\u3000\u30 Shenzhen Fountain Corporation(000005) 19 North Industries Group Red Arrow Co.Ltd(000519) )
Key investment points
North Industries Group Red Arrow Co.Ltd(000519) business segment includes “special equipment + superhard materials (cultivation Diamond & industrial diamond) + automobile”, which is subordinate to China ordnance industry group North Industries Group Red Arrow Co.Ltd(000519) is a large civil military integration enterprise. Its main businesses include special equipment, superhard materials, automobiles and auto parts. Many of its subsidiaries are engaged in different businesses. Among them, the subsidiary Zhongnan diamond is a leading enterprise in China’s superhard material industry, with leading technical advantages. In 2021, the company realized a revenue of 7.51 billion yuan, a year-on-year increase of + 16%, and a net profit attributable to the parent company of 470 million yuan, a year-on-year increase of + 72%.
Cultivate diamond industry β： The global penetration rate has increased rapidly and developed rapidly. China’s upstream manufacturing enterprises have deep technological barriers and outstanding industrial advantages. 1) Rapid increase in penetration rate: since the price of cultivated diamonds reached the psychological threshold of consumers in 201920, the penetration rate of cultivated diamonds began to increase rapidly. In the single month import and export data of India in February 2022, the penetration rate of cultivated diamonds has reached 6% – 7%, and is still in rapid increase. 2) The price of cultivated diamonds anchors the price of natural diamonds. The continuous rise in the price of natural diamonds provides a basis for raising the price of cultivated diamonds. 3) the production methods of cultivated diamonds mainly include high-temperature and high-pressure method and CVD method. China has obvious industrial advantages in high-temperature and high-pressure method. The process barriers of upstream manufacturers are high, and the average product quality is continuously improved driven by technological progress. The cultivated diamond manufacturers are expected to usher in a “structural price increase”.
Company α， The entry threshold of diamond cultivation by high temperature and high pressure method is actually high, and the process barrier of upstream manufacturers is its source of profit. Under the resonance of supply and demand, industrial diamond also ushered in the double rise of volume and price North Industries Group Red Arrow Co.Ltd(000519) wholly owned subsidiary Zhongnan diamond is the largest superhard material enterprise in China, with early industrial diamond layout and long accumulation of experience in high temperature and high pressure technology. There are differences in cultivating diamond products. The selling price of higher grade products shows exponential growth. Manufacturers with better technology have stronger profitability. Profitability comes from better technology and technology, not homogeneous equipment and capital investment, but technology and technology need time and experience. In addition, even for mature manufacturers, the payback period of equipment investment needs a long time. When the process technology of new manufacturers is not reached, the payback period is longer. For Zhongnan diamond, as the head manufacturer, the process still has room for progress. With the same cost, it can produce higher quality products, create more profits and build the company alpha. At the same time, with the rapid expansion of the company’s diamond cultivation; The situation of short supply of industrial grade diamond has caused the price of industrial grade diamond to keep increasing, and ushered in the simultaneous rise of volume and price.
Special equipment business: intelligent ammunition helps strengthen the army and waits for performance recovery. The company’s special equipment business is undertaken by North Hongyang, North Hongyu, north to East, North Binhai and Jiangji. The business orientation of this sector is the R & D and manufacturing of intelligent ammunition, involving many fields such as large-diameter shells, rockets, missiles and submunitions. The company’s special equipment business is temporarily at a loss and is expected to turn losses into profits in the future.
Profit forecast and investment rating: North Industries Group Red Arrow Co.Ltd(000519) is a leading enterprise in China’s artificial diamond industry, leading the industry in industrial technical barriers. It fully enjoys the high prosperity dividend of diamond cultivation, realizes the simultaneous rise of volume and price, and contributes to the core profit. We expect the company to realize the net profit attributable to the parent company of RMB 1.11/1.53 billion in 202223. The latest share price corresponds to 28 times of PE in 2022. It is covered for the first time and is rated as “buy”.
Risk tips: macroeconomic and demand fluctuations, intensified market competition, raw material price fluctuations, etc
