Key points of investment:

Plastic bathroom pumps are the “invisible champions” of the US export chain and high-quality targets with high dividends; foreign countries benefit from the recovery of US real estate & active inventory replenishment cycles, and domestic benefits from trillion-dollar treasury bonds & equipment trade-in policies.

Plastic bathroom pump “invisible champion” & stainless steel pump first tier company Plastic bathroom pumps are the “invisible champions” of segmented racetracks, with a global market share of about 60%-70%; stainless steel pumps are in the first tier of the domestic industry. The company's revenue increased from 1.10 billion yuan in 2018 to 1.32 billion yuan in 2023, with a 5-year CAGR of 4%; net profit to mother increased from 220 million yuan in 2018 to 380 million yuan in 2023, or 11% CAGR in 5 years. Overseas inventory backlog in 2023-2023 has put pressure on the company's performance in the short term. Currently, overseas inventory has basically been digested, and the 2024 results are expected to gradually recover.

Plastic bathroom pumps: Benefiting from the US real estate recovery & inventory replenishment cycle, the US manufacturing PMI has been in a contraction range for 14 consecutive months since October 2022. It bottomed out in the second half of 2023, and returned to a boom line in January 2024. New and existing home sales in the US also rebounded in December 2023 and January 2024, respectively, with a clear recovery trend. At the same time, construction materials related to strong real estate are about to enter the active inventory replenishment cycle. We believe that the US real estate recovery & active inventory replenishment cycle will bring a new round of growth to the company's plastic bathroom pump exports.

Stainless steel pumps: benefit from trillion-dollar treasury bonds & equipment trade-ins

Stainless steel pumps save about 10% to 20% of electricity compared to traditional cast iron pumps, but they are 20% to 30% more expensive, so they account for less than 1/3 of the stock market, and there is plenty of room for replacement. 2023Q4 The central government issued an additional trillion yuan of treasury bonds, of which about 50% was used for water infrastructure, speeding up the renewal and replacement of stainless steel pumps with cast iron pumps. Meanwhile, the equipment trade-in policy proposed in February 2024 has once again catalyzed the replacement of stainless steel pumps.

The company's cash dividend ratio is expected to remain high in 2024

Cash dividends have been implemented for 7 consecutive years since listing, with a cumulative cash dividend of about 1.9 billion yuan, a cash dividend of 360 million yuan in 2023, a dividend payment ratio of 93.2%, and a dividend rate of 5.8%. The company's original planned production capacity site for 8 million pumps has already been completed. There are no major capital expenses in the later stages, and the cash dividend ratio is expected to remain high.

Investment advice: Optimistic about the US export chain and high-quality assets with high dividends, we expect the company's 2024-2026 revenue to be 15.8/18.1/1.99 billion yuan, up 20%/15%/10% year on year, respectively; net profit to mother will be 4.6/5.3/580 million yuan, respectively, up 20%/15%/10% year on year. The absolute valuation method measures a value of 23.2 yuan per share, which is 15 times the company's 24-year average PE. Given that the company belongs to the US export chain and high-quality assets with high dividends, we gave the company 18 times PE in 24 years, with a target price of 23 yuan/share, covering the first time and giving it a “buy” rating.

Risk warning: Demand in the pump industry falls short of expectations; the company's pump production capacity release falls short of expectations.