marginal improvement in Q4 2026.

CICC released a research report stating that due to weakening demand, the steel industry has returned to a low point. The bank believes there will be marginal improvements in Q4 2026: on one hand, the pressure on demand has been relatively fully reflected in profitability and valuation; on the other hand, the easing of cost pressures is expected to drive industry profits to stabilize and rebound. The bank believes that with the recovery of profits, leading companies with Alpha attributes are likely to first experience a dual boost in valuation recovery and profit improvement. CICC's main points are as follows: Clear bottom characteristics, the sector currently has a high risk-reward ratio. The bank has observed distinct bottom characteristics in the sector: 1) Profit bottom: In the first half of 2026, the total industry profit was only 31.77 billion yuan, down 25% year-on-year, with profit per ton of steel at 64 yuan, nearing the breakeven line. The duration of this profit bottom has now exceeded that of the cycles in 2008-2009 and 2015-2016. 2) Valuation bottom: The Shenyin Wanguo steel P/B ratio has fallen to 0.9x, at the 35th percentile over the past decade, with several general steel targets seeing P/B drop below 0.5 times. 3) Holding bottom: The sector accounts for only 0.07% of the market value of public equity mutual funds, with an expanded underweight of -0.42%, indicating that pessimistic expectations have been relatively fully priced in and the sector has a high margin of safety. The industry is in a bottom reconstruction cycle, shifting from scale-driven to value-driven. Demand continues to decline as it restructures; steel used in construction continues to decline, while total and proportion of steel used in manufacturing continues to rise. The supply logic is gradually shifting from "profit-driven" to a progressive constraint of "capacity replacement + environmental protection + differentiated regulation." The bank expects output to continue to decrease, and capacity to clear rapidly; the cost curve will gradually shift downwards along with the decline in the price center of raw materials, while low-carbon enterprises will gradually expand their cost advantages; the industry will face its last window for mergers and integration, with concentration likely to accelerate; the industry is shifting from homogeneous competition in pursuit of scale to comprehensive competition in product innovation, green smelting, intelligent manufacturing, and comprehensive service capabilities. Focusing on Alpha. The bank recommends three main lines. 1) Benefiting from the industry's profit recovery, the currently undervalued core asset Hunan Valin Steel; 2) The high-end materials leader TIANGONG INT'L-H, benefiting from the upgrade of demand structure; and 3) The resource leader Inner Mongolia BaoTou Steel Union, benefiting from the low-carbon transition and the ascending prosperity of rare earths. Risks Geopolitical conflicts leading to significant cost increases, seasonal demand not meeting expectations, policy fluctuations, and risks of industry competition.