From January to March 2011, the company achieved operating income of 673 million yuan, an increase of 20.36% over the same period last year; operating profit of 26.03 million yuan, down 21.7% from the same period last year; net profit of 2212 yuan belonging to the owner of the parent company, down 33.07% from the same period last year; and fully diluted earnings per share of 0.06 yuan.

The sharp rise in the price of raw materials and the higher manufacturing costs in the initial stage of scale expansion have lowered the company's gross profit level, resulting in an increase in income but no profit. In the first quarter of this year, with the gradual release of the company's production capacity and good orders, the company's sales increased by 20%, and the production and sales situation has shown signs of gradual recovery. However, due to the large increase in the company's costs, the company's gross profit level was reduced by nearly 5 percentage points, resulting in an increase in the company's financial performance in the first quarter but no profit increase.

About the company's cost, we have the following comments: 1. The company's main products are oil casing and other petroleum machinery products, and its cost composition is 70% of steel, 3-5% of labor, and the rest is related manufacturing costs. From the first quarter of 2011, the composite index of steel prices increased by 17% compared with the same period last year, and the prices of major steel varieties rose 22% from the same period last year. Although the production cycle of the company's main products is short, the price adjustment of the final products still lags behind the steel prices. therefore, we believe that the higher-than-expected sharp rise in steel prices is the main reason for the sharp decline in the company's short-term gross profit level.

two。 The 180 high-grade oil special pipe project raised by the company is currently in the early stage of production, and each production link still needs a certain running-in, resulting in relatively high manufacturing costs.

In addition, due to the first quarter is a relatively low season of production, coupled with the new project has just been put into production, the release of new capacity is limited, resulting in a larger fixed cost per unit of product. This has also eroded the company's earnings performance to some extent.

About the future trend of company cost and gross profit level, we have the following views: 1. At present, the main customers of the company's products are: Petrochina Company Limited, China Petroleum & Chemical Corp, CNOOC, Yanchang Oil, export and other fields. Among them, the procurement of China Petroleum & Chemical Corp and Yanchang Oil is more market-oriented, the product specifications of CNOOC are relatively high, the price is higher, and the order cycle of overseas exports is relatively short. we think that the transmission efficiency of these kinds of orders to steel prices is relatively high. the risk of steel price fluctuation is relatively controllable. Petrochina Company Limited's order generally has a long cycle and strict price adjustment conditions, so the transfer ability of this part of the order to steel price risk is limited.

However, we should pay attention to two points: (1) Petrochina Company Limited adjusted the purchase price of oil casing in May last year due to a similar situation; (2) this year, with the substantial expansion of the company's production capacity and the development of overseas markets and penetration into other fields, the company's dependence on Petrochina Company Limited has been greatly reduced. The share of sales is expected to fall to about 20% from 30-40% in previous years.

Therefore, regardless of Petrochina Company Limited's adjustment of procurement prices and the assumption that steel prices do not rise significantly in the future, we think that the company is expected to resolve the impact of rising steel prices at this stage through the gradual transfer of cost prices to a certain extent.

two。 As the first quarter is the traditional off-season, coupled with the Spring Festival, as well as new capacity running-in and other factors, the efficiency of the company's investment projects has not been fully released. Higher manufacturing costs and larger fixed costs per unit of product have affected the company's gross profit margin in the first quarter to a great extent. According to the company's current production situation, we expect that the fund-raising projects in the second half of the year will gradually exert economies of scale, and the gross profit level is expected to pick up quickly.

Overall, in the context of the obvious recovery of the industry and the gradual increase in the proportion of the company's high-end products, combining the above two judgments, we expect the company's full-year profitability to be no worse than that during the financial crisis. Combined with the fluctuation of the company's gross profit margin in previous years (2010Q1glaze 13.79% Magi Q2RU 16% Magi Q2RU 20.8% Magi Q4RV 18.2%), we comprehensively judge that the first quarter will be the low point of the company's gross profit margin. The company's performance will gradually pick up in the future.

The company's full-year results are still worth looking forward to. It is expected that the company will sell about 530000 tons of oil casing, 4 million meters of sucker rod, 20, 000 pumps and plungers, 20 pumping units and 320 gearboxes, and the income of other products is about 200-300 million yuan. The company currently has about 300000 tons of orders on hand, and the production plan has been arranged to July and August. According to this trend, we believe that the company will still achieve substantial production and sales growth for the whole year, and the company's sales revenue is expected to achieve 40-50% growth in 2011.

Profit forecast and investment rating: as the steel cost price rose more than we expected, we temporarily lowered the company's profit forecast by 12.5%. It is estimated that the company's EPS for 2011-2013 will be 1.05,1.27 and 1.57 yuan, respectively. Based on the latest closing price of 19.47 yuan, the corresponding dynamic PE is 19 times, 16 times and 13 times respectively. In the context of the recovery of the industry and the release of the company's production capacity, we believe that there is still some room for improvement in the company's valuation from the time latitude of the year. However, considering the uncertainty of raw material cost trend and the change of market style, we temporarily downgraded the company's rating from "buy" to "overweight". We will closely track the impact of raw material price changes on the company's performance and the progress of the expansion of the company's production scale, update the company's profit forecast in a timely manner, and remind investors to focus on the possibility of a rebound in the company's performance in the second half of the year.

Risk hint: raw material prices continue to rise sharply; the progress of production expansion is not as expected.