Incidents:

The company released its 2022 annual report. The company achieved total annual revenue of 643 million yuan, an increase of 137.42% over the previous year; net profit attributable to shareholders of listed companies was 91 million yuan, an increase of 216.43% over the previous year; the weighted average return on net assets was 14.29%, and the basic earnings per share was 0.77 yuan.

The company plans to use capital reserves to transfer 8 shares for every 10 shares to all shareholders.

Comment:

The increase in the production capacity of the King Kong Line and the improvement in operating efficiency led to a sharp reversal of losses in 2022.

The company is one of the earliest enterprises engaged in R&D, production and sales of diamond wire in China. The company's main products are used for cutting hard and brittle materials such as crystalline silicon and sapphire. The significant increase in the company's performance in 2022 was mainly due to increased sales of diamond wire, improvements in gross margin and period expense ratios, and a sharp reduction in asset impairment. Specifically: (1) The second phase of the company's project expanded production in 2022, and the production capacity of diamond wire increased to 3 million km/month by the end of the year. The company's on-hand orders were abundant. The annual diamond wire sales volume was 13.1019 million kilometers, an increase of 2.90 times over the previous year. (2) With the release of production capacity, the company's scale effect became apparent. At the same time, the “20-line machine” equipment was comprehensively promoted and applied to improve man-machine efficiency and production efficiency. Affected by factors such as structural changes such as the reduction in the diameter of mainstream product lines, the average sales price of the company's King Kong wire in 2022 was 47.74 yuan/km (YOY -38.78%), and the decrease in unit cost of 30.86 yuan/km (YOY -53.59%) was significantly greater than the average price drop. The gross profit margin of the company King Kong Line was 35.36%, an increase of 20.63 percentage points over the previous year, reflecting a significant recovery in profitability. (3) The company's total expenses during the period were 117 million yuan, an increase of 64.79% over the previous year, which was significantly lower than the revenue growth rate. (4) Asset impairment losses were 1,9518 million yuan, a sharp decrease over the previous year.

The company is actively expanding new production capacity, and shipments are expected to reach another level in 2023. The company grasped the strong market demand of the photovoltaic industry and actively expanded production capacity. The company's capacity expansion plans for the end of 2022 and the first half of 2023 were gradually implemented, with diamond wire production capacity reaching 3 million kilometers and 6 million kilometers per month, respectively. The company's downstream customers include mainstream silicon wafer manufacturers such as Longji, Tongwei, Jingke, Shangji, and Beijing Express, and will benefit from the expansion of production by downstream silicon companies.

Keep up with the “thinning” trend of the industry to help reduce costs continuously and promote R&D and production of tungsten wire. The company continues to promote the “thinning” of diamond wire through technological progress and process improvement.

The company's product specifications maintained a leading position in the industry. At the beginning, middle and end of 2022, mainstream diamond wire specifications were 40 microns, 38 microns, and 35 microns, and carbon steel diamond wire small-batch wire diameters were as low as 30 microns. On the other hand, the company's “20-line” machine production equipment has been fully promoted and applied, and man-machine efficiency and unit costs have been significantly reduced. In terms of new products, in order to further reduce wire diameters and reduce costs, the company is looking ahead to the development and production of diamond wire using tungsten wire as the base material. The large-scale supply of tungsten wire diamond wire has a wire diameter of 30-32 microns, with a minimum wire diameter of 27 microns.

It is expected that with the increase in the supply of tungsten wire busbars and the reduction in costs, the linear price ratio of tungsten wire diamonds will increase, and market demand will grow rapidly.

The majority shareholders plan to participate fully in the company's private stock offering to increase market confidence and reduce the pressure on the company's debt. The company plans to raise capital by issuing shares to specific targets, totaling 342 million yuan. After deducting issuance fees, the net amount of capital raised will be used to supplement working capital and repay interest-bearing liabilities. Cheng Xiyi Technology, which is controlled by the actual controller, Mr. Duan Zhiming, plans to subscribe for all of the shares issued this time in cash. This non-public offering of shares is not only conducive to optimizing the company's capital structure, reducing liabilities, and enhancing the company's ability to develop business, but also consolidates the control of the majority shareholders and promotes the stable development of the company.

Investment advice: Without considering the dilution of the company's non-public offering of shares for the time being, the company's net profit attributable to shareholders of listed companies in 2023, 2024, and 2025 is estimated to be 227 million yuan, 299 million yuan and 375 million yuan respectively. The corresponding earnings per share are 1.87, 2.38, and 3.08 yuan/share. Based on the closing price of 34.28 yuan/share on March 8, the corresponding PE is 18.38, 14.39 and 11.12 times respectively. Despite the rapid expansion of production in the diamond wire industry, there is a risk that prices will drop and competition will become fierce in the industry. However, considering the company's continuous promotion of thinning and improving production efficiency to reduce costs and laying out tungsten wire diamond wire products, the company's production capacity is clearly flexible, and growth expectations are good.

The first coverage gave the company an “increase in holdings” investment rating.

Risk warning: There are many participants in the industry, competition is intensifying, and there is a risk that gross margin will decline; the company's notes receivable and accounts receivable are increasing rapidly, increasing the risk of the company's capital consumption and loss of bad debts.