Core view
Cultivating diamonds: the downstream consumption of the industry is highly “immune”. Since the second half of 2020, the recovery of overseas consumption has driven the rapid growth of cultivated diamond consumption, and the whole industry is in short supply. The diamond consumer market is concentrated in the United States (accounting for 80% of the world), and the consumer side is less affected by the epidemic. China supplies 40% of the world’s cultivated diamond rough, and is the largest producer. China’s Cr4 (Central South diamond, Henan Huanghe Whirlwind Co.Ltd(600172) , Henan Liliang Diamond Co.Ltd(301071) , Zhengzhou Huajing) accounts for nearly 80%, significantly benefiting from the rise of downstream C-end.
Industry data tracking: in 2022q1, India’s imports of cultivated diamond blanks amounted to US $511 million, a year-on-year increase of + 106%; The export volume of cultivated diamond bare diamonds was 385 million US dollars, a year-on-year increase of + 77%; The penetration rates of cultivated diamonds at the import end and export end are 9.6% / 6.2% respectively.
2021a-2022q1 comments: the operating performance of the sector has increased significantly. Benefiting from the high prosperity of diamond cultivation and industrial diamond in the two application fields of artificial diamond, the profitability of major manufacturers has been greatly improved. In 2021, Henan Liliang Diamond Co.Ltd(301071) / North Industries Group Red Arrow Co.Ltd(000519) / Henan Huanghe Whirlwind Co.Ltd(600172) man-made diamond business achieved revenue of 498 million yuan, 2407 million yuan and 1645 million yuan respectively, with gross profit margins of 64%, 43% and 45%, year-on-year + 20.5pct, + 6.1pct and + 12.8pct. In 2022q1, Henan Liliang Diamond Co.Ltd(301071) / North Industries Group Red Arrow Co.Ltd(000519) / Henan Huanghe Whirlwind Co.Ltd(600172) respectively realized the net profit attributable to the parent company of 101 million yuan, 281 million yuan and 29 million yuan, with a year-on-year increase of 148%, 191% and 179%.
Investment suggestion: at present, the global penetration rate of cultivating diamond C-end is only 4%. Under the advantage of high cost performance, there is a wide alternative space. Chinese manufacturers supply nearly half of the global rough, which significantly benefits from the rise of global C-end. Cultivating diamond leaders is also the leader of industrial diamond. When the industry is in short supply, the profitability is restored and the excess performance is contributed. At the same time, the demand for equipment has increased significantly under the expansion of the industry, and the price of six sided top press is expected to rise under the supply and demand gap. It is suggested to focus on two investment routes: 1) cultivate diamond / industrial diamond manufacturers Henan Liliang Diamond Co.Ltd(301071) ( Henan Liliang Diamond Co.Ltd(301071) . SZ), North Industries Group Red Arrow Co.Ltd(000519) ( North Industries Group Red Arrow Co.Ltd(000519) . SZ), Henan Huanghe Whirlwind Co.Ltd(600172) ( Henan Huanghe Whirlwind Co.Ltd(600172) . SH); 2) Supply forging six sided press and arrange Sinomach Precision Industry Co.Ltd(002046) ( Sinomach Precision Industry Co.Ltd(002046) . SZ) for MPCVD to cultivate diamonds.
Risk tip: the downstream demand is less than expected, the industry competition is intensified, and the production capacity of enterprises is less than expected.
