Core views
Demand for cultivating diamonds as jewelry was released +some small factories withdrew from production capacity in 23. It is expected that the price of cultivated diamonds will rise by about double digits from 2024. As a leader in cultivating diamonds, the company had the most capital among its peers to expand production after the fixed increase was completed in '22, and maintained an expansion trend (the 23Q4 press is expected to have around 1,700 units, mostly 800 and 850 models).
It is expected that cultured diamonds are currently in full production and sales, and sales will continue to expand. In the short term, the gradual steady rise in the price of cultivated diamonds is expected to drive the company's profitability back up. In addition, as of February 29, the company has repurchased 215 million yuan of shares (all of which will be used to implement employee stock ownership plans or share incentives) and the chairman has repurchased 0.3 billion yuan.
occurrences
The company issued an announcement on the progress of the repurchase:
1) As of February 29, 2024, the company repurchased 5.822 million shares of the company's shares through a special securities account for share repurchase, accounting for 2.24% of the current total share capital. The highest transaction price was 84.50 yuan/share, the lowest transaction price was 24.06 yuan/share, and the total transaction amount was 215 million yuan.
2) As of February 5, 2024, Mr. Shao Zengming, the actual controller, controlling shareholder and chairman of the company, increased his holdings of the company's shares by 976,000 shares through centralized bidding transactions through the Shenzhen Stock Exchange trading system, accounting for 0.38% of the company's total share capital. The increase in holdings was 298.42 million yuan (excluding transaction fees).
Brief review
Demand for cultivating diamonds as jewelry was released +some small factories withdrew from production capacity in 23. It is expected that the price of cultivated diamonds will rise by about double digits from 2024. Supply in the cultivated diamond market increased dramatically, and the price of rough cultivated diamonds began to drop in 22Q2. The average rough prices for cultured diamonds in 22Q1, Q2, Q3, and Q4 were 664, 551, 440, and 319 yuan/carat. Subsequent prices bottomed out in 23Q2, and gradually stabilized in 23Q3 and Q4. Since 2024, rough diamond prices have risen by double digits month-on-month (small diamonds are expected to rise more), mainly due to: 1) cultivating diamond jewellery demand: European and American markets cultivating diamonds gradually became jewellery (accounting for 50% + in sales), retail sales volume of US cultivated diamond jewellery +40.6%, retail sales volume +56.2%, total sales of loose diamonds cultivated in the US +16% in 2023; 2) supply-side entrants decreased +16% in 2023 It went out of business. Prices are expected to show a steady upward trend in 2024.
After completing the fixed increase, the company had sufficient cash and about 4 billion yuan in 23Q3 monetary capitals+transactional financial assets, and maintained a trend of capacity expansion over the past 21 years.
After completing the fixed increase, the company had the most abundant capital to expand production among its peers, with 23Q3 monetary capital of 2,396 billion yuan and transactional financial assets of 1,632 billion yuan. As of 23Q3, the company's fixed assets were 1,589 million yuan, an increase of 591 million yuan compared to 22Q4. The 23Q3 and Q4 companies are expected to have around 1,500 or 1,700 presses (mostly 800 and 850 models), and it is expected that the expansion trend will continue in the future. The company's cultivated diamonds are currently at full production and sales volume continues to expand; with the gradual steady recovery in the price of cultured diamonds, the company's profitability is expected to pick up (2023M9 net interest rate 46.8%, 23Q3 net interest rate 45.1%).
On the demand side of cultivating diamonds, the boom rebounded, and India's rough natural diamond imports rose markedly in January '24. According to GJEPC data, the year-on-year growth rate of India's rough diamond imports slowed in January 2024; in January 2024, India's rough diamond imports were US$139 million/ +5.3%; the export value of cultured diamond loose diamonds was US$114 million/ +10.3%, and exports changed from negative to positive year-on-year. It is expected that stocks of diamonds cultivated overseas will end.
Profit forecast: Due to the rise in rough diamond prices since 2024, the profit forecast for 24 and 25 was raised (the original assumption was that the price in 24 and 25 fell further year on year 23. This update is a 10% increase in 24 compared to 23, and the price in 25 is the same as in 24). The estimated revenue for 2023-2025 is 7.83, 10.39, 1.32 billion yuan, -13.7%, +32.8%, +27.3%; net profit to mother of 3.67, 5.35, 689 million yuan, -20.3% year on year , +45.9%, and +28.9%, corresponding PE is 22, 15, 12 times, maintaining the “buy” rating.
Risk warning: 1) Demand for cultivated diamonds falls short of expectations: 80% of demand for cultivated diamonds is in the US. The US has been experiencing high inflation for 22 years. If inflation continues, it may have an impact on terminal demand; 2) Competition intensifies the decline in gross margin: The superhard materials industry is growing significantly under the influence of the rise of diamonds and the rapid growth in demand in industries such as new photovoltaic energy and consumer electronics. Currently, under the influence of factors such as the rise of diamonds, the rapid growth in demand in industries such as new photovoltaic energy, and consumer electronics, etc., the prices of the company's products have risen across the board, and the industry is in a boom period. There is a risk that the price of the company's products will fall due to factors such as the continuous expansion of production capacity of industry competitors, the increase in new entrants to the industry, and the slowing growth of the nurturing diamond market. 3) Risk warning about the company and related personnel receiving a warning letter from the Henan Securities Regulatory Bureau: The company and related personnel received the “Decision on Issuing Warning Letter Measures against Henan Power Diamond Co., Ltd. and related responsible personnel” issued by the Henan Regulatory Bureau of the China Securities Regulatory Commission on December 15, 2023. The main reason was that related transactions failed to comply with information disclosure obligations and review procedures, part of the funds raised were not managed centrally through special fund-raising accounts, and the use of idle funds raised for cash management did not complete the review procedure in a timely manner.