Core views

The company's performance in 2023 was under pressure, mainly affected by the decline in the price of cultivated drills and diamond single crystals. Cultivated Diamond's revenue in 2023 was -41.5%. 24Q1's revenue and net profit to mother were +45.0% and +42.2%, mainly due to the recovery in demand and the gradual stabilization of diamond production capacity. 24Q1's gross profit margin was 48.9% /-4.1pct, and -2.1pct month-on-month, mainly due to the decline in industrial diamond prices in Q1. Looking ahead, 1) the company has sufficient cash on hand as the leader in diamond cultivation. 24Q1 monetary capital+transactional financial assets are about 3.78 billion yuan, and the 23Q4 press has around 1,700 units, and will continue to expand; 2) Demand for 24Q1 cultivated diamonds improved month-on-month, and the price of 24Q1 cultivated diamonds rose by about double digits. In the short term, we are optimistic about the increase in overseas terminal demand.

occurrences

The company released its 2024 quarterly report: 24Q1 revenue of 238 million yuan/ +45.0%, net profit of 106 million yuan/ +42.2%, net net profit of 89 million yuan/ +41.1%; net cash flow from operating activities of 212 million yuan/ +466.6%, EPS (basic) of 0.41 yuan/share, ROE weighted 1.98% /+0.57pct.

The company released its 2023 annual report: 2023 revenue of 752 million yuan/ -17.0%, net profit of 364 million yuan/ -21.0%, net profit of 308 million yuan/ -29.5%; net cash flow from operating activities of 281 million yuan/ -14.4%, EPS (basic) 1.4 yuan/share, -60.8% YoY, and ROE weighted 6.87%/-31.86pct. The company plans to distribute a cash dividend of 5 yuan (tax included) for every 10 shares to all shareholders.

Brief review

The recovery in revenue and performance in 24Q1 is expected to benefit from increased sales of cultivated diamonds and a steady month-on-month price. 24Q1's revenue is 238 million yuan/ +45.0%, which is expected to benefit mainly from growing diamond production capacity and gradual price stabilization under demand; 24Q1 net profit of 106 million yuan/ +42.2%, after deducting non-net profit of 89 million yuan/ +41.1%, 24Q1 company's gross profit margin of 48.9%/-4.1pct, month-on-month. The gross margin declined. The price of major diamond industrial stones fell in Q1.

The company's performance in 2023 was under pressure, mainly affected by the decline in the prices of cultivated drills and diamond single crystals. In 2023, revenue was 752 million yuan/ -17.0%, net profit to mother was 364 million yuan/ -21.0%, 23Q4 revenue and net profit to mother were -17.9%, -8.6% year-on-year, -5.2% and +11.1%, respectively. By product, including: 1) Diamond single crystal: 2023 revenue of 205 million yuan/ +17.7%, with a gross profit margin of 42.8% /-9.9pct; 2) Diamond powder: 2023 revenue of 296 million yuan/ -6.5%, the price increase led to a gross margin of 59.8% /+5.8pct; 3) Cultured diamonds: 2023 revenue of 228 million yuan/ -41.5%, mainly the price of cultured diamonds declined from 23Q1. The year-on-year increase was significant, with a gross margin of 52.7% /-26.6pct of diamonds cultivated in 23 years.

Profitability declined in '23, and expenses were properly managed. The company's gross profit margin in 2023 was 51.67%/-11.62pct, with sales, management, R&D, and finance expenses ratios of 0.86%, 3.50%, -4.32%, and 5.83%, respectively, +0.19, +2.63, -2.59, and +0.97pct. The increase in management expenses was mainly due to increased personnel, depreciation and amortization expenses due to the increase in personnel, depreciation and amortization expenses brought about by the full commissioning of the new plant. The sharp decline in financial expenses was due to the increase in interest income in 23 million yuan from 17.84 million yuan to 3.83 million yuan/net increase in 2019 million yuan. In addition, the company's investment income for 23 years was 54.759 million yuan/net increase of 41.462 million yuan, mainly due to an increase in wealth management income. The investment income/revenue for 23 years was 7.28% /+5.8pct. The company's net profit margin in '23 was 48.37% /-2.41pct. The 24Q1 company's gross profit margin was 48.87%/-4.11pct, sales, management, R&D and finance expenses ratio 0.75%, 2.42%, -0.42%, 4.74%, +0.74%, +0.21, -0.3, +1.76, -0.71 pct, 24Q1 net profit margin 44.5%/-0.89pct.

The profitability of the cultivating diamond industry has declined sharply, the number of entrants is expected to drop drastically, the company has sufficient cash on hand, and has maintained a trend of expanding production capacity for 21 years.

After completing the fixed increase, the company had the most capital to expand production among its peers, with 24Q1 monetary capital of 2,098 billion yuan and transactional financial assets of 1,674 billion yuan. The total liabilities of the 24Q1 company were 1.21 billion yuan, mainly including 750 million yuan in current liabilities (of which 556 million yuan in notes and accounts payable) and 450 million yuan in non-current liabilities. As of 23Q4, the company's fixed assets were 1.80 billion yuan, an increase of 800 million yuan over the end of '22. The 23Q4 press is expected to have around 1,700 units (mostly 800 and 850 models), and the company plans to continue to expand in the future.

Looking ahead to 2024, demand for cultivated diamonds improved month-on-month in 24Q1. It is expected that the release of cultured diamond production with stable prices in 24 is expected to drive growth in performance. Demand for jewelry was released and production capacity was withdrawn from some small factories in '23. It is expected that the price of cultivated diamonds will rise by about double digits in 24Q1, and the price will show a steady upward trend in 2024. On the demand side, according to India's GJEPC data, imports of rough diamonds grown in India reached US$353 million/ +19.77%, and loose diamond exports reached US$377 million/ +7.68%, and demand improved. Among them, rough imports in January, February, and March were US$139 million/ +5.3%, US$127 million/ +100.3%, and US$87 million/ -12.4%, respectively. 2024Q1 According to Tenoris data, sales of cultured diamond jewelry in the US increased by 41.4% in March, and total retail sales increased by 25%; in 24Q1, sales of cultured diamond jewelry increased by 43.6% and retail sales increased 26%; in 24Q1, sales of cultured diamonds and loose diamonds in the US increased 27% year over year. In the short term, we will focus on the channel storage situation, and we are optimistic about the starting demand for overseas terminals in the medium to long term.

Profit forecast: Expected 2024-2026 revenue of 10.47, 13.23, 1,542 billion yuan, +39.2%, +26.4%, +16.6%; net profit to mother of 4.89, 6.19, 728 million yuan, +34.4%, +26.7%, +17.6%, corresponding PE is 18, 14, and 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.