(Report Producer/Analyst: Zhu Ye of Tianfeng Securities)
1. Lingxiao Pump Industry: Plastic bathroom pump faucet, short-term performance decline releases risks
1.1. Development history: civil centrifugal pump faucet, three major product lines with a comprehensive layout
Guangdong Lingxiao Pump Industry Co., Ltd. mainly produces stainless steel pumps, recreation pumps, clean water pumps, submersible pumps, pipeline pumps, motors and other products, and is a large-scale manufacturer of small civil electric pumps and industrial supporting electric pumps in China.
The company has more than 40 years of experience in electric pump manufacturing, mastered the core technology of products, and has become a large-scale manufacturer in the field of jacuzzi pumps and spa pumps in the world.
It has the genes of public ownership and has mechatronics technology in its heart. Founded in 1977, the predecessor of the company, Yangchun Motor Factory, is a nationally owned enterprise, starting from three-phase motors, water machine accessories, household fans and other products.
In the early 80s, under the wave of contract responsibility system, the company switched to the production of integrated series of motor and water pump products based on its advantages in the field of motor.
Yangchun Motor Factory was restructured into Guangdong Yangchun Lingxiao (Group) Co., Ltd. in 1993, and after the completion of the re-standardization in 1997, the company was transformed into a private enterprise with an output value of hundreds of millions of yuan.
In 2001, it was renamed Guangdong Lingxiao Pump Industry Co., Ltd.
After 2005, the company focused on the development of bathtub pumps and stainless steel pump products, with an annual output value of more than 200 million yuan and nearly 500 million yuan in 2008.
In 2017, the company was listed on the SME Board of the Shenzhen Stock Exchange, raising a net of RMB 500 million to invest in stainless steel pumps, plastic bathroom pumps and clean water pump expansion projects.
The shareholding structure is simple, and the husband and wife are actually controlled. As of the third quarter report of 2024, Wang Haibo, as the largest shareholder, owns 29.57% of the shares of Lingxiao Pump, and his spouse Shi Zongmei holds 16.97% of the shares of Lingxiao Pump, holding a total of 43.54% of the company's shares and is the actual controller of the company. The top 10 shareholders include institutional investors Dacheng Fund, Tianhong Fund and Pension Insurance Fund.
The company's products are mainly divided into three categories: plastic bathroom pumps, stainless steel pumps and general pumps:
1) Plastic bathroom series: including bathtub pumps, SPA pumps, swimming pool pumps and other products, the company is one of the largest suppliers of water sports and bathroom pumps in mainland China. According to the company's prospectus, bathtub and SPA pumps are the main products of the company's plastic bathroom pumps, accounting for more than 80% of the total revenue from 2014 to 2016;
2) Stainless steel pumps: The products mainly include horizontal single-stage, horizontal multi-stage, vertical multi-stage stainless steel pumps, which are mainly used in pipeline water supply, industrial water, air conditioning systems, water purification equipment, and aquaculture. With the improvement of national awareness such as health and safety, stainless steel is more widely used in the field of civil centrifugal pumps;
3) General pump equipment: including submersible pumps, clean water pumps, pipeline pumps, etc., among which clean water pumps are the most important products in general pumps.
Plastic bathroom pumps are growing rapidly, and profitability continues to improve. In 2020 and 2021, plastic bathroom pump products will increase rapidly, but the gross profit margin has declined, and the gross profit margin of plastic bathroom pumps is rebounding since 2021. The company's highest gross profit margin is the stainless steel pump series, with a gross profit margin of nearly 40% in the first half of 2023, and the gross profit margin of general purpose pumps is lower, usually around 30%.
The international competitiveness has been enhanced, and the overseas business has increased rapidly. In 2013-2022 and 2018-2022, the compound growth rate of the company's overseas revenue was more than 15%, accounting for 39% of the company's revenue in 2013 to 59% in 2022. The gross profit margin of the company's overseas business is higher than that of the domestic business except for 2021.
1.2. Financial data: profitability continues to improve, and we are optimistic about the subsequent performance recovery
In recent years, the company's performance has declined, and it is optimistic about the follow-up performance recovery. From 2017 to 2021, Lingxiao Pump's operating income and net profit attributable to the parent company increased from 980 million yuan and 190 million yuan to 2.06 billion yuan and 480 million yuan respectively. In 2022, operating income and net profit attributable to the parent company declined significantly, with revenue decreasing by 28.1% year-on-year and net profit attributable to the parent company decreasing by 12.7%.
Profitability continued to improve, and expense ratios declined rapidly. From 2017 to 2022, the company's gross sales margin and net profit margin attributable to the parent company generally increased, from 30% and 19% in 2017 to 38% and 30% in the first half of 2023, respectively. From 2017 to the first half of 2023, the company's expense ratio decreased rapidly from 9.9% to 3.67%, excluding the impact of financial expenses, and the expense ratio for the first three quarters of 2023 was 6.78%. The company's R&D expense ratio has remained above 3% for many years.
2. Pump industry: a highly decentralized but centralized acceleration of the 100 billion track
2.1. Pumps – a wide range of uses, high SKU standards
Pump is a machine that converts the mechanical energy of the prime mover into kinetic energy and potential energy flowing through the liquid inside it to achieve liquid transfer or pressurization, and is widely used in agriculture, chemical industry, mining and metallurgy, electric power, national defense and military industry, municipal and other industries. There are many types of pumps, which can usually be divided into vane, positive displacement and other types of pumps according to their working principle.
Vane type relies on the force of a rapidly rotating impeller to transfer mechanical energy to the liquid, increasing its kinetic energy and pressure to achieve liquid transfer, including centrifugal pumps, axial flow pumps, and mixed-flow pumps. Centrifugal pumps are the most common vane pumps.
Positive displacement pumps rely on working elements to reciprocate or rotate in the pump cylinder, so that the working volume of the pump cylinder increases and decreases alternately to achieve the suction and discharge of liquids, including piston pumps, gear pumps, and screw pumps.
Other types of pumps include jet pumps, water hammer pumps, solenoid pumps.
The centrifugal pump is mainly composed of pump body, pump seat, motor and other parts, and the pump body is composed of water inlet section, diversion shell, check valve, pump shaft and impeller and other parts. When working, the impeller of the motor drives the pump to rotate so that a vacuum is formed at the impeller inlet and the water is sucked in, and the water produces centrifugal force under the action of the impeller blades to obtain speed energy and pressure energy;
The raw materials of centrifugal pumps are mainly enameled wires, silicon steel sheets, iron castings, plastics, electronic components and other standardized products. The downstream of civil centrifugal pumps can be supporting customers and end customers. Supporting customers usually integrate centrifugal pumps into their own products such as jacuzzis, water purification equipment, air conditioners, chillers, etc., while end users directly use centrifugal pumps for irrigation, water supply, cleaning, etc. Water pumps are widely used, and the price is not expensive, and the demand is relatively rigid and there is no obvious periodicity.
From the perspective of product characteristics, the pump is a highly mature, high-SKU, and low-technical difficulty product. There are more than 5,000 pump products worldwide. Most of the domestic small pump enterprises rely on a large number of labor, purchase of purchased parts and components, low technical content, homogenization is more serious, the scale of the enterprise is small, the continuous supply capacity and the full range of products coverage ability is poor.
2.2. Market size - a 100 billion market with steady development
Water pumps are a vast market. According to Zion Market Research, P&S Market Research, and our estimates, the global pump market is expected to grow from US$40.4 billion (RMB247.2 billion) in 2014 to US$66.5 billion (RMB452.2 billion at 6.9 billion) in 2024, with a compound annual growth rate of 5.8%.
China's water pump market accounts for about half of the world's market, is also a 100 billion level of large market, we are expected to increase from 142.2 billion yuan in 2014 to 250 billion yuan in 2024, a compound annual growth rate of 5.5%, accounting for the proportion of the global market size will drop slightly from 58% in 2014 to 55%.
According to the QYResearch "2021-2027 Global and China Centrifugal Pump Market Status and Future Development Trend" report, the global centrifugal pump market size in 2020 will be about 201.6 billion yuan, and China's centrifugal pumps will account for about 60% of the global water pump market size, and the market size of China's centrifugal pump in 2020 will be about 121 billion yuan.
According to HIS data, from 2016 to 2021, the compound annual growth rate of China's centrifugal pump market is 5%, and we assume that the compound annual growth rate of 5% will be maintained from 2020 to 2024, and the size of China's centrifugal pump market will reach about 147 billion yuan in 2024, about half of the whole.
The downstream of the pump is widely used, the overall market scale is large, and the overall economic development is highly correlated. With the gradual slowdown of the mainland's economic development, the main business income and total profit of the mainland's pump and vacuum equipment manufacturing enterprises above designated size have also gradually slowed down, and in recent years, the GDP growth rate has basically been at the level below. Since 2018, Sino-US trade frictions have led to high tariffs, and the exports of mainland pump companies have been affected to a certain extent.
2.3. Competitive landscape – highly fragmented but accelerating
The pump industry is a highly fragmented market with relatively concentrated heads
The pump industry is a highly fragmented market. Compared with the general equipment sections, the pump market concentration is comparable to that of bearings, machine tools and other industries, according to our estimates, the market share of the top ten companies is roughly between 20% and 30%.
We believe that pumps are similar to general equipment such as valves, bearings, machine tools, etc., with mature technology, large market demand and high degree of standardization of raw materials, which can provide survival soil for a large number of small and medium-sized enterprises.
From the perspective of the competition pattern of the global pump industry, there are nearly 10,000 pump manufacturers in the market, and the market competition is fierce. At present, the global pump companies are mainly concentrated in the United States, Germany, China and Japan. Internationally renowned enterprises were founded earlier, mastered the core technology, and occupied the main share, and there is no shortage of theoretical pioneers such as Japan's Ewara. According to McIlvaine's Pump Market Information, the world's top 10 pump companies account for about 50% of the world's total sales. In recent years, multinational pump companies have been increasing their global acquisitions and expansion, and the concentration of the global pump industry has been increasing.
From the perspective of the competition pattern in the mainland, there are more than 6,000 pump manufacturers in the mainland, and most of them have small production scale, extensive operation, low technical level, backward technology and equipment.
According to our estimates, in 2021, the top 10 in China's pump industry revenue will occupy a total of 21.2% of the national market share, far lower than the international market level, and the top five companies in terms of revenue scale are Ebara, Kaiquan, Dongfang, Nanfang, and Liancheng, accounting for 3.3%, 3.2%, 3.0%, 2.2%, and 2.2% respectively.
China's local pump companies mainly include Kaiquan Pump, Dongfang Pump, CICC Environment (formerly Nanfang Pump), Leo, Dayuan Pump and Lingxiao Pump.
The trend of concentration of the head of China's pump industry is accelerating
The agglomeration effect of China's pump industry is obvious. Although the current degree of concentration of domestic pump enterprises is far lower than the international level, there is a strong regional agglomeration. Pump manufacturers in mainland China are mainly distributed in East China, Central China and North China, especially in Wenling City, Zhejiang Province. The pump is the first leading enterprise in Wenling City, with an output value of more than 65 billion yuan and more than 3,000 enterprises in the pump and motor industry, accounting for more than 60% of the market share in the field of small submersible pumps, well submersible pumps, circulating pumps and other products.
The scale effect of pump industry enterprises is obvious. We analyze the cost/revenue of pump-related businesses in Nanfang, Dayuan, Lingxiao, and Taifu in 2022, and find that the correlation between production efficiency and scale of domestic listed pump companies is obvious. The direct labor input of the southern pump industry with a business scale of more than 3 billion yuan can generate 20 yuan of income, the labor input of the similar Dayuan and Lingxiao pump units can generate about 14 yuan of income, and the smaller Taifu pump industry can only generate 11.5 yuan of income. Therefore, we believe that pump enterprises have a greater incentive to expand their scale and improve profits.
The trend of concentration of the head of China's pump industry is accelerating. From 2016 to 2020, the revenue market share of the top 10 enterprises in China's pump industry increased from less than 10% to nearly 20%, and the concentration continued to increase. From 2016 to 2020, the average size of enterprises above designated size in China's pump industry decreased from 182 million yuan to 142 million yuan. We believe that with the slowdown in China's macro economy and the scale of the pump industry, the trend of integration and concentration of leading enterprises is expected to be further strengthened.
3. Company highlights: "invisible champions" in the subdivision track, high-dividend and high-quality targets
3.1. Different fireworks in the pump industry, "invisible champion" of the bathroom pump track
The so-called "hidden champion" refers to the small and medium-sized enterprises that have a global/regional market leader status in a certain segment, but are not easily known by the outside world. Such companies tend to have deep moats and can maintain a leading position in the market for a long time.
According to relevant market data and calculations, we believe that Lingxiao Pump Industry is the "hidden champion" in the hot tub pump (i.e. hot tub, or spa jacuzzi, etc.) track:
The hot tub pump industry is too small to accommodate multiple large businesses. According to Pkdata, Jacuzzi, and Amazon, the average price of a single hot tub in 2020 was $8,040, and the price of hot tub pumps was mostly between $150-$350, and at the pivot of $250, most hot tubs had two separate pumps, and it was roughly estimated that the value of the tub pump accounted for 6.3% of the selling price.
According to Modor Intelligence, global hot tub sales will increase from $5.66 billion to $6.68 billion in 2024-2029, with a USD/RMB exchange rate of 6.8 Roughly estimated at 2024-2029, the global hot tub pump market size will be approximately RMB 2.41-2.84 billion from 2024 to 2029. Compared with the scale of 100 billion yuan in the global water pump industry, the hot tub pump market is a typical segmented small track.
The hot tub pump industry can survive for a long time and develop steadily.
The hydromassage bathtub is a typical high-end leisure consumer product, and there is no substitute for similar functions on the current market, and the pump is its basic component. According to the announcement of Tenglong Health, the United States will be the largest market for spa baths in the world in 2022, accounting for more than 50%, and the penetration rate of the residential market is still low. We believe that the spa tub market has a long-term growth foundation as income levels and quality of life demand increase in other regions.
Hot tub pump has a strong brand effect: high value & low price, high integration, and price insensitivity.
1) Bathtub integrator: The key to the quality of the jacuzzi lies in the quality of the pump, but the price of the pump only accounts for 6.3% of the total price of the jacuzzi, and the swimming pool/large bathtub is usually under the conditions of large temperature difference, humidity difference, exposure to the sun, and immersion in water, and the product quality requirements are high.
2) End consumers: Jacuzzi is faced with high-end consumer groups and is in direct contact with the skin, and users have high requirements for quality, safety and environmental protection, and have less tolerance for low consumption experience caused by damage to accessories, and are not sensitive to price.
3) With brand effect: the pump is a mechanical equipment with many parts, complex structure and high integration, and we believe that its motor control and assembly clearance depend on long-term accumulated process experience, and the performance needs to be verified through long-term use, so the brand effect of integrators/terminals before purchase is strong, and the product has a premium space.
Lingxiao Pump Industry has a leading market share and is firmly on the top of a mountain.
According to the prospectus of Lingxiao Pump Industry, the global jacuzzi sales in 2014 was about 1.086 billion US dollars, and the value of the bathtub pump accounted for about 6.3% of the previous article, and the corresponding bathtub pump market size was about 414 million yuan, and the company's bathtub pump sales revenue in 2014 was 261 million yuan, accounting for about 63% of the global bathtub pump market. In the prospectus of Tenglong Health, a spa massage cylinder accessories manufacturer, only one company in the field of global spa massage cylinder pumps is listed.
3.2. Concentrate on the main business and continue to return shareholders with high dividends
Focus, internationalization and innovation are the three pillars of "hidden champion", and the company has excellent genes
Operate the main business steadfastly and build a first-class enterprise in the subdivided field. We believe that the pump industry itself is not a bright spot, the market is generally optimistic about the business, the number of head pump companies listed is small, and several larger listed companies are seeking opportunities for transformation and development. Lingxiao Pump continues to focus on the hot tub pump segment, and pump products continue to account for more than 95% of the company's total revenue.
According to the announcement of Lingxiao Pump Industry, the company will strive to become a world-class pump product manufacturer in the market segment, and plans to increase the production capacity of civil centrifugal pumps to 8 million sets in the next five years (the output in 2021/22 will be 463/2.48 million units, respectively).
Overseas business is the cornerstone of the company, and the number of customers continues to grow. The overall space of a single country's subdivision track is limited, but the "hidden champions" often have international leading competitive strength, and internationalization is usually an important direction of their development.
Spa bathtubs are mainly concentrated in the European and American markets, and the overseas market has been the cornerstone of the Lingxiao pump industry since the beginning, and the revenue from overseas regions has basically been more than 40% since 2012, and the revenue from overseas regions accounted for 51%/59%/51% in 2021/22/23H1.
According to the company's research, most of the bathroom pump products are exported, and the domestic sales of pumps are basically export sales; in recent years, the company's overseas sales have declined slightly, and the number of overseas customers of the company is growing, but the market is relatively weak, and the number of orders is relatively reduced.
We believe that during the epidemic, the company's performance declined after rapid growth due to the advance stocking and advanced consumption of downstream customers, and with the increase in the number of downstream customers and the digestion of channel inventory, the follow-up revenue is expected to return to the track of steady development.
Self-developed water pump motor, forming a dual advantage of cost & adjustment. The improvement of the performance of the whole pump of civil centrifugal pump, such as noise reduction, energy consumption and safety, needs to be improved through the design of supporting motors. Lingxiao Pump Industry, formerly known as Yangchun County Motor Factory, was established with three-phase motors, fans, and water machine accessories as the main products, and in 1985, based on the technical advantages of its own motivation, it switched to the production of integrated motor and pump products, and has accumulated more than 40 years of experience in the field of motors, forming the core technology of high-efficiency, low-noise and low-vibration motor design technology. We believe that self-developed pump motor products can form the dual advantages of low cost and deep tuning.
High cash dividends for many years, continuous return to shareholders
Since its listing, Lingxiao Pump has implemented cash dividends for six consecutive years, with a cumulative cash dividend of 1.541 billion yuan and a dividend rate of 69.16%, and a cumulative cash dividend of 1.046 billion yuan in the past three years. In 2020/21/22, the company paid dividends of 1.3/1/1 yuan per share, with dividend payout ratios of 92.10%/74.01%/84.77% and dividend yields of 5.4%/3.6%/6.0% respectively.
4. Earnings forecasts and valuations
We forecast that the total operating income of Lingxiao Pump Industry in 2023-2025 will be 14.5/16.8/1.90 billion yuan, and the gross profit margin will be 34.4%/35.4%/34.9%. The main assumptions and specific calculation process are as follows:
Overseas customers in the first half of 2021-2022 for a variety of reasons, a large number of stock, the current customer inventory is basically digested, orders have a warming trend, we believe that the follow-up is expected to enter a new round of replenishment cycle, assuming that the growth rate of plastic bathroom pump business in 2023-2025 is -15%/20%/15% respectively;
The compound growth rate of the company's stainless steel pump business revenue from 2014 to 2021 is 15%, and the compound growth rate from 2014 to 2022 is 12%, assuming that the company's stainless steel pump revenue growth rate from 2023 to 2025 is 15%/14%/13% respectively;
General purpose pump is a cast iron as the main material of the pump body of the civil centrifugal pump, used in the medium sanitary conditions of the low civil, agricultural, water conservancy field, we believe that the technical difficulty is low, due to the rapid increase in the domestic pump industry head concentration trend, assuming that the revenue growth rate is comparable to the development rate of China's centrifugal pump market size, the annual growth rate is 5%.
CICC Environment, Dayuan Pump, a listed company in the pump industry, as well as Neway Co., Ltd., a valve manufacturing enterprise in the general equipment sector, and Guomao Co., Ltd., a general reducer manufacturing company, are selected as comparable companies.
Lingxiao Pump Industry has long focused on subdividing the plastic bathroom pump track, occupying a leading position, forming a strong brand, and continuing to implement cash dividends to return shareholders since its listing.
According to the business split and profit forecast, the company's operating income from 2023 to 2025 is expected to be 14.5/16.8/1.90 billion yuan, and the net profit attributable to the parent company is expected to be 4.29/5.26/556 million yuan.
The PE of the selected comparable companies in 2023 is between 11-22 times, with an average of 17 times, and the PE of Lingxiao Pump is 18 times, with a target price of 21.61 yuan per share, which is 22.2% upside compared to the closing price on January 25, 2024.
5. Risk Warning
Downstream orders fell short of expectations. During the epidemic, the supply chain was blocked due to the early stocking of channels and the development of the home economy, which may lead to the subsequent development of the company's main business less than expected.
Raw material price fluctuation risk. The main raw materials required for the company's production are bulk commodities such as silicon steel sheets, enameled wires, stainless steel, plastics, aluminum ingots, iron castings, etc., and the total cost of the above six main raw materials accounts for about 55% of the operating costs. If there is a large change in the supply and demand of the main raw materials, resulting in abnormal price fluctuations, it may have an adverse impact on the company's production and operation.
Inventory impairment risk. The company has a large production scale, a variety of product types, and a large inventory scale, accounting for a high proportion of total assets. In the future, if the customer's consumption preferences change, the material technology of the pump industry has made great progress, or the emergence of new substitutes leads to the unavailability of raw materials, or the company's original common specifications and models of products are unsalable, the company's inventory is at risk of impairment.
The assumptions and calculations in this article are subjective and are for reference only.
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The report comes from [Foresight Think Tank]