The leader in the welded pipe industry, benefiting from the acceleration of pipeline construction

Jinzhou Pipeline is a leading welded pipe manufacturer in China, and its products are mainly used in long-distance oil and gas pipelines, urban and rural pipe networks and other fields. The company has the advantages of many customer resources, outstanding R & D capability, high market acumen and strong profitability. We believe that the future growth of the company mainly comes from two points: 1) insufficient investment in oil and gas pipelines in 2019. After the establishment of the pipe network company, the pipe network investment growth rate or upward in 2020, and the pipe network company is more market-oriented, the company orders may increase. 2) there is still room for growth in natural gas consumption, the conversion of coal to gas is moving forward steadily, and infrastructure investment may further boost urban and rural pipeline construction in 2020. We estimate that in 2019-21, the company will have a "overweight" rating for the first time with a target price of 6.51-7.01 yuan and an EPS of 0.53 yuan.

The product profit advantage is remarkable, the customer development and maintenance ability is strong

The company achieved net profit of 1.9 and 280 million yuan respectively in 2018 and 2019, which was + 17% and + 44% respectively compared with the same period last year. In 2018, the gross profit margin of galvanized pipe, steel-plastic pipe and spirally welded pipe was 10%, 25% and 16% respectively, which was higher than the average of comparable companies (2%, 16% and 5%). The overall gross profit margin and net profit margin were 14% and 4%, respectively, higher than the average of comparable companies (10%, 1%). In addition, the company continues to develop high value-added new products, such as stainless steel pipe fittings, double-sided coating, painting and so on. The company is the main pipeline supplier of "three barrels of oil" and five major cities, with rich experience in large-scale projects and close tracking of customer demand.

Establishment of pipe network company or acceleration of a new round of long-distance pipeline construction

The investment and construction of long-distance oil and gas pipelines in China is mainly led by Petrochina Company Limited. The capital expenditure on oil, gas and pipelines is 26.5 billion yuan in 2018 and 17.8 billion yuan in 2019. In terms of the completion of the first half of 19 years, the capital expenditure for the whole year has declined or exceeded 33%. In 2019, the capital expenditure of oil decreased and the degree of completion was low, or due to the divestiture of oil and gas pipe network assets and the establishment of the National Pipe Network Company. The National Pipe Network Company was established in Beijing on December 9, 2019, becoming the main body of pipe network investment and bidding, with a level of marketization and opening to the outside world or higher. The relevant capital expenditure is expected to resume growth from 2020, and the probability of the company getting more orders is expected to increase. According to the pace of Petrochina Company Limited's capital expenditure, we expect to build 100000 km of long-distance oil and gas pipelines from 2021 to 2025, with an average of 20, 000 km per year.

The transformation from coal to gas and the infrastructure of urban and rural pipe networks are expected to advance steadily.

In December 2017, the National Development and Reform Commission and others issued a document supporting the northern region to step up the implementation of "coal to gas" with central financial subsidies, and strive to make natural gas consumption account for 10% of the total energy consumption in 2020 (7.8% in 2018). However, due to insufficient gas sources, delayed subsidies and incomplete infrastructure, there was a "gas shortage" in the heating season from 2017 to 2018. Since then, the government has stressed that "if it is appropriate to gas, then gas", "coal to gas" has slowed down. We believe that compared with the 10% target in the plan, there is still room for natural gas consumption, and natural gas imports are increasing, supply is tightening or gradually improving, and pipeline construction is expected to complement the growth of supply and demand. In addition, we expect that infrastructure and real estate investment may rebound due to rush work after the end of the epidemic, which is expected to boost pipeline demand.

Benefiting from the capital expenditure of the pipeline network, the first coverage gives the "overweight" rating. We estimate that in 2019-21, the company's BVPS 4.69max 5.03 shock 5.52 yuan, corresponding to PB 1.31 shock 1.22 shock 1.11 times, comparable to the company's average PB (2020E) 1.24 times, considering that the company is expected to benefit from the oil and gas pipe network investment volume, and the long-distance pipeline market is more open than other links of the industrial chain. We give the company a valuation of 1.30-1.40 times PB in 2020, with a target price of 6.51-7.01 yuan and a "overweight" rating.

Risk tips: macroeconomic downside more than expected; downstream demand is lower than expected; raw material prices are rising.