Incident: The company disclosed its 23 annual report and 24 quarterly report.
23 Full year: Revenue of $750 million (-17%), net profit attributable to mother of $360 million (-21%), net profit of non-return to mother of $310 million (-30%). The company's new plant was put into operation one after another in '23, and production volume rose sharply (output +79%, about 1,600 presses), but revenue declined due to the decline in the price of single diamond crystals and cultivated drills.
23Q4: Revenue of 190 million (-18%), net profit of 100 million yuan (-9%), net profit of non-return to mother of 90 million (-4%).
24Q1: Revenue of 240 million (+45%), net profit due to mother of 110 million (+42%), net profit after deducting non-return to mother of 90 million (+41%), mainly driven by increased production.
23 Revenue split: Diamond powder & single crystal are stable, and the overall pressure on the cultivated drill is obvious.
Product categories: Diamond single crystal 210 million (+18%); diamond powder 300 million (-7%); cultivated diamond 230 million (-42%), mainly due to a sharp drop in the price of cultivated diamonds.
By region: 60 billion yuan (-4%) at home and 160 million yuan (-45%) abroad.
Profit split: Gross margin dragged down profitability, but 1Q24 profit margin decline narrowed.
Gross profit margin: 23 51.7% (-11.6pct) for the whole year, including 42.8% (-9.9pct) of diamond single crystal, 59.8% (+5.8pct) of diamond powder, and 52.7% (-26.6pct) of cultivated diamonds. 24Q1 was 48.9% (-4.1pct year-on-year, -2.1pct month-on-month). Prices have gradually stabilized, and the decline in gross margin has narrowed.
Expense rate: The 23-year sales, management, R&D, and finance rates were 0.9% (+0.2pct), 3.5% (+1.7pct), 5.8% (+1.0pct), and -4.3% (-2.6pct). Among them, the increase in management expenses was mainly due to the commissioning of new plants; investment income contributed 50 million in profit in 23 years. All expenses remained stable in 24Q1.
Net profit margins to mother: 48.4% (-2.4pct) and 44.5% (-0.9pct) for 23 and 24Q1, respectively.
The overall cultivation and drilling industry was under pressure in '23, but in '24, the company's performance is highly flexible as prices are expected to rise steadily: the company's diamond powder and single crystal product business remained stable in '23. The continuous expansion of production capacity in the cultivating drill industry led to a sharp drop in rough diamond prices, and the company's cultivating drill business declined markedly. In '24, as part of the industry's production capacity was liquided/converted, demand in the US continued to grow rapidly, and the domestic market was on the rise. The supply and demand pattern for cultivating diamonds improved. Prices are expected to gradually stabilize or even rise, while also driving the company's 1Q24 revenue/performance improvement markedly. Previously, with the company's fund-raising projects being put into operation one after another, production capacity is expected to maintain a rapid expansion trend; at the same time, as an industry leader, the company has sufficient technical reserves, and has now mass-produced high-grade cultivated diamonds with large grains of less than 30 carats. In addition, the company will promote the cultivation of the downstream diamond terminal market layout and expand its own brand system and retail flagship stores.
Investment advice: As a leading enterprise in the superhard materials industry, the company seizes the industry's opportunity period and forwardly lays out production capacity. It is expected that the drilling industry will recover steadily in 24 years and achieve high elasticity in revenue and performance. We expect the company's 24/25 profit to be 51/63 million yuan, +39%/+25% over the same period last year, giving it a recommended rating.
Risk warning: brand upgrade falls short of expectations; competition in apparel industry intensifies; terminal retail environment is weak