Henan Liliang Diamond Co.Ltd(301071) (301071)
[key investment points]
An old manufacturer of synthetic diamond, cultivating diamond business and driving the company’s high profit. 1) In the past, the company focused on industrial diamond manufacturing. Since 2021, the diamond cultivation business used in the consumption field has increased rapidly. The revenue of diamond cultivation in H1 in 2021 was 89 million yuan, 2.4 times that of the whole year in 2020, and the proportion of revenue increased from 16% in 2020 to 41% in H1 in 2021. The stable growth of the company’s industrial products and the rapid expansion of diamond cultivation capacity are expected to further release the company’s performance. According to the performance forecast, the net profit attributable to the parent company is expected to be 232-245 million yuan in 2021, with a year-on-year increase of 217.14% – 234.95%. 2) The product structure is inclined to cultivate diamond business with high gross profit margin, which drives the improvement of the company’s overall profitability. In terms of business, in 2020, the gross profit margin of the company’s industrial diamonds will be 40%, and that of cultivated diamonds will be 67%. The increase in the proportion of H1 cultivated diamonds in 2021 will increase the company’s overall gross profit margin from 43% in 2020 to 65% in H1 in 2021.
Cultivate the high-speed growth of diamond industry and the trend of short supply continues to benefit upstream producers. 1) Supply side: in 2020, the global output of cultivated diamond rough diamonds will be 7.2 million carats, and the penetration rate will reach 6%. It is expected that the penetration rate of cultivated diamond rough diamonds will increase to 15% in 2025, the global / Chinese rough diamond market will reach 49.3 billion yuan / 29.6 billion yuan respectively, and the CAGR will be 22% / 32% respectively in the next five years. 2) Demand side: in 2020, the United States will cultivate the diamond retail market, accounting for 82%, while only 8% in China is still in its infancy. The growth of the consumer side is driven by the cultivation of diamond’s obvious cost-effective advantages, and the market education of brands drives the improvement of consumer awareness. It is estimated that the scale of China’s diamond jewelry market will grow by 46% in the next five years. 3) The overall industrial chain conforms to the smile curve. The gross profit margin of upstream manufacturers is about 60%, that of midstream processors is about 10%, and that of downstream jewelry retailers is about 60%. The company is located in the upstream of the industrial chain with high technical and capital barriers. It is expected to maintain a high gross profit margin under the continuous state of short supply in the industry.
The company’s advanced equipment and technology are continuously optimized, and the fund-raising and production expansion drive the rapid release of production capacity. 1) The company has a number of patents in core technology. Technological progress has led to the improvement of diamond quality and product structure, which is finally reflected in the growth of production and sales and the improvement of average product price. The average price of diamonds cultivated by the company has increased significantly from 273 yuan / carat in 2020 to 657 yuan / carat in Q1 in 2021. 2) Due to the high price of the six sided top press and the high capital requirements for rapid production expansion, the IPO raised a total of 591 million yuan and 516 million yuan for the construction of intelligent chemical plant, of which 336 million yuan was used for the purchase of 320 new six sided top presses. Referring to the installed capacity of 483 six sided presses at the end of June 2021, the utilization rate of diamond cultivation capacity will continue to be higher than 96% from 2018 to 2020, and the significant expansion of production is expected to break through the capacity bottleneck and open the ceiling of diamond cultivation business.
[investment advice]
Based on the steady growth of cultivated diamond and industrial diamond production capacity brought about by the continuous operation of new factories, and the improvement of cultivated diamond sales proportion and product quality brought about by technology research and development, we raised our forecast for the company’s operating revenue and net profit attributable to parent company from 2021 to 2023. It is estimated that from 2021 to 2023, the company’s operating revenue will be 532 / 916 / 1450 million yuan respectively, with a year-on-year growth rate of 117.22% / 72.25% / 58.26% respectively; The net profit attributable to the parent company was 244 / 430 / 685 million yuan respectively, with a year-on-year growth rate of 234.53% / 75.91% / 59.49% respectively; EPS is 4.04/7.12/11.35 yuan / share respectively; The corresponding PE was 69 / 39 / 24 times. We believe that cultivating diamonds is expected to open up a new consumer market, and the company’s industrial grade diamonds are growing steadily. On the whole, the company is given 53 times PE in 2022, corresponding to the target price of 377.36 yuan, which is raised to the “buy” rating.
[risk tips]
The production capacity is lower than expected;
The improvement of consumer awareness is less than expected;
Industry competition intensifies.
