China Galaxy Securities: Focus on the re-integration of steel production capacity, expected to benefit from manufacturing upgrades and AI transformation

According to the Zhitong Finance APP, China Galaxy Securities has released a research report stating that the steel industry has experienced weak prosperity in recent years, with individual stocks falling to relatively low valuations. The firm believes that as the supply-demand pattern in the industry improves, the profitability and valuation of leading steel companies are expected to recover. From the supply side, industrial policies continue to take effect, leading to a trend of shrinking steel production capacity and an expected increase in industry concentration; from the demand side, new policies are accelerating investment in downstream manufacturing, and the industry is expected to benefit from manufacturing upgrades and AI transformation. It is recommended to pay attention to: Shougang, CITIC Pacific Special Steel, HEBEI STEEL CORP., Benxi Steel, and Anyang Iron & Steel. The main points of China Galaxy Securities are as follows: Industry Review and Analysis: The steel sector saw a slight increase in the first half of the year, with good performance in plate and special steel. The steel sector rose by 1.23% in the first half of 2025; among the three sub-industries of the sector, the plate and special steel sub-sectors had the highest increases of 5.39% and 4.23%, respectively. From the demand side, a series of favorable policies are expected to lead to a rebound in steel demand from downstream infrastructure and manufacturing; from the supply side, on May 29, 2024, the State Council proposed in the "2024-2025 Energy Conservation and Carbon Reduction Action Plan" to strengthen the regulation of steel production capacity and output, with an expected improvement in industry concentration and supply-demand pattern, indicating that the steel industry is likely to rebound from the bottom. Outlook: Unlike the market's pessimistic expectations, the firm believes that the steel sector is likely to usher in a new transformation and cycle structurally. The performance of the special steel sub-sector is expected to improve marginally: Profitability is higher than that of ordinary steel, with strong downstream automotive demand. The profitability of the special steel sector is generally higher than that of ordinary steel, and the debt-to-asset ratio has been declining year by year. From the perspective of average sales gross margin, SW Special Steel I is significantly higher than SW Ordinary Steel. In terms of domestic demand for special steel, the automotive industry accounts for the highest proportion at about 40%, which is expected to bring new development space. AI transformation in traditional sectors brings new opportunities: Digital empowerment of traditional industries: "AI + Steel" is imperative: The steel industry strongly supports China's industrialization and modernization process, and the scenario-based innovative applications of advanced technologies such as artificial intelligence, cloud computing, and 5G are expected to enhance industry safety and production efficiency. In December 2024, the Ministry of Industry and Information Technology released the "List of Typical Application Cases for AI Empowering New Industrialization," with 14 cases from the steel industry, accounting for 9.3% of the entire industry, which is expected to accelerate AI transformation in the future. Some enterprises are breaking through integration and restructuring, likely ushering in new development changes: Policies are promoting industry mergers and reorganizations, facilitating the concentration of resource elements towards advantageous enterprises: According to statistics from the Steel Industry Association, in recent years, Ansteel has invested in Lingsteel, achieving regional integration and optimization of industrial layout; CITIC Pacific Special Steel and Nanjing Steel are jointly creating the world's largest specialized special steel enterprise; Jianlong is restructuring Xining Special Steel, with mixed ownership reform steadily advancing. The China Iron and Steel Association has repeatedly advocated for promoting industry mergers and reorganizations, encouraging steel companies to actively seek relevant targets to enhance industry concentration. Risk Warning: Risks of downstream real estate and infrastructure demand falling short of expectations, uncertainties in the prices of raw materials such as iron ore and coal, risks of technological innovation in steel smelting, and risks of restructuring falling short of expectations, etc