Key points of investment
Net profit of the mother returned in 2022 increased 69% year-on-year, in line with expectations
According to the company's 2022 annual report, it achieved operating income of 514 million yuan, an increase of 23.24% over the previous year; Guimu's net profit was 154 million yuan, an increase of 68.55% over the previous year; after deducting non-Gumo's net profit of 118 million yuan, an increase of 78.79% over the previous year. Benefiting from the recovery of the oil and gas extraction industry, the upgrading of the domestic manufacturing industry and the replacement of superhard tools, the traditional main business resource extraction and finishing business grew steadily.
Profitability increased dramatically: In 2022, the company's overall gross profit margin was 55.56%, and the net interest rate was 29.19%. The year-on-year increase was +2.67PCT and +7.11PCT respectively. The increase in gross margin was mainly due to an increase in the share of high-margin resource extraction products. Among them, the gross profit margin of resource extraction products was 62.39%, +1.10 PCT over the previous year; the gross profit margin of precision processing products was 40.90%, +2.73 PCT year on year. It is expected that the proportion of superhard tools will increase mainly.
Optimizing cost control and increasing investment in R&D: the rate during 2022 was 28.87%, compared to -4.38PCT. Sales rate 7.24%, year-on-year -0.64 PCT; management fee rate 12.5%, year-on-year -2.64 PCT, finance rate -3.37%, year-on-year -2.79 PCT; R&D fee rate 12.50%, year-on-year +1.69 PCT.
Cash flow improved significantly: net operating cash flow in 2022 was $159 million, up 39.40% year over year.
Short-term Q1 performance in 2023 was under pressure: achieved revenue of 134 million yuan, +6.24% year on year; net profit of Gimu was 34 million yuan, -13.98% year on year; after deducting net profit of non-Gimo's net profit of 30 million yuan, -7.91% year on year.
Traditional business: The resource extraction business grew rapidly, and the precision processing business was resilient. The resource extraction business achieved revenue of 304 million yuan in 2022, an increase of 29.42% over the previous year. Demand for the company's petroleum composite products continues to recover with the boom in the oil service industry, the import substitution plus major customer strategy continues to advance, and revenue is expected to return to pre-epidemic levels.
Precision processing business: Achieved revenue of 177 million yuan in 2022, an increase of 11.43% over the previous year. The company's precision processing business is resilient, speeding up category expansion, increasing the market share of superhard tool products, and maintaining steady growth.
CVD Diamond: Cultivating diamonds steadily expands production. It is planned to invest 700 million yuan to build a 700,000-carat functional diamond project. According to the company's 2023 annual report, CVD diamond's main business plans include developing MPCVD equipment, MPCVD diamond growth processes, etc., to prepare high-quality, large-size ultrapure CVD diamonds in batches, which will be applied to high-end manufacturing and consumer fields such as semiconductors and power devices, jewelry, precision tools, optical windows, chip thermal insulation, etc., contributing to increased performance.
According to the company's announcement on April 21, 2023, the subsidiary Tianxuan Semiconductor (CVD diamond operator) plans to invest 700 million yuan to build the “700,000 carat annual production functional diamond industrialization project” in Zhengzhou, Henan. The construction cycle is planned for 12 months to further expand the company's business in the CVD diamond field and enhance its core competitiveness.
Profit forecasting and valuation
The company's net profit is expected to be 1.9/244/290 million yuan in 2023-2025, an increase of 24%/27%/22% over the previous year, and a compound growth rate of 24%. The corresponding PE is 25/19/16 times, maintaining the “buy” rating
Risk warning: the risk of changes in the competitive pattern and profitability of cultivating diamonds, and fluctuations in raw material prices