Main points of investment
The overall performance of H1 is high, and the impact of Q2 photovoltaic new deal appears. According to the 2018 semi-annual report, H1 achieved a business income of 218 million yuan (+ 145.44%), a net profit of 65.57 million yuan (+ 241.14%) and a gross profit margin of 51.14% (+ 5.72pcts), mainly benefiting from the increased penetration of the diamond wire slicing industry and the release of its own new production capacity. However, under the influence of the photovoltaic "531" new policy, the price of diamond line products has dropped sharply since Q2, some customers have stopped work and reduced production, and the market demand has shrunk sharply, resulting in a decrease in some product orders of the company, with quarterly revenue falling to 79.86 million yuan (- 42.37%), net profit to 13.05 million yuan (- 75.15%) and gross profit margin to 43.14% (month-on-12.62pcts).
The scale effect continues to appear, and the cash flow decreases greatly in the short term. During the H1 period of the company, the expense rate was 12.23% (- 7.14pcts), of which the sales / management / financial expense rate was 2.46%, 10.54% and 0.77% (- 1.29/-4.63/-1.22pcts), respectively. The significant increase in scale effect led to a relative decrease in all expense rates, and the net interest rate increased to 30.02% (+ 8.42pcts). The net cash flow of the company's operating activities was 11.76 million yuan (- 66.29%), the cash-to-cash ratio decreased to 86.28% (- 45.64pcts), accounts receivable increased to 123 million yuan (+ 86.38%), and the payback ability became worse.
The proportion of Kumgang line business has increased, from scale growth to quality improvement. The company's electroplated diamond line business achieved revenue of 192 million yuan (166.67%), revenue accounted for 88%, gross profit margin of 48.28% (+ 7.00pcts), diamond grinding wheel business revenue of 23.48 million yuan (+ 89.31%), gross profit margin of 73.58% (+ 5.54pcts). In the case of insufficient demand and overcapacity in the downstream of the Diamond Line, the company has shifted from scale growth to quality improvement, further improving production efficiency, improving product quality and reducing production costs, so as to improve the core competitiveness of the company's products, expand product market share and resist the adverse effects of intensified competition.
Fund-raising projects are progressing steadily to strengthen research and development and enhance technological competitiveness. The construction of the IPO investment project of the company has progressed steadily, the second phase of the infrastructure project of diamond wire saw with an annual output of 1 million kilometers has been successfully completed, and the technical transformation project of the R & D center of superhard material products has been accelerated. The company strives to strengthen technological innovation and product development, and continues to increase R & D investment. 2018H1 R & D expenses reached 14.8219 million yuan (+ 177.97%), accounting for 6.79% of revenue, and 41 / 10 patents have been obtained / newly applied for. Through the continuous upgrading and improvement of equipment and a number of technical reform measures, the company strives to improve the quality of diamond line products, accelerate the development of key new products such as grinding wheels, slicing knives and CMP-DISK, and some products have made phased breakthroughs. In the future, the company will also increase the development of precision diamond tools for integrated circuits to form a two-wheel drive pattern of diamond wire saw and diamond grinding wheel.
Risk factors: photovoltaic demand continues to decline, the price of Diamond Line continues to decline, market competition intensifies, and so on.
Profit forecast and valuation: since the photovoltaic industry demand has fallen off a cliff and the prices of upstream products have dropped sharply since the new policy, based on the principle of prudence, we have lowered the company's EPS forecast for 2018-2020 to 1.26 EPS 1.53 pounds 1.80 yuan (taking into account the dilution of the original forecast is 2.26 million 2.83 pounds 3.26 yuan), corresponding to the PE of 22-18-15, giving the company 25 times PE in 2018, corresponding to the target price of 31.50 yuan. Downgrade to "overweight" rating.