Pipe industry under "steady growth": capital construction helps demand, costs move down and profits increase

Key investment points

Core logic: "stability" is the main theme of 2022. As an important means to ensure China's steady economic growth, the investment growth rate of the infrastructure industry is expected to stabilize and rebound. Among them, municipal construction, petrochemical and natural gas pipelines, engineering facilities and power demand will help usher in the explosion of pipe demand. With the mild production restriction of steel mills, the steel price has dropped significantly compared with the peak, and the profits of pipe enterprises are expected to be further thickened.

The industry competition pattern is improving. With the success of China's supply side reform, the backward production capacity of the industry has been gradually cleared, while large pipe factories such as Tianjin You Fa Steel Pipe Group Stock Co.Ltd(601686) and yuantaiderun still put in new production capacity, and the industry concentration has continued to increase. At the same time, excellent enterprises have formed a dislocation competition pattern in subdivided fields, and the industry competition pattern is improving.

"Steady growth" has helped the growth rate of infrastructure investment pick up, and the demand for steel pipes is expected to explode. The central economic work conference has stressed that the economic work in 2022 should be "stable and seek progress while maintaining stability". As a counter cyclical adjustment tool, infrastructure investment is expected to stabilize and recover in 2022. We believe that water conservancy, environment and public facilities will be one of the driving points of infrastructure investment in 2022. The combination of policies such as gas pipeline, steel structure and power grid will help usher in the explosion of pipe demand in 2022.

The production restriction of steel mills tends to be mild, and the pressure on the cost side is relieved. Since 2020, due to the upstream production restriction, the price increase of raw materials has exceeded that of steel pipe products, and the enterprise profit has been compressed. In 2022, under the tone of "steady growth", the production restriction of the iron and steel industry will be much milder, and the focus of steel price has dropped significantly compared with the peak in 2021, which is conducive to thickening corporate profits.

Investment advice. Capital construction has boosted the demand for pipes, and the production restriction of steel mills tends to be mild, which has pushed down the cost and thickened the profits of pipe mills. The beneficiaries include: Tianjin You Fa Steel Pipe Group Stock Co.Ltd(601686) (increased output, favorable demand of water conservancy policy and downward cost), Zhejiang Kingland Pipeline And Technologies Co.Ltd(002443) (demand explosion of oil and gas pipeline, higher gross profit margin and downward cost), Xinxing Ductile Iron Pipes Co.Ltd(000778) (higher gross profit margin, favorable demand of water conservancy policy and downward cost)

Risk warning: infrastructure investment is less than expected; Industry capacity expansion exceeded expectations; Industry production restriction exceeded expectations; Raw materials rose more than expected; Falling price risk of inventory goods.

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