\u3000\u30 Shenzhen Fountain Corporation(000005) 19 North Industries Group Red Arrow Co.Ltd(000519) )
Event: the company disclosed the annual report of 2021 on April 18. During the reporting period, the company achieved operating revenue of 7.514 billion yuan (+ 16.26%), net profit attributable to the parent company of 485 million yuan (+ 76.66%), basic earnings per share of 0.35 yuan (+ 76.72%), roe of 5.54% (+ 2.24pcts), gross profit margin of 20.74% (+ 3.16pcts) and net profit margin of 6.46% (+ 2.21pcts).
Key investment points:
The rapid growth of the company’s net profit is mainly due to the profit contribution of superhard materials business. During the reporting period, the company realized an operating revenue of 7.514 billion yuan (+ 16.26%) and a net profit attributable to the parent company of 485 million yuan (+ 76.66%), which is mainly due to the growth of superhard materials business; At the same time, the company’s roe (5.54%, + 2.25pcts), gross profit margin (20.74%, + 3.16pcts) and net profit margin (6.46%, + 2.21pcts) have increased. We believe that it is mainly due to the large profit contribution of superhard materials business (net profit of 657 million yuan, + 60.24%) with high gross profit margin (43.45%, + 6.14pcts), and the proportion of this business revenue in total revenue (32.03%, + 2.30pcts) remains stable.
In terms of expenses, during the reporting period, the company incurred 871 million yuan (+ 17.43%), mainly due to the rapid growth of sales expenses (6200 yuan, + 34.22%) and management expenses (523 million yuan, + 22.59%), and the increase of sales expense rate (0.83%, + 0.11pcts) and management expense rate (6.96%, + 0.36pcts); The R & D expense ratio (4.59%, -0.23 PCTs) decreased; The financial expense is – 59 million yuan (last period – 43 million yuan), mainly composed of interest income.
At the same time, we note that the company’s contract liabilities (945 million yuan, + 199.29%) increased significantly during the reporting period, mainly due to the increase in customer payments received, reflecting that the company has sufficient orders on hand and will maintain a good growth trend in future performance.
The performance of the first quarter report of 2022 started steadily, and the net profit reached a record high in the same period
On April 1, 2022, the company disclosed the performance forecast for the first quarter of 2022. It is expected that the net profit attributable to the parent company in the first quarter of 2022 will be 240280 million yuan, with a year-on-year increase of 148.14% – 189.50%, a record high for the company in the same period. During the reporting period, the company’s operating performance increased significantly year-on-year, mainly due to superhard material products, the overall market demand for products remained strong, and the sales price increased significantly compared with the same period of last year; The construction of military equipment has initially formed an operation trend of balanced production.
The company’s business mainly includes three business segments: special equipment business segment, superhard material business segment, special vehicle and auto parts business segment.
① special equipment business
The company’s military products business is positioned at the R & D and manufacturing of intelligent ammunition, involving many weapons and equipment fields such as large-diameter shells, rockets and submunitions. It can meet the production requirements of different ammunition and is at the advanced level in China. During the reporting period, this segment realized an operating revenue of 4.388 billion yuan (+ 15.05%), accounting for 58.40% (-0.62pcts) of the total revenue and a gross profit margin of 10.70% (+ 0.82pcts). The special equipment business mainly includes five wholly-owned subsidiaries of Jiangji special, north to East, North Hongyu, North Binhai and North Hongyang, all of which were injected into listed companies in 2016. Jiangji special has achieved an operating revenue of 2.143 billion yuan (+ 14.91%) and a net profit of 113 million yuan (- 11.72%), which is the research and production base of missiles, fuzes and intelligent ammunition in China. It can be seen from the company’s financial data in recent years that the performance of the military products business segment in recent years is mainly contributed by the subsidiary Jiangji special.
The subsidiary northern Hongyang achieved an operating revenue of 888 million yuan (+ 80.12%), and a net profit loss of 243 million yuan (a loss of 235 million yuan in the same period of last year). It is mainly engaged in military products processing, manufacturing, charging, assembly and final assembly production. The north to east of the subsidiary is the research and production base of China’s aviation rocket, missile warhead and long-range guided rocket launch box; North Hongyu mainly produces and sells all kinds of ammunition fuses, all kinds of submunitions, rocket warheads and other products. On March 8, 2022, the company disclosed that North Hongyu “XX machine production line technical transformation project” has completed the completion acceptance of all construction contents approved. It will focus on solving the problems of backward machine processing production equipment and testing means, insufficient machine processing production capacity and other problems in North Hongyu, so as to improve the digital manufacturing level of XX parts. From 2016 to 2021, the company’s special equipment revenue increased by 149.04%, with a compound growth rate of 20.02%.
The sales volume of the company’s series of anti tank missiles has increased significantly in recent years, and the production capacity is in short supply. The bidding of guided shells was successful in 2020. At present, the design has been finalized, and the demand for orders in the future is obvious. At the same time, as a key national military protection enterprise of ordnance industry, the company was awarded the special prize of outstanding contribution to economic benefits of ordnance industry group in 2021 for its outstanding performance in 2021.
The spokesman of the Ministry of national defense disclosed in June 2021 that the ammunition consumption of the whole army increased significantly in the first half of the year, and the proportion of highly difficult subject training continued to increase.
We believe that with the army’s overall strengthening of military training and preparation and the intensification of actual combat exercises, ammunition, as an indispensable consumable equipment of the modern army, is a veritable “consumable” of the army. Its demand is expected to maintain a sustained and stable growth during the “fourteenth five year plan” period, and its future performance may benefit or reverse the current loss of military products business. The demand for practical training and war preparation has led to the increase of the “quantity” of weapons and equipment demand, which constitutes the bottom logic of the company’s military products business in the high boom development of the 14th five year plan.
② superhard material business
The main products of superhard materials business of the company are artificial diamond and cubic boron nitride single crystal and polycrystalline series products, composite materials, cultivated diamond, high-purity graphite and products, etc. The company ranks first in the world in terms of production, sales and comprehensive competitive strength of synthetic diamond. The main company contributing to the performance of superhard materials business is Zhongnan diamond company. During the reporting period, the operating revenue was 2.407 billion yuan (+ 25.21%), the net profit was 657 million yuan (+ 60.24%), which contributed 135.45% (- 13.63pcts) to the overall net profit scale of the company, the gross profit margin was 43.45% (+ 6.14pcts), and the revenue accounted for 32.03% (+ 2.30pcts) of the total revenue. Zhongnan diamond is the top high-quality enterprise in the superhard material industry. Its leading product industrial diamond production, sales and market share have ranked first in the world for many years, and cubic boron nitride ranks first in China. At present, the company can stably produce large-size gem grade cultivated diamond single crystals with high temperature and high pressure method within 30 carats, and can batch supply more than 3 carats of high-quality gem grade cultivated diamond products with high temperature and high pressure method.
The preparation technology of CVD cultivated diamond products has reached the international mainstream level. Mastered the centimeter level high temperature and high pressure CVD seed preparation technology, which laid a foundation for expanding the application of functional diamond.
GJEPC released the import and export data of Indian diamonds in March 2022, and the import / export volume of cultivated diamonds maintained a high increase in that month. In March, the import and export of cultivated diamonds maintained a rapid growth: the import / export volume of cultivated diamonds in India in that month was US $203 / 137 million, with a year-on-year increase of + 157.10% / + 59.45% and a month-on-month increase of + 30.97% / + 8.73%. We believe that due to the obstruction of the supply chain of natural rough diamonds under the influence of geographical factors, the price may continue to rise, and the cost performance advantage of cultivated diamonds is more obvious; The import / export volume of natural diamonds was USD 2.037/2.199 billion, with a year-on-year increase of + 45.22% / + 3.08% and a month on month increase of – 1.21% / + 11.12%; In addition, the annual penetration rate of cultivated diamonds increased steadily: we calculated that the import / export volume of cultivated diamonds in India accounted for 9.97% / 6.23% of natural diamonds in March, with a year-on-year increase of + 4.33 / + 2.20pcts; In fiscal year 2022 (from April 2021 to March 2022), the import / export volume of cultivated diamonds accounted for 7.25% / 5.40% respectively, with a year-on-year increase of + 1.52 / + 1.49pcts.
We believe that the company’s superhard materials, as the company’s main profit contribution sector at present, has the technical advantages of the whole process of superhard materials products. As the world’s first producer of industrial diamond production and marketing, the company will benefit from the demand growth of downstream photovoltaic, semiconductor and other new infrastructure; As a leading diamond producer in China, it is expected to continue to expand the scale of market space in the future, benefiting from the maturity of dakela diamond cultivation technology, the increase of international luxury jewelry manufacturers in the industry to cultivate diamond layout, the initiative to guide consumption habits, and the steady improvement of the high landscape and penetration rate of the current diamond cultivation industry.
③ special purpose vehicles and auto parts business
The main products of the company’s special-purpose vehicles and auto parts section include special-purpose vehicles, internal combustion engine parts and vehicle chassis mechanism parts. Among them, the income of special purpose vehicles was 398 million yuan (- 5.52%), and the income of auto parts was 320 million yuan (+ 5.04%), which increased steadily. The core subsidiaries include Hongyu special automobile, North Binhai and Galaxy Power Company. The market share of blasting equipment transport vehicles ranked first in China, and the sales volume of cold chain transport vehicles ranked first in China. The UAV fire truck project has completed the finalization of the product prototype. In the future, the company will use the military customer resources and the complete supporting system of internal military products to develop towards the market direction of military and police special vehicles. We believe that the company’s stripping of low value-added products and optimizing structural adjustment in the special vehicle business will contribute to the development of future performance.
Investment advice
We believe that 1) during the 14th Five Year Plan period, the quality and efficiency construction level of national defense and military modernization needs to be greatly improved, the upgrading and intelligent development of weapons and equipment will be accelerated, and the performance of the company’s military products is expected to continue to grow steadily;
2) the superhard material Zhongnan diamond has gradually expanded from industrial diamond to jewelry grade and consumer grade, and will be applied to more high-end products, and the added value of products is expected to increase; At the same time, under the development of new infrastructure (photovoltaic, 5g, fourth generation semiconductor, etc.), superhard materials will break through the industrial processing mode and have a promising market space in the future;
3) stripping low value-added products in the special vehicle business, optimizing structural adjustment and developing towards military and police use, which is conducive to the development of future performance;
4) according to the investor relations records disclosed by the company in November 2020, the company currently has an equity incentive scheme, which will be launched when the conditions are ripe in the future. The company’s equity incentive scheme is expected to further improve the company’s operating efficiency and team stability, so as to further improve the company’s internal equity incentive scheme.
Based on the above point of view, we estimate that the company’s operating revenue from 2022 to 2024 will be 10.24 billion yuan, 13.324 billion yuan and 17.639 billion yuan respectively, the net profit attributable to the parent company will be 981 million yuan, 1.375 billion yuan and 1.883 billion yuan respectively, and the EPS will be 70 million yuan, 99 million yuan and 135 yuan respectively. We maintain the “buy” rating, with a target price of 28.00 yuan, corresponding to 40 times, 28 times and 21 times of the predicted income from 2021 to 2023.
Risk warning: fluctuation of special equipment orders; The downstream market development of superhard materials is less than expected; The adjustment of special vehicle business structure is less than expected
