Incident: The company publishes its 2022 annual report. In 2022, the company achieved operating income of 6.714 billion yuan, or -10.65% year on year; achieved net profit of 819 million yuan, +68.76% year on year; net profit after deducting non-return to the mother was 774 million yuan, +64.53% year on year. By product, the non-metallic mineral products industry, the special equipment manufacturing industry, and the automobile manufacturing industry achieved revenue of 26.83, 35.50, and 480 million yuan respectively, +11.51%/-19.11%/-33.18%; gross margin was 50.95%/16.13%/-0.25%, respectively, and +7.50%/+5.43%/-6.25% compared with the same period last year. In 2022, the company fully completed its annual tasks, the special equipment product structure continued to improve, and its core competitiveness was continuously strengthened; the superhard materials sector insisted on both domestic and foreign markets, and market development achieved positive results, and economic benefits continued to improve; the special vehicle and auto parts business actively expanded new product fields, accelerated product structure transformation and upgrading, and increased economic growth points.
“Three rounds” of technical improvement and production expansion established Zhongnan Diamond's leading position in HTHP: the subsidiary Zhongnan Diamond's production capacity iteration can be divided into three stages: 1) 2004-2012: The new equipment was mainly φ500 and φ550 models to replace the old “small presses”. At the end of 2013, the company achieved a production capacity of 5.45 billion carats per year of synthetic diamonds, becoming the global leader in diamond production; 2) 2012-2020: The new equipment was mainly φ650 models with high output and stable performance, and made a breakthrough in the colorless diamond cultivation project in 2016; 3) 2020-present: The new equipment is mainly φ800, φ850, and φ900 super-large presses, gradually eliminating φ500, φ550, and some φ650 old equipment. In 2022, the company's superhard material products were exported to more than 40 countries and regions including Europe and the United States. Industrial diamonds and cubic boron nitride production, sales, and comprehensive competitive strength ranked first in the world.
Special equipment is at the leading level in the country in the field of expertise: the company has a variety of product research and test design conditions, has R&D and mass production capabilities for many key models of products in the country, can meet the production requirements of different products, and is at an advanced level in the country; it also has specialized testing grounds and risk assessment testing grounds for some products. The company's special equipment business adheres to the “three-step” strategic goal of serving national defense and military modernization, and comprehensively serves the construction of all military classes. At the end of 2022, the company had contract liabilities of 455 million yuan.
Investment suggestions: Zhongbing Red Arrow (000519.SZ)'s main product, cultivating diamonds & industrial diamonds, is in short supply. The production expansion project was selected for the Henan “982” project, and performance is expected to continue to grow after increasing production capacity. The company is expected to achieve net profit of 10.46/1,27/1,423 billion yuan respectively in 2023-2025. Corresponding to the current PE valuation is 30x/25x/22x, maintaining the “buy” rating.
Risk warning: Orders for the military industry have declined, competition to cultivate the drilling industry has intensified, and downstream demand has fallen short of expectations.