Core viewpoints
Event: Zhongbing, the shareholder of the company, invested to increase the 1.62% stake in the company. On October 26, the company announced that Zhongbing, a shareholder with more than 5% of the shares, increased its stake in the company by centralized bidding through the Shenzhen Stock Exchange trading system from October 25 to 26, 2022, accounting for 1.6222% of the company's total share capital. and the subsequent plan to continue to increase. Zhongbing Investment intends to increase its stake in the company by not less than 2 million shares and not more than 4 million shares within 6 months from the date of disclosure of this announcement. Shareholder increase shows confidence in the company's development prospects, civilian products downstream high prosperity superimposed military products steady improvement, the company's profitability is expected to continue to improve.
In September, India's export of cultivated bare diamonds is + 86% compared with the same period last year, and the performance is expected to continue to increase at the end of the peak season:
In September 2022, India's imports of cultivated diamond blanks were US $110 million, up 8.28 per cent from a year earlier, and exports of cultivated diamonds were US $178 million, an increase of 85.88 per cent over the same period last year. The United States will enter the peak jewelry sales season from November to December, the downstream will enter the stock replenishment cycle, and the export side will recover quickly. In the middle reaches, due to the consideration of its own inventory, the shipment rebate inventory is reduced, which is about to enter the replenishment stage, and the growth rate of India's blank import is expected to improve month-on-month. China, as the world's largest supplier of drilling blanks, head manufacturers will fully benefit from the increased downstream demand and strong performance certainty.
Zhongnan Diamond: "three rounds" technological transformation & production expansion to establish a leading position: subsidiary Zhongnan Diamond since 2004 began large-scale technical transformation, put into the new six-sided jacking press, affected by the iterative speed of products of upstream equipment manufacturers, the company's capacity iteration can be divided into three stages: 1) 2004-2012: the new equipment is mainly φ 500 and φ 550 models, replacing the old "small press". At the end of 2012, the company achieved a synthetic diamond production capacity of 5.45 billion carats / year, becoming the leader in the global diamond production field; 2) in 20102020: the new equipment is mainly φ 650s with high output and stable performance, and made a breakthrough in the colorless diamond cultivation project in 2016; 3) 2020-now: the new equipment is mainly φ 800,850,900 super large presses, phasing out φ 500,550 and part of φ 650 old equipment. The company has achieved stable production of less than 30 carats of cultivated diamond blanks, batch supply of more than 3 carats of high-quality cultivated diamond blanks.
Investment suggestion: Zhong Bing Red Arrow (000519.SZ) is mainly engaged in cultivating diamonds & industrial diamonds are in short supply. The expansion project is selected into Henan "982" project. The performance is expected to continue to grow after the increase in production capacity. It is expected that the company will achieve a net profit of 10.11 pounds in 2022-2024, corresponding to the current PE valuation of 29x/22x/16x, maintaining the "buy" rating.
Risk hint: the military business continues to lose money, the competition in the nurturing drilling industry intensifies, and the downstream demand is lower than expected.