Events: on April 20, the company released a report for the first quarter of 2022, with a total operating income of 298 million yuan, an increase of 26.77% over the same period last year; a net profit loss of 2.035 million yuan, compared with a profit of 5.893 million yuan in the same period last year; deducting a non-homing net profit loss of 5.37 million yuan. Earlier, on the evening of March 29th, the company disclosed its annual report for 2021, with an annual operating income of 2.437 billion yuan, an increase of 18.07% over the same period last year, a net profit of 143 million yuan, a decrease of 14.59%, and a non-return net profit of 130 million yuan, an increase of 6.83% over the same period last year.

The company's main business grew steadily and made good progress: for the whole of 2021, the company achieved a total operating income of 2.437 billion yuan, an increase of 18.07% over the same period last year; in the first quarter of 2022, the company's main business continued to grow rapidly, with a total operating income of 298 million yuan, a record high in the past 10 years, an increase of 26.77% over the same period last year, showing a good momentum of business development.

In terms of products, concrete pipe is the main product: the company's main products include concrete pipe (52.42% of revenue in 2021), plastic pipe (27.43%), composite steel pipe (10.36%) and design consulting (9.07%). The proportion of these four products in 2020 was 42.17%, 35.09%, 9.86% and 12.54%, respectively. It can be seen that the company's business depends heavily on concrete pipes. Specifically, the pipeline business signed a total of 1.781 billion yuan in 2021, of which concrete pipe accounted for 1.006 billion yuan, sales increased 4.55% year on year to 634km, achieving business income of 1.276 billion yuan, up 46.86%; plastic pipe sales decreased 11.78% to 49500 tons, achieving business income of 668 million yuan, down 7.65% from the same period last year. The business income of composite steel pipe was 252 million yuan, up 24.14% from the same period last year, while that of design consulting was 220 million yuan, down 14.53% from the same period last year.

From a regional point of view, the four major regions are all up from the same period last year, of which the northwest is the company's main market: the northwest region, which has the highest share, achieved 1.768 billion yuan in main business income in 2021, accounting for 72.63% of the country's total, up 20.43% from the same period last year; this region also accounts for a high proportion of 71.25% in 2020. Followed by North China, accounting for 16.94%, it was 18.33% in 2020. Followed by Central China, accounting for 8.03%. The remaining East China region accounts for 2.4%. The year-on-year growth rate of the four regions was the largest in the northwest, 20.43%, and the smallest in North China, 9.19%.

The growth rate of homing net profit decreased compared with the same period last year, and the profitability declined slightly: for the whole of 2021, the company's homing net profit decreased by 14.59% year on year. In the first quarter of 2022, the company lost 2.035 million yuan in net profit, down 134.53% from the same period last year. First of all, in the past 21 years, the company's net profit from 2018 to 2020 has increased by leaps and bounds, mainly due to the continuous increase in state investment in water conservancy and the increase in the company's market share (PCCP pipeline revenue continues to increase), so even though the 21-year net profit has declined compared with the same period last year, it is still at a high level. Looking at the first quarter of 22 years, judging from the quarterly report of the past decade, the company suffered losses in six years in the first quarter of the past decade, of which the business basically stopped in 2020 due to the epidemic, with a loss of 34.68 million yuan. The main reason for the loss for many years in the quarterly report is that the industry in which the company is located is obviously affected by seasonal factors due to the downstream water conservancy, municipal and other construction industries, which are understarted at the end of the year and the beginning of the year. The industry was off-season in the first quarter, and production capacity was mainly released in the second and third quarters. In 2020, the proportion of the company's main business income in the first quarter of the year was only 4.46%. In 2021, it was 9.65%.

The price of raw materials has increased significantly, and the cost side is under pressure: according to the 2021 annual report, the company's operating costs of raw materials, labor wages, manufacturing expenses, and transportation handling expenses accounted for 74.76%, 5.38%, 13.09% and 6.74% respectively, and the largest proportion of raw materials in 2020 was 72.9%. In fact, in the past, raw materials accounted for more than 70% of the company's operating costs. Commodity prices rose to varying degrees in 2021. The average purchase price of polyethylene, polyvinyl chloride, prestressed steel wire, cold plate, hot plate and cement for the company's production increased by 7.48%, 42.57%, 41%, 42% and 37% respectively over the same period last year, resulting in gross profit pressure. The annual gross profit margin in 2021 is 26.37%, which is basically the same as the 26.1% in 2020, but still much lower than the 35.06% in 2019 and the average 31.33% in 2013-2019. In terms of products, the gross profit margin of concrete pipe, which accounts for the largest proportion, rose 3.99% compared with the same period last year, while the gross profit margin of plastic pipe decreased by 1.81%, and the gross profit margin of composite steel pipe decreased the most, reaching 23.12%. Since Q1 in 2022, the prices of major raw materials have continued to rise. In 2022, the operating cost of Q1 reached 206.3 million yuan, an increase of 36.5% over the same period last year, which was higher than the growth rate of 26.8% of operating income, resulting in a 5% year-on-year drop in gross profit margin. Today, the war between Ukraine and Russia has caused huge shocks in global commodities, and operating costs are expected to remain under pressure in the second quarter.

The annual report on the profit and loss of non-main business in 2021 is relatively large, the cost during the first quarterly report in 2022 has increased, and the R & D investment has continued to increase: the expense rate in 2021 has not changed much compared with 2020, and the ratio of four fees to revenue is about 16%. There is a big difference in financial expenses, which increased by 1785.62% in 2021 compared with the same period last year, mainly due to the increase in short-term borrowing and the reduction of expenses by receiving financial discounts in the same period last year. Compared with 2020, the investment income decreased by 32.5 million to only 9.028 million yuan, and the asset and credit impairment loss was 54.435 million yuan, an increase of 27.33 million yuan over the provision for 2020, mainly due to the impairment provision for accounts receivable, debt-offset assets and foreign loans. By the end of 2021, the balance of the company's accounts receivable was 1.324 billion yuan, and the accounts receivable in 2020 was 967 million yuan, an increase of 32.96% over the same period last year, accounting for 26.46% of the total assets and an increase of 6.5% over the same period last year. The substantial increase was mainly due to the increase in income during the reporting period and the failure to recover the sales rebate in a timely manner. The loss of assets and credit impairment accounted for 30.33% of total profits, which also had a greater impact on the year-on-year decline in net profit in 2021; other income (mainly government subsidies) decreased by 5.18 million yuan compared with the same period last year. Generally speaking, the profit and loss of non-main business in 2021 has a great impact on the total profit. The expenditure rate during the Q1 period in 2022 was 27.12%, an increase of 2 percentage points over the same period in 2021, of which R & D expenditure increased by 51.92% over the previous year, due to increased R & D investment during the reporting period; and financial expenses increased by 38.3% year-on-year. The main reason is that liquidity borrowing increased during the reporting period compared with the same period last year.

In the future, if the industry is in the mature stage, the demand of the pipeline industry will continue to grow steadily: at present, the industry to which the company's main business belongs has shown the characteristics of mature period, such as high degree of marketization, fierce competition for product homogenization, overcapacity and so on. With the implementation of the 14th five-year Plan and the outline of the long-term objectives for 2035, the National Water Saving Action, the Water Security Plan of the 14th five-year Plan, the Water Saving Society Construction Plan of the 14th five-year Plan, the Water Conservancy Science and Technology Innovation Plan of the 14th five-year Plan, the comprehensive management plan of water environment in key river basins of the 14th five-year Plan, and the strategy of Belt and Road Initiative and the development of the western region. As well as the vigorous promotion of the construction of major modern infrastructure systems, such as the backbone projects of the national water network, the construction of high-standard farmland and the transformation of urban water supply networks, investment in water-related construction will continue to remain high. the market demand of the pipeline industry will continue to grow steadily for a long time in the future, and the industry to which the company's main business belongs will still be in a boom cycle for a long time.

The unique geographical location brings greater market demand: the company is one of the pipeline manufacturing enterprises with the most complete product varieties and specifications in China's pipe industry, and it is also the largest manufacturer of water supply and drainage pipes in Shaanxi, Gansu, Ningxia, Qinghai and Inner Mongolia regions. at the same time, the northwest region is one of the areas with the most serious water shortage, with many water conservancy projects and great demand for pipe materials. Compared with other areas, the demand for pipelines in this area has always been on the high side.

Focus on PCCP, located in the industry leader: in the PCCP (prestressed steel tube concrete pipe) industry, the production concentration is very high. According to the relevant report of China concrete and cement products Association, the market share of the top five enterprises in the prestressed steel tube concrete pipe (PCCP) industry is basically stable, especially the echelon phenomenon, and has shown a further increase in concentration in the past two years. According to the ranking, the company has won the first place in the output of national key prestressed steel tube concrete pipe (PCCP) enterprises for six consecutive years from 2015 to 2020.

Taking Ningxia Water Conservancy Design Institute as the platform, we will make every effort to promote the construction of the project general contracting platform: in 2019, the company completed 81.28% of the equity acquisition of Ningxia Water Conservancy Design Institute, making it a holding subsidiary of the company. Ningxia Water Conservancy Design Institute has Class An of Engineering Survey, Class An of Water Conservancy Industry Design, Class An of Engineering Consulting Units, Class An of Water Resources argumentation for Planning and Construction projects, Class A Credit Certificate for Hydrology and Water Resources investigation and Evaluation, it is the leader of water conservancy survey and design industry in Ningxia.

The main proportion of design consulting business in 2019 / 2020 / 2021 is 3.43%, 12.54%, 9.07%, and the consulting and design business is developing well. In recent years, while maintaining the absolute leading position in Ningxia market, the design institute has accelerated the national layout of design business at the same time. As of February 2021, the design institute has set up 19 branches in the country. In the future, the head office will continue to take Ningxia Water Conservancy Design Institute as the platform, strive to build a design group facing the whole country, and make every effort to promote the construction of the project general contracting platform, build the overall solution capability of design, consulting, procurement, manufacturing and construction, and enhance the ability to provide comprehensive services to customers.

There are plenty of orders on hand, and the future growth is worth looking forward to: the company has sufficient orders on hand, and two major projects have been announced in 2022. One is the product purchase and sale contract signed and sealed by Shaanxi Azure Dragon Management Industry and Shaanxi Jinfei Industry, which was announced on March 3. The object of the contract is to provide III grade reinforced concrete steel pipe jacking (including rubber rings) and product transportation fees, loading fees and taxes (excluding unloading fees) according to the provisions of the contract, with a total amount of 66.205 million yuan, accounting for 2.7% of the company's total revenue in 2021. Ningxia Water Conservancy Survey and Design and Research Institute Co., Ltd., a subsidiary of the company announced on April 1st, won the bid for the Ningdong Water supply Source Project and Water Distribution Network Safety improvement Project General contract (EPC) project, with a winning bid amount of 249 million yuan, accounting for 10.22% of the company's total revenue in 2021. These two projects are expected to have an impact on the company's performance in 2022 and beyond. At the same time, most of the projects that won the bid in the fourth quarter of 2021 will be supplied and settled this year. According to the 2021 annual report, the contract amount carried forward to the later reporting period is 1.228 billion yuan, including 930 million yuan for concrete pipe, 188 million yuan for plastic pipe and 110 million yuan for composite steel pipe. All this will bring the company an upside in profits for the whole of 2022.

Profit forecast and valuation level: the company's industry is related to the national economy and people's livelihood, and its development is directly affected by changes in national and government investment policies, with obvious cyclical characteristics; located in the core of Belt and Road Initiative and the western development, business directly benefits from infrastructure growth, and future development is expected to continue.

In view of the fact that the industry to which the company's main business belongs will still be in a business cycle for a long time, and as one of the pipeline manufacturing enterprises with the most complete product varieties and specifications in China's pipe manufacturing industry, it is also the largest water supply and drainage pipeline manufacturer in Shaanxi, Gansu, Ningxia, Qinghai and Inner Mongolia, with a compound growth rate of 19.20% from 2017 (1.207 billion yuan) to 2021 (2.437 billion yuan). Give the company a growth rate of 15%, 12%, 12%, 10% in revenue over the next three years. It is estimated that the company's revenue from 2022 to 2024 will reach 28.03 pound 31.39 / 3.453 billion yuan, and its net profit will reach 1.59max 1.78 / 195 million yuan, an increase of 11.4%, 11.8%, 9.9% and 0.47, 0.53, 0.58 per share over the same period last year. The price-to-earnings ratio corresponding to the closing price on April 28, 2022 is 18.7, 16.5, 15.1 times. We select Han Jian Heshan, Longquan Co., Ltd. and Xiongsu Technology, which are also mainly engaged in R & D, production and sales of similar pipe fittings, as comparable companies. As of April 28th, 2022, the average PB of comparable companies is 1.65; the company's PB is 1.35, which is lower than the average PB of comparable companies. To sum up, give the company an "overweight" rating.

Risk tips: the risk of a sharp rise in the prices of major raw materials, the risk of the spread of the COVID-19 epidemic, the risk of policy change, the risk that accounts receivable can not be recovered on time, the risk that the scale of infrastructure investment is not as large as expected, and so on.