Zhitong Finance APP learned that Guolian Securities released a research report stating that water pumps belong to the underestimated market with a scale of hundreds of billions, and the industry valuation is at the bottom range. The pattern is scattered and expected to accelerate concentration. China's manufacturing industry is rebounding, trillion yuan government bonds and equipment renewal policies actively create domestic demand, overseas real estate rebounds and inventory cycles effectively boost external demand, which is bullish for pump industry development. As for the targets, we recommend Lingxiao Pump Industry (002884.SZ): plastic sanitary pump leader, benefitting from the US real estate rebound and active replenishment cycle; and Nanfang Zhongjin Environment (300145.SZ): stainless steel pump leading enterprise, benefitting from trillion yuan government bonds and equipment renewal policies.

Guolian Securities' main points are as follows:

Market space: General equipment with a market size of hundreds of billions.

By 2024, the global water pump market is expected to reach 460 billion yuan, a year-on-year growth rate of approximately 6%. The market space for China's water pump market is approximately 236 billion yuan. In addition, China is the world's largest supplier of water pumps and is expected to account for more than 30% of global water pump production in 2023, benefiting from domestic products that mainly export to developed countries in Europe and the United States, as well as emerging markets such as the Middle East, Africa, and Southeast Asia.

Domestic demand: Manufacturing industry rebounds and policy promotes the replacement of energy-saving pumps.

In March 2024, China's manufacturing PMI returned to the expansion zone after 6 months and was reported at 50.8; it was reported at 50.4 in April, remaining in the expansion zone; May/June were reported at 49.5, falling slightly, mainly due to the high base effect in the previous period and insufficient current demand. Guolian Securities believes that the production indexes for May/June were reported at 50.8/50.6, still above the critical point, indicating that although the production growth has slowed down, it still maintains an upward trend. In addition, the trillion yuan government bond and equipment renewal policies accelerate the replacement of stainless steel pumps with traditional cast iron pumps. The pace is dominated by central SOEs, and equipment suppliers with a high proportion of downstream customers who are central SOEs are the first to benefit.

External demand: US real estate rebounds and inventory turning point boosts demand.

In February 2024, the global manufacturing PMI returned to the expansion zone after 17 months and has been there for 4 consecutive months. Among developed economies, the US manufacturing PMI rebounded significantly and has been there for 6 consecutive months, and sales of existing and new homes continue to show a fluctuating upward trend. Guolian Securities believes that the US real estate is bullish and will effectively boost home building material consumption such as sanitary pumps. From the perspective of inventory, China's export growth rate of building materials to the United States turned positive in February 2024, but the US building materials industry is still accelerating inventory reduction. US demand is strong, and it is currently at the end of the passive destocking period or it is about to enter a replenishment cycle.

Competitive landscape: Domestic CR10 is about 15% and is accelerating to match foreign improving concentration.

Overseas products are positioned in the mid-to-high end, with high concentration of competition and a CR10 market share of about 50%, including Xylem from the US at 12%, Ebara from Japan at 8%, and Grundfos from Denmark at 8%. Domestic products are positioned in the low-end, and the competitive landscape is scattered, with a CR10 market share of about 15%, including Nanfang Zhongjin Environment at 2.1%, Zhejiang Dayuan Pumps Industry at 0.8%, and Lingxiao Pump Industry at 0.6%. Currently, domestic leading enterprises are accelerating the expansion of mid-to-high end products, and are expected to eliminate tail-end enterprises with scale effects and technical barriers, accelerating the trend of concentration in the leading enterprises.

Risk reminders: fluctuations in raw material prices, lower-than-expected downstream demand growth, excess capacity in low-end production capacity, production capacity investment or lower-than-expected, macroeconomic downturn risks, geopolitical risks, etc.