\u3000\u30 Shenzhen Fountain Corporation(000005) 19 North Industries Group Red Arrow Co.Ltd(000519) )
The company is mainly engaged in superhard materials, special equipment and automotive products, accounting for 47%, 40% and 13% of the revenue in 2021h1. The company is the listing platform of core special equipment and superhard materials under China ordnance industry group. It is not only a key model supplier of intelligent ammunition in China, but also a global leader in industrial diamond and diamond cultivation.
Two asset injections to build the company’s core business. In 2013, the company acquired Zhongnan diamond and in 2015 acquired 6 subsidiaries to realize ammunition asset injection. So far, the company has entered the dual track development stage of superhard materials + defense products.
The profit has improved significantly and is expected to be driven by two wheels in the later stage: the company announced that the net profit attributable to the parent company in 2021 is expected to be 450490 million yuan, with a year-on-year increase of 64% – 78%, and the profits of the company are thickened by superhard materials in large quantities; With the increase of special equipment revenue orders and the reform of pricing mechanism, the gross profit margin of the company’s products is expected to be further improved, and military products + materials jointly promote the implementation of performance.
Cultivating diamonds: CAGR exceeded 120% in previous years and the production penetration rate was only 6%, which will grow rapidly in the next few years. High growth rate and low penetration track: from 2017 to 2019, the compound growth rate of global diamond production exceeded 120% and the penetration rate was only 6%, which has a broad market space. Affected by the reduction of natural diamond production, the increase of cost, the advantage of diamond cultivation price, the improvement of China’s consumption strength + the change of consumption concept, the diamond cultivation industry is expected to accelerate its penetration. The company’s subsidiary Zhongnan diamond large particle cultivation diamond has the largest market share in the world and strong technical innovation force. In 2021, the revenue of H1 Central South diamond (cultivated diamond + industrial diamond) was 1.36 billion yuan, a year-on-year increase of 65%; The net profit was 340 million yuan, a year-on-year increase of 133%.
Industrial diamond: an important source of profit. The rising demand for photovoltaic diamond wires + capacity squeeze promote the improvement of profits, and the steady growth of demand: as a necessary product for high-end manufacturing, industrial diamond benefits from the growth of downstream demand for photovoltaic diamond wires and so on; The market share of the company’s products in production and sales ranks first in the world, and the industry leader is expected to gain a greater share. The production capacity is squeezed by cultivated diamonds, and the short supply promotes the improvement of profitability: due to the large demand for cultivated diamonds, the existing production capacity is more inclined to it, the industrial diamond production capacity is squeezed, and the price continues to rise due to the short supply of products, so the profitability is expected to continue to improve.
The target of the scarcity of intelligent ammunition is the core listed platform of Ordnance Group, and its market value ranks first among the listed companies of ordnance. As the target of the scarcity of A-Shares of intelligent ammunition, the company will increase the consumption and demand caused by the increase of the frequency of new intelligent ammunition loading + actual combat drills in the future; The company has high technical barriers, strong track blocking, strong qualification background and full production capacity. In the later stage, it is expected to benefit from the demand growth of ordnance industry group and the purchase of intelligent ammunition by the Chinese army.
Profit forecast and valuation
It is estimated that the net profit from 2021 to 2023 will be 480 / 10.4 / 1.36 billion, with growth rates of 76%, 115% and 30% respectively, compound growth rate of 70% and PE of 57 / 27 / 20 times. It is covered for the first time and given a “buy” rating.
Risk tips
The change of diamond competition pattern and profitability, the iteration of new technology and the change of underwriting system have made military products less than expected.
