Event

The company is the faucet of water supply and drainage pipes. Recently, the company released its annual report that the total revenue for the whole year of 2016 was 825 million yuan, a slight increase of 0.81% over the same period last year; the net profit of returning to the mother was 21.2073 million yuan, down 56.32% from the same period last year; and the net profit after deducting non-return was 17.6937 million yuan, down 57.22% from the same period last year. The failure to achieve the target at the beginning of the year was mainly affected by the delay in the construction of the project, the delay in revenue recognition of the contract and the increase in costs. In addition, revenue reached 340 million yuan in the fourth quarter of 2016, an increase of 25.97 percent over the same period last year and a sharp increase of 101.84 percent from the previous quarter.

The order quantity changes rapidly, and the cost end is under pressure.

In terms of business, the company's main business includes concrete pipe (52% of revenue), plastic pipe (44%) and micro-loan (4%). Among them, the gross profit margin of ① concrete pipe was 34.80%, up 1.75% from the same period last year, mainly due to a sharp increase in newly signed orders in 2016, with a contract value of 1.53 billion, an increase of 252.53%, and sales of 457.55KM, up 40% from the same period last year, while production also increased by 88%. The gross profit margin of ② plastic pipe was 24.29%, down 5.55% from the same period last year, mainly due to a sharp reduction in orders, the contract amount was 505 million yuan, and production and sales fell 25%, respectively, to 34000 tons and 36700 tons, respectively. The rise and fall of orders led to a slight change in the business structure, with the share of revenue from plastic pipes falling by more than 5 percentage points.

From a regional point of view, northwest (78.33% of revenue), North China (20.34%), and Central China (1.33%). Among them, business in North China increased significantly, reaching 35.6%, while business in central China dropped sharply year by year, with a decrease of 38% in 2016 compared with the same period last year. The main reason is that northwest business fell nearly 4%, compared with an increase of 12% last year. Based on the northwest, the company has been committed to new market development, but in recent years, the business fluctuation in North and Central China is more obvious, or because of the particularity of the water supply and drainage industry, it is difficult to expand in different places.

The cost side is under pressure. First, the price of raw materials has risen. The company's raw materials account for 70% of the cost. The main products PCCP, PCP, BCCP, PVC and other pipe raw materials are generally steel, cement and plastic resin. Cement and steel prices all rebounded in 2016. Second, there was a significant increase in fees during the period, of which financial expenses rose sharply by 41.6%, mainly due to the increase in loan interest and the decline in the benefit of bank deposits compared with the same period last year. Management expenses increased by 6.87%, mainly due to an increase of nearly 95% in R & D expenditure, and an increase in intermediary fees and office expenses. Sales expenses increased by 2.39%, mainly due to an increase of 114% in bidding service fees.

With high-quality customer resources in hand, it is located in the hot area of Belt and Road Initiative + western development strategy, and it is still interesting for 17 years.

The company undertakes the business through winning the bid, the business model determines the resource dependence, needs to break through the system barrier, the company originally belongs to the Ningxia Water Resources Department, has accumulated a large number of high-quality resources for many years, according to the annual report disclosure information, the top five customers are Zhanghe Water Conservancy Project Construction Management Bureau of Shanxi Province, Xinjiang Changyuan Water Affairs Huidong Water supply Co., Ltd. However, the industry characteristics determine that the company has regional limitations, while the advantages of local resources, it is faced with the disadvantage of remote resources. Although the company's remote business has shown instability in recent years, the northwest, as the core area of the company's business, is located in strategic areas such as Belt and Road Initiative and the western development, and the business will directly benefit from infrastructure growth. In addition, according to the 2017 government report, the construction of 15 major water conservancy projects and more than 2000 kilometers of urban underground pipe corridors will be started again, and this year is the year of PPP, the model penetration rate and landing rate are constantly increasing, and the company's performance is expected to increase, and there are still interesting points for 17 years.

It is estimated that the EPS of the company from 2017 to 2019 is 0.14,0.22,0.25 yuan respectively.

Risk hint: the infrastructure process in the western region is not as expected.