Baosteel's 2Q26 Results Were In Line, with a Higher Interim Dividend but Continued Cost Pressure on Gross Profit per Tonne

Overview

This report reviews Baoshan Iron & Steel's results for the first half and second quarter of 2026. Morgan Stanley believes profit was in line with expectations, supported by stable sales volumes, growth in export orders, and improvement in non-steel businesses, while the interim dividend also increased. The main pressure came from higher unit costs and narrowing gross profit per tonne, which may persist into 3Q26.

Core views

Overall results were in line with expectations, and the report therefore believes they do not alter its existing investment view. 1H26 net profit was Rmb4.6bn, down 6.3% year over year; 2Q26 net profit was Rmb2.3bn, up 5.5% quarter over quarter and down 4% year over year, in line with Morgan Stanley's expectations. Although profit continued to decline year over year, it improved sequentially in the second quarter, with no earnings deviation beyond the report's expectations. Sales volumes remained stable. Crude steel output in 1H26 was 25.5mnt, down 0.6% year over year, while finished steel sales volume was 25.7mnt, up 1.5% year over year. Finished steel sales volume in 2Q26 was 13.1mnt, flat year over year and up 3.9% quarter over quarter, in line with expectations. Export performance was stronger, with new export orders reaching 4.1mnt in 1H26, up 24.8% year over year, supporting stable overall sales volumes. Profitability pressure primarily came from narrowing gross profit per tonne rather than a significant deterioration in sales volumes. The average selling price of steel products declined 2.3% year over year in 1H26. In 2Q26, the average selling price edged up 0.1% year over year but declined 0.8% quarter over quarter. Morgan Stanley estimates that unit production costs rose 0.5% quarter over quarter and 2.2% year over year in 2Q26. Consequently, gross profit per tonne fell to Rmb194/t from Rmb247/t in 1Q26 and was also below Rmb279/t in 2Q25. The report believes this change was consistent with its previous view and expects gross profit per tonne to weaken further sequentially in 3Q26 amid rising raw material prices, particularly higher coking coal prices. While the core steel business remained under pressure, non-steel businesses improved. The report estimates that gross profit from non-steel businesses increased by Rmb342mn, or 31%, year over year in 1H26, including an estimated year-over-year increase of approximately Rmb475mn in 2Q26. Among associates, Shandong Iron & Steel Rizhao, in which Baosteel holds a 48.61% stake, generated profit of Rmb194.3mn in 1H26, below Rmb391.6mn in 1H25. Maanshan Iron & Steel recorded net profit of Rmb103.9mn, compared with a net loss of Rmb62mn. Performance diverged across businesses and associates, with improvement in non-steel businesses partially cushioning the impact of lower gross profit per tonne in the core steel business. Shareholder returns were a positive development in these results. The company's interim dividend per share was Rmb0.13, higher than Rmb0.12 in 1H25, while the payout ratio increased from 52.6% to 61.8%. The report therefore highlights the “higher dividend” in its title and conclusion: despite the year-over-year decline in earnings, the company increased its interim cash distribution. The forecast table shows net revenue of Rmb318bn, Rmb315bn, Rmb315bn, and Rmb319bn for 12/25, 12/26e, 12/27e, and 12/28e, respectively; EBITDA of Rmb32,673mn, Rmb29,681mn, Rmb32,663mn, and Rmb38,404mn, respectively; and ModelWare net profit of Rmb10,346mn, Rmb9,489mn, Rmb11,554mn, and Rmb15,775mn, respectively. The two sets of earnings-per-share figures in the table are Rmb0.48, 0.44, 0.54, and 0.74, and Rmb0.47, 0.50, 0.58, and 0.69, respectively. Corresponding P/E multiples are 15.4x, 13.1x, 10.7x, and 7.9x, while P/BV multiples are 0.8x, 0.6x, 0.6x, and 0.6x. RNOA is 4.6%, 4.5%, 5.4%, and 7.6%, while ROE is 5.2%, 4.6%, 5.5%, and 7.4%. The forecasts indicate a path of earnings pressure in 2026 followed by a gradual recovery. Valuation uses a residual income model. The report discounts earnings forecasts through 2031 and then applies normalization. It assumes a 9.2% cost of equity, comprising a 2.5% risk-free rate, a 7.23% risk premium, and a beta of 0.93, and applies a 7.0% long-term ROE. This produces a target price of Rmb6.90, 19% above the closing price of Rmb5.81 on August 21, 2026. The stock is currently rated Overweight, with an Attractive industry view.

Analysis framework

The report first compares 1H26 and 2Q26 net profit with its own expectations to determine whether the results alter its existing view. It then breaks down the performance of the core steel business by sales volume, average selling price, unit costs, and gross profit per tonne, while using export orders, non-steel businesses, and profits from associates to explain overall earnings. Finally, it applies a residual income model to earnings forecasts discounted through 2031 and derives the target price using assumptions including the cost of equity and long-term ROE.

Methodology notes

• Event-Driven Trading and Behavioral FinanceExpectation Gap/Expectation Management

  Comparison of Results with Expectations

  The report compares 2Q26 net profit, sales volume, and gross profit per tonne with Morgan Stanley's expectations. As the key indicators were broadly in line, it concludes that the results do not alter the existing investment thesis.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Breakdown of Sales Volume, Selling Prices, Unit Costs, and Gross Profit per Tonne

  The report separately examines finished steel sales volume, the average selling price of steel products, and unit production costs, and then estimates gross profit per tonne to distinguish whether profit changes stem from sales volumes or unit profitability.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Steel Demand, Raw Material Supply, and Cost Pass-Through

  The report identifies steel demand, automobile sales, the recovery of iron ore supply, environmental production restrictions, and coking coal prices as key variables affecting steel sales volumes, supply, and gross profit per tonne.

• Valuation MethodRIM Residual Income Model

  Residual Income Valuation

  The report discounts earnings forecasts through 2031 and then normalizes them, using a 9.2% cost of equity and a 7.0% long-term ROE to estimate the company's equity value and target price of Rmb6.90.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Baoshan Iron & Steel (600019.SS)

  The A-share steel company directly covered by the report, rated Overweight with a target price of Rmb6.90.

  Strengths

  Stable finished steel sales volume, a 24.8% year-over-year increase in new export orders in 1H26, improved gross profit from non-steel businesses, and year-over-year increases in both the interim dividend per share and payout ratio.

  Weaknesses

  1H26 net profit declined 6.3% year over year, 2Q26 gross profit per tonne fell to Rmb194/t, and unit profitability in the core steel business was constrained by rising costs.

  Comparison

  2Q26 gross profit per tonne was below Rmb247/t in 1Q26 and Rmb279/t in 2Q25; the interim payout ratio increased from 52.6% in 1H25 to 61.8%.

  Risks

  Rising prices of raw materials such as coking coal, a further slowdown in automobile sales, weaker-than-expected environmental production restrictions, and weaker-than-expected steel demand.

Key data

• 1H26 Net ProfitRmb4.6bnDown 6.3% year over year
• 2Q26 Net ProfitRmb2.3bnUp 5.5% quarter over quarter and down 4% year over year, in line with Morgan Stanley's expectations
• 1H26 Crude Steel Output25.5mntDown 0.6% year over year
• 1H26 Finished Steel Sales Volume25.7mntUp 1.5% year over year
• 2Q26 Finished Steel Sales Volume13.1mntFlat year over year and up 3.9% quarter over quarter
• 1H26 New Export Orders4.1mntUp 24.8% year over year
• 2Q26 Average Selling Price of Steel ProductsYoY +0.1% / QoQ -0.8%The 1H26 average selling price declined 2.3% year over year
• 2Q26 Unit Production CostQoQ +0.5% / YoY +2.2%Morgan Stanley estimate
• 2Q26 Gross Profit per TonneRmb194/tBelow Rmb247/t in 1Q26 and Rmb279/t in 2Q25
• 1H26 Increase in Gross Profit from Non-Steel BusinessesRmb342mnUp 31% year over year; the year-over-year increase in 2Q26 is estimated at approximately Rmb475mn
• Interim Dividend per ShareRmb0.13Rmb0.12 in 1H25
• Interim Payout Ratio61.8%52.6% in 1H25
• Target PriceRmb6.9019% upside from the closing price of Rmb5.81
• Cost of Equity Assumption9.2%Risk-free rate of 2.5%, risk premium of 7.23%, and beta of 0.93
• Long-Term ROE Assumption7.0%Used in the normalization stage of the residual income valuation

Impact & implications

The report believes stable sales volumes, strong export orders, improvement in non-steel businesses, and a higher payout ratio support its existing positive view, but unit profitability in the core steel business remains constrained by rising costs. The near-term earnings trajectory will depend more heavily on prices of raw materials such as coking coal and changes in gross profit per tonne in 3Q26, while the valuation forecasts reflect pressure in 2026 followed by a gradual recovery in 2027–2028.

Risks

• A further slowdown in automobile sales could weaken the demand outlook for automotive steel.
• Weaker-than-expected environmental production restrictions could increase steel supply pressure.
• Rising raw material prices, particularly coking coal prices, could cause gross profit per tonne to weaken further sequentially in 3Q26.
• Weaker-than-expected steel demand would pose downside risk.

What to watch

• Monitor whether gross profit per tonne continues to decline sequentially in 3Q26 amid rising prices of raw materials such as coking coal.
• Monitor the impact of steel demand and automobile sales on demand for automotive steel.
• Monitor the extent of the recovery in iron ore supply and the enforcement intensity of environmental production restrictions.
• Monitor whether growth in export orders can continue to support finished steel sales volume.