North Industries Group Red Arrow Co.Ltd(000519) (000519)
After decades of development, Chengdu accessories factory has finally completed the diversified platform business layout. The company, formerly known as Chengdu parts factory founded in 1965, has finally completed the diversified layout of superhard materials + defense products after several equity changes and mergers and acquisitions. At present, the company has three business segments: superhard materials, special equipment, special vehicles and auto parts. In recent years, the company's revenue scale has maintained a stable growth. In the first three quarters of 2021, the company achieved a revenue of 4.848 billion yuan, a year-on-year increase of + 24.28%; The company achieved a performance of 607 million yuan, a year-on-year increase of + 84.18%, both at a new high level.
Diamond cultivation is in the Ascendant: low permeability, high growth, high-quality production capacity and high barriers. According to our calculation results, it is expected that the scale of China's cultivated diamond rough market is expected to grow to 11 billion yuan in 2025, and the CAGR will be as high as 38% in five years. Although the order fulfillment rate of leading companies is low, we believe that there is no risk of rapid deterioration of the competition pattern. From the short-term perspective, leading companies have capital advantages and have high certainty of expanding production; In the medium and long term, leading companies have all-round advantages such as scale + technology + channel, and high-quality production capacity has significant high barriers.
Zhongnan diamond is one of the earliest companies to cultivate diamonds, and continues to benefit from the expansion of the industry. Zhongnan diamond is the leader of superhard materials in China. It has been cultivating diamonds in a forward-looking layout since 2016. In terms of technology, the company is one of the first enterprises to realize the batch and stable production of 3-6 carat diamond blanks, and is in the leading position in the industry in many dimensions such as product yield and patent reserve; In terms of channels, benefiting from the advantages of scale and stable product quality, the company is favored by downstream customers. At the same time, the company has established a long-term cooperative relationship with the press manufacturer. The cash in hand of the parent company 2021q3 reaches 5.54 billion yuan, which can escort the company's capacity expansion. Based on the calculation of the number of presses and production parameters, it is estimated that the company's diamond cultivation business will achieve revenue of RMB 1.127 billion, RMB 1.815 billion and RMB 2.685 billion respectively from 2021 to 2023, and the gross profit margin will continue to increase to 58.6%, 63.1% and 65.5%. In addition, due to the shift of some production capacity in the industry to cultivated diamond production, the demand for industrial diamonds is also in short supply. Since the beginning of 2021, the cumulative price has increased by more than 40%. The subsequent price is expected to remain high, and the company is expected to continue to benefit.
Benefiting from the high prosperity of intelligent ammunition and the reform of pricing mechanism, the profitability of special equipment can be improved. Smart ammunition has broad prospects and high barriers to entry. The company injects ammunition assets through M & A, and the revenue side is expected to continue to benefit from the high growth of the industry in the future. At the same time, under the previous "cost plus" pricing model, the company's poor profitability of special equipment business is the main reason for the loss. In the future, with the continuous promotion of pricing mechanism reform, it is expected to open profit space. In 2021, the company's loss reduction measures have made good progress, and the automobile sector has basically turned losses into profits. In the dimension of the whole year, the total performance of other subsidiaries except Zhongnan diamond is expected to return to the breakeven point.
Investment suggestion: the company is a platform enterprise of superhard materials + defense products. It has a forward-looking layout to cultivate diamond business. Its production capacity and technology are in the first echelon in China, and is expected to continue to benefit from the expansion bonus of the industry; Meanwhile, the profitability of the company's special equipment business is also expected to improve. We expect the company to achieve EPS of 0.60, 1.00 and 1.42 yuan respectively from 2021 to 2023, with corresponding PE of 44, 27 and 19 times respectively. At present, the wind consistency of comparable companies in the industry ( Henan Huanghe Whirlwind Co.Ltd(600172) , Henan Liliang Diamond Co.Ltd(301071) ) is expected to be 34 times in 2022, and the company's valuation is lower than the average of comparable companies. Considering the outstanding scale and technical advantages of the company and high performance certainty, it is covered for the first time, Give a "recommended" rating.
Risk tip: the demand for cultivating diamonds is lower than expected, the price of raw materials rises sharply, the industry competition pattern worsens, the demand for special vehicles and auto parts declines, and the profit improvement of special equipment is slower than expected
