Incident: The company released its 2023 annual report. The company achieved annual revenue of 542 million yuan, an increase of 5.55% over the previous year. Net profit attributable to shareholders of the parent company was 138 million yuan, down 10.66% year on year, net profit attributable to mother after deduction was 108 million yuan, down 8.73% year on year, with basic earnings per share of 0.28 yuan.
Key points of investment:
The overall performance of the 2023 performance was steady, and the main oil and gas extraction industry maintained rapid growth. Although international oil prices fluctuated in 2023, the overall price was medium to high. According to Zhuochuang information, the average price of crude oil in 2023 was 77.6 US dollars/barrel. Driven by high oil prices, the average number of monthly active drilling rigs in North America reached 689 in 2023, a decrease of 32 compared to 2022, but a significant increase of 214 compared to 2021. Oil and gas companies will also continue to expand production and increase capital expenditure in 2023. According to Saudi Aramco's official website, Saudi Aramco's capital expenditure for the full year of 2023 was 49.7 billion US dollars, an increase of 28.10% over the previous year, and the scale of capital expenditure increased dramatically. Benefiting from the fact that the number of active drilling platforms in North America remains high and capital expenditure increases, the oil service industry continues to be booming in 2023, driving an increase in demand for superhard composite products, so the company's revenue from oil and gas extraction products continues to increase. In 2023, the company achieved revenue of 542 million yuan, an increase of 5.55% over the previous year. By business, the company's revenue from resource extraction/engineering construction products was 345 million yuan, up 13.50% year on year; revenue from precision processing products was 179 million yuan, up 0.9% year on year; revenue from other business was 0.18 million yuan, down 43.77% year on year.
Other business revenue mainly comes from high-value metal waste revenue generated when selling the production of superhard products, which accounts for a relatively small share of revenue. Overall, the company's performance for the full year of 2023 was steady.
Profitability is under pressure in the short term, and cash flow continues to improve. In terms of profitability, the company's comprehensive gross margin in 2023 was 51.50%, a decrease of 4.06 pct compared to the same period last year. Among them, the gross margin of resource extraction/engineering construction products was 61.07%, a decrease of 1.32pct compared to the same period last year. The gross margin of precision processing products was 33.06%, down 7.84pct from the same period last year. The depreciation of the company's fixed assets in 2023 was $66 million, an increase of 32% over the previous year.
As a result, the decline in gross margin is mainly due to the company's continuous purchase of production equipment, and increased depreciation of fixed assets has led to an increase in costs. The company's sales/management/finance/R&D expense rates were 6.48%/24.88%/-0.82%/11.61%, respectively, -0.76/-0.12/+2.56/-0.89pct compared with the same period last year. The total sales, management and financial expenses ratio was 30.54%, an increase of 1.67 pct over the same period last year. The company's consolidated net interest rate in 2023 was 23.29%, a decrease of 5.90 pcts compared to the same period last year, under the influence of a decrease in gross margin, a decrease of 23.29% in the same period last year. Affected by the decline in net interest rates, the company achieved net profit of 138 million yuan, a year-on-year decrease of 10.66%, and net profit to mother after deduction of 108 million yuan, a year-on-year decrease of 8.73%.
The company's fourth quarter results showed a steady recovery. Looking at single-quarter results, in the fourth quarter, the company achieved operating income of 136 million yuan, up 12.95% year on year, 4.27% month on month, net profit to mother of 0.28 million yuan, up 12.74% year on year, down 4.96% month on month; net profit after deduction was 16 million yuan, up 94.51% year on year, down 19.40% month on month.
With the “1+N industry pattern” as the strategic core, we continue to invest heavily in R&D to develop new products. Due to the wide application of diamonds, the company actively develops and lays out multiple application fields according to downstream development trends. Actively promote the “import substitutation+major customer strategy” for oil and gas extraction products and the industrialization of CVD diamond technology in the short term, promote “import substitutation+alloy substitution” for precision processing in the medium term, and cultivate other diamond application markets in the long term. In terms of precision processing business, with the rapid growth of new energy vehicles in China and import substitution, the demand for precision, ultra-precision, high-speed and ultra-high-speed processing and personalized services for superhard tools is increasing. The company has increased investment in R&D to continuously develop new products to meet market needs and increase sales scale. In 2023, the company's R&D expenses rate was 11.61%, and R&D personnel accounted for 26.15%, maintaining a high level in the superhard materials industry. The annual report shows that all three business segments have new products under development. Continued research and development of new products will help enhance the competitiveness of the company's products, meet customer needs, and expand the company's sales scale.
The CVD diamond project is progressing smoothly, and it is expected that the first year of contributing to the performance of the diamond cultivation project will begin.
The company's functional diamond project with an annual output of 700,000 carats is progressing smoothly. It has entered the final sprint stage of the plant renovation project. It is expected that production will be commissioned one after another in the first half of 2024. The project uses self-developed MPCVD equipment and CVD diamond technology, which has a cost advantage. At the same time, the early stages of the project mainly produced large-carat cultured diamonds for overseas export. Compared with small-carat cultivated diamonds, the gross margin was higher. According to GJEPC data, since the fourth quarter of 2023, the growth rate of cultivated diamond rough imports has been corrected, and since the first quarter of 2024, the growth rate of cultured diamond loose diamond exports has been corrected. Meanwhile, in February 2024, India's imports of rough cultivated diamonds were US$127 million, up 100.3% year on year, and loose diamond exports were US$139 million, up 22.2% year on year. The import value of cultivated diamond blanks was significantly higher than that of loose diamond exports, so the midstream industry chain may begin a new round of inventory replenishment. The growth rate of cultivating diamonds is picking up and a new round of inventory replenishment may indicate that the industry's downward cycle is about to reach an inflection point. The company's CVD diamond project is gradually achieving potential upward opportunities for the production and superposition of the diamond industry, which is expected to begin the first year of contributing to the performance of the company's diamond cultivation project.
Profitability and investment advice: We expect the company's revenue for 2023-2025 to be 6.24/717/825 million yuan, net profit of 1.53/1.77/207 million yuan, corresponding EPS of 0.31/0.36/0.43 yuan, and corresponding PE of 25.97/22.39/19.14 times. Considering the company's position and development prospects in the field of superhard composites, we maintain an “plus” rating.
Risk warning: Demand in the downstream market is not as good as expected, new product market development is not as good as expected, industry competition intensifies, and geopolitical uncertainty affects the company's product exports.