Key points of investment
The company is a leading private enterprise in the welded steel pipe industry. The company's main business is to manufacture and sell welded steel pipes and provide related manufacturing services, as well as property development and investment. It is the largest straight seam welded pipe manufacturer and exporter in China, and is a leading private enterprise in the domestic welded steel pipe manufacturing industry. The main products include straight seam submerged arc welded pipes, spiral submerged arc welded pipes, and resistance welded pipes, which are mainly used in oil and gas pipeline construction. The company has an annual production capacity of 3.38 million tons of welded steel pipes, which is the largest in China.
The construction of oil and gas pipelines and UHV power grids is speeding up, and it is expected that the company's performance will improve dramatically. According to the national “13th Five-Year Plan”, 5,000 kilometers of oil transportation pipelines, 12,000 kilometers of refined oil transportation pipelines, and 40,000 kilometers of natural gas transportation pipelines will be built in 2016-2020. It is estimated that in 2017-2020, 16,000 kilometers of crude oil and refined oil pipelines will be built, and 39,000 kilometers of natural gas pipelines will be built, bringing a total of 28 million tons and 240 billion yuan in pipe demand. According to the construction plan of the State Grid Corporation, 23 UHV lines will be built in 2016-2020, bringing in 32 million tons and 200 billion yuan of steel structure pipe requirements. The company has supplier qualifications and construction experience for the three major petroleum companies and national power grid companies. It is expected to receive no less than 2 million tons of pipe orders from oil and gas network construction in the next four years, and seize opportunities for UHV grid construction. The golden period for the company's development is approaching.
Complete products, outstanding research and development. The company has a complete range of steel pipes and specifications; it has invested heavily in R&D, and is the first and only manufacturer in China that can successfully produce 1,500 meters of deep-sea welded pipes. The company continues to improve existing production processes and launch new products. It is expected that the variety of products will be further enriched in the future, and gross margin will increase steadily.
Overseas sales and production capacity layout are becoming more and more perfect. The company's overseas business revenue is an important part of the main revenue, accounting for 40%-60%. The company has overseas sales offices in the United States, Saudi Arabia, Dubai, Singapore, etc., and has a production plant in Saudi Arabia with a straight seam submerged arc welded pipe production line with an annual production capacity of 300,000 tons. Overseas sales and production capacity layout are becoming more and more perfect, and overseas business is expected to continue to grow steadily.
Various businesses support the main steel pipe business. The company adopted a “plate and tube integration” strategy to build a bimetallic composite plate processing plant, with an annual production capacity of 2.16 million tons after completion, entering the upstream supply chain of steel pipe manufacturing; developing the “Golden Dragon City Fortune Plaza” real estate business is expected to continue to bring stable cash flow, improve the company's financial situation, and provide strong support for the main steel pipe business.
Risk factors: The progress of the “13th Five-Year Plan” for oil and gas development fell short of expectations; the overseas order execution cycle was lengthened; real estate business sales fell short of expectations, and the company was short of cash.
Profit forecast, valuation and investment rating: We expect Pearl River Steel Pipe to receive no less than 2 million tons of oil and gas network orders in the next four years. Steel structure pipes used in UHV project construction are expected to become a new growth point for the company. The forecast is EPS of $0.01/0.21/0.41 for 2017/18/19. Considering that the company is more likely to start turning a loss into a profit in 2017, according to PB=1, the target price is HK$1.56, and a “buy” rating was given for the first time.
