\u3000\u30 Shenzhen Fountain Corporation(000005) 19 North Industries Group Red Arrow Co.Ltd(000519) )
Point 1 exceeding market expectations: at present, the market is worried that the decline in the terminal price of cultivated diamonds will be transmitted to upstream manufacturing enterprises, but we believe that HPHT synthetic blanks are in a state of price mismatch for a long time due to technical differences, and there is a broad space for repair in the future. Even under the pessimistic expectation of downward terminal price, upstream enterprises can still improve the average price through the optimization of dakla product structure and the iteration of synthetic process.
Point 2 exceeding market expectation: due to the particularity of military business, the market pays low attention to North Industries Group Red Arrow Co.Ltd(000519) but we believe that there is a bottom loss in military business, and the reform of military pricing mechanism is expected to repair the profitability of the company. Comparing the characteristics of cultivated diamond and natural diamond industry, starting from the three dimensions of product attribute, industry space and pattern and industrial chain links, we judge that head manufacturers with core technology are easy to form a lasting moat, form a monopoly pattern and reap excess profits. At present, the diamond industry in Central South China, the leader of diamond synthesis technology, has a solid position and has a more say in HPHT process.
Civil products business: lead the industry in pricing and have sufficient capacity to expand production. 1) Strong R & D strength and leading HPHT synthesis technology: as of 2021h1, the overall R & D investment has reached 138 million yuan, exceeding the total of comparable peers. There are 1559 R & D personnel, accounting for 18.82% of the total employees. It can produce 30 carat colorless diamond blanks and 20 carat color diamond blanks. 2) The production capacity of superhard materials ranks first in the world: we speculate that the output of North Industries Group Red Arrow Co.Ltd(000519) diamond single crystal will reach 4.845 billion carats in 2020, and the cultivated drilling capacity will exceed 1 million carats. The overall production and sales strength ranks first in the industry. 3) The upstream relationship is stable and the book capital is sufficient: the upstream and downstream cooperation relationship of the company is stable. As of 21q3, the total current assets of the company reached 8.915 billion yuan, including 5.2 billion yuan of monetary capital, which has both power and strength to expand production. We expect the revenue of superhard materials to reach 4.674 billion yuan by 2023, accounting for 44.4% of the total revenue, and the gross profit margin of the sector is expected to increase to 54.5%.
Military business: Reform of procurement policy and release of profit elasticity. The change of military procurement policy from cost plus method to target plus method can effectively improve the awareness of reducing costs and increasing efficiency, and release the flexibility of performance and profit. The group’s subsidiaries Galaxy Power and Hongyu special automobile have highly benefited and obvious stop loss signs. We expect the future revenue growth of special equipment and special automobile business to be stable and the profitability to be continuously repaired. By 2023, the gross profit margin of special equipment and special automobile will reach 17.5% / 7.3% respectively.
Profit forecast and investment suggestions: the company is the leader in the manufacture of superhard materials with leading technology, and the benefits of artificial diamond and other civilian products are determined. The profit recovery of military products can be expected in the future. It is a “diamond” that can not be ignored in the A-share market. From 2021 to 2023, the company is expected to realize operating revenue of RMB 7.514/87.94/10.520 billion and net profit attributable to the parent company of RMB 472/9.29/1.413 billion, corresponding to eps0.05 billion 34 / 0.67/1.01 yuan per share. Based on the overall valuation of comparable peers, the company is given a target price of 26.80 yuan in 2022, corresponding to pe40x, which is covered for the first time and given a “buy” rating.
Risk tip: downstream demand is less than expected, capacity expansion is less than expected, industry competition intensifies, and technology iteration is less than expected.
