Industry demand is weak, and 23Q1 performance is under pressure. 2023Q1 achieved revenue of 164 million yuan (YOY -14.22%), net profit of 75 million yuan (YOY -26.22%), and net profit of 63 million yuan (YOY -34.96%) after deducting non-net profit. As a result of fluctuations in the price of superhard materials in the first quarter, gross margin fell by 16.19 pcts to 52.98%. Expense control capabilities were excellent during the period. The sales expenses rate fell 0.15 pcts to 0.54%, mainly due to a decrease in the performance of business personnel. The management/R&D expenses ratio fell 0.31 pcts/0.09 pcts to 2.72%/5.45%, driving the same decline in net interest rate of 7.39 pcts to 45.39%.
Cash flow repayments and liquidity weakened in the short term. 1) Cash flow: Net operating cash flow at the end of the 2023Q1 period fell 55.95% to $337 million, mainly due to a decline in sales in the current period and a decrease in repayments for industrial products. Net investment cash flow increased by 980.77% to -188 million yuan, mainly due to the purchase of equipment and wealth management products. 2) Prepayment: The prepayment amount at the end of the period decreased by 81.72% compared to the beginning of the year to 2,205 million yuan, mainly due to the arrival of material payments made in advance at the beginning of the period, and fewer prepayments in the current period. 3) Turnover capacity:
The inventory value at the end of the period increased 14.19% to $235 million from the beginning of the year, and the inventory turnover rate reached 0.35 times; accounts receivable decreased 23.94% from the beginning of the year to 120 million yuan, and the receivable turnover ratio reached 1.18 times.
The decline in diamond cultivation and inventory backlog are still short-term shackles. Referring to India's GJEPC import and export statistics, 2023Q1 India's imports of cultivated diamond rough fell 42.3% to US$300 million, exports of cultivated loose diamonds fell 9.3% to US$350 million, and the import and export penetration rate of cultivated diamonds reached 6.6%/6.1% respectively. Among them, the monthly rough imports in March fell 51.1% to US$99 million, and exports of loose diamonds fell 22.0% to US$111 million. The current environment of high interest rates and high inflation in the global economy has heightened uncertainty about the development of the diamond and jewelry industry. Weak terminal demand and the expansion of midstream and upstream production have led to a mismatch between supply and demand. The price of cultivated upstream rough diamonds has dropped significantly under inventory backlog, and upstream manufacturers are under some pressure.
Focus on optimizing the competitive pattern and expanding the entire industry chain. The short-term pressure on industry sentiment has forced small and medium-sized manufacturers and new entrants to clear the market, favoring the optimization of the pattern of leading and high-quality manufacturers. The company is the leading HPHT synthetic diamond manufacturer in China. The laboratory stage of diamond cultivation technology has exceeded 30 carats, and can mass-produce high-grade high-carat cultivating drills below 15 carats. In the industrial field, mass production of special special-shaped diamond spinels for IC chip superfinishing has advantages. At present, the fixed increase is in place and 560 million yuan has been invested to build production capacity. We estimate that the number of six-sided top presses installed in 2023 is expected to reach 2,000 units, corresponding to cultivating diamonds of more than 1.3 million carats. The company actively expands opportunities throughout the industry chain and extends development opportunities from top to bottom. It plans to invest 100 million yuan to establish a wholly-owned subsidiary, Hainan Power Diamond, to cultivate diamond retail with its own brand and strengthen collaborative development upstream and downstream of the industrial chain.
Profit forecast and investment advice: The company is a leading manufacturer of synthetic diamonds, and production capacity and performance are expected to be gradually realized with the help of a constant increase. Based on the quarterly report, we adjusted our previous profit forecast. We expect the company to achieve revenue of 11.83/15.55/2,037 billion yuan in 2023-2025, with a net profit of 5558/661/792 million yuan, corresponding to 22 times PE in 2023, maintaining the “buy” rating.
Risk warning: Terminal demand is weak, capacity expansion is limited, and average factory prices are declining.