A leader in the civilian centrifugal pump industry, there is plenty of room for future growth. The company's main business is R&D, design, production and sales of civilian centrifugal pumps. As the civilian pump industry is affected by the gradual strengthening of support policies and the positive macroeconomic situation, the overall operation of the industry has maintained a relatively steady, sustainable and healthy development, actively promoting the steady development of the pump industry. According to statistics released by Zion MarketResearch and P&S Market Research, the pump market size in 2017 was about 44.9 billion yuan. It is expected that the global pump market will continue to grow steadily from 2018 to 2024, with a growth rate of 5.29%. By 2024, the total global pump market will reach 66.51 billion US dollars. According to the company's prospectus, based on the calculation of operating income, enterprises with a similar product structure to the company were selected as a sample, and the company's share of the domestic market was less than 3%. Due to the large number of manufacturing enterprises and uneven technical standards in China's pump industry, superior resources have gradually been skewed towards leading companies in the main market segments. Currently, the company's plastic bathroom pumps are in the leading position in the country, and general pumps and stainless steel pumps are in the first tier, so there is a lot of room for future growth.

Focus on process quality, with both R&D and cost advantages. The gross margin of the company's main products, plastic sanitary pumps, general purpose pumps and stainless steel pumps, remained stable. In 2020, the gross margins of stainless steel pumps and plastic sanitary pumps reached 36.39% and 32.12% respectively, and the gross margin of general pumps was 27.58%. The company started with motors and has more than 40 years of motor design and manufacturing experience, which is conducive to cost control. At the same time, the company continues to promote pump process innovation and has successively obtained ISO9001 quality management system certification, and various international product quality certifications such as China's 3C, EU CE, German TUV, US UL/ETL, Australian SAA, and EU RoHS, making the company's products highly competitive in the global market. With the company's cost-effective products and quality services, the company's sales volume of various water pumps increased from 2,329,900 units in 2013 to 3.6067 million units in 2020, with a compound annual growth rate of 6.4%. At the same time, the company's product sales cover the national market and are exported to more than 80 countries and regions, including the United States, Europe, the Middle East, and Southeast Asia. The company has established long-term and stable cooperative relationships with well-known foreign brand dealers and manufacturers.

Excellent financial indicators, a well-deserved “cash cow”. The performance of various financial indicators was excellent.

According to the company announcement, in 2016-2020, operating income increased from 815 million yuan to 1,435 million yuan, CAGR was 15.19%, net profit of the mother increased from 150 million yuan to 359 million yuan, and CAGR was 24.38%. In the first quarter of 2021, performance increased rapidly. The company achieved operating income of 432 million yuan, an increase of 77.71% over the previous year, and Guimu's net profit was 91 million yuan, an increase of 41.85% over the previous year. The company's gross margin grew steadily, reaching 33.47% by 2020. The company's overall gross margin has declined recently, mainly due to the rise in short-term raw material prices. The company has responded through measures such as reducing costs and increasing efficiency and moderately increasing prices. Although there is still some pressure in the short term, long-term gross margin is expected to stabilize. Since its listing, the company has continued to pay high dividends. In 2018-2020, cash dividends were 181, 252, and 330 million yuan, and the dividend ratio was as high as 80.94%, 92.68%, and 92.10%.

It is becoming a trend for stainless steel pumps to replace cast iron pumps, and there is plenty of room for the future of the stainless steel pump market. Because of its characteristics such as corrosion resistance, high temperature resistance, and wear resistance, stainless steel itself will play a more active role in energy, petrochemical, electricity, mining and other fields developed in China. Extensive practice has proven that stainless steel is the best material for the water industry, such as water preparation, storage, transportation, purification, regeneration, and seawater desalination. Therefore, under the impetus of the stainless steel industry, both civilian stainless steel water pumps and industrial stainless steel industrial pumps in the industrial sector have good market development prospects.

Investment advice: The company's performance as a leader in the pump industry has been growing steadily, with stable cash flow and high dividends. At the same time, it focuses on the three major products “plastic bathroom pump+stainless steel pump+general purpose pump”. Relying on cost advantages and optimized product structure, the company's gross margin in the past three years has been higher than the industry average. The motor is produced independently, the production process is controllable, and the matching situation between the motor and pump is also controllable. With large-scale investment and construction in civilian fields such as water conservancy facilities and agricultural irrigation, it will bring a lot of demand for centrifugal pumps, and the company's future performance is promising. We expect the company's EPS from 2021 to 2023 to be 1.26 yuan, 1.57 yuan, and 1.96 yuan respectively. The corresponding PE will be 18.5x, 14.9x, and 11.9x. The initial coverage will give a buy-A rating, and the target price for 6 months is 31.5 yuan.

Risk warning: Higher prices of product raw materials have led to a decrease in the gross profit of the company's products, overseas sales fell short of expectations, and market competition intensified