The leading diamond wire company has reached an inflection point in its performance. The company specializes in diamond wire products, including diamond wire for silicon cutting and sapphire cutting. It has been deeply involved in the field for more than ten years. Its customers cover a wide range of leading downstream silicon companies, including Longji Co., Ltd., Tongwei Co., Ltd., Poly Gongxin, Shanghai CNC, Beijing Express, etc. Over the past four years, due to factors such as macro-control of the national PV policy, gradual fierce market competition, and the COVID-19 pandemic, the company's revenue and profits have all shown large fluctuations. With 2022Q1, the company achieved revenue of 120 million yuan (+175.8%) and net profit of 13.51 million yuan (reversal of losses); with 2022H1, it is expected to achieve net profit of 39.5 to 43.5 million yuan (loss reversal). Thanks to full orders, the smooth release of production capacity, and a sharp increase in sales of major products. At the same time, with the gradual emergence of economies of scale, profitability has increased, and an inflection point in the company's performance is expected to arrive.
Sufficient orders+rapid release of production capacity. Global PV installations continue to grow, driving up demand for silicon wafers. According to CPIA data, China's silicon production is expected to exceed 293 GW in 2022 as leading companies expand at an accelerated pace. As the main consumable material for silicon wafer cutting, demand for diamond wire has increased dramatically. The company announced the first round of production expansion plans in April 2022, with a planned production capacity of 3 million km/month. At present, the company's production capacity is increasing month by month, from 800,000 km/month in January 2022 to 120 km/month in June. As new equipment is put in place one after another, the actual production capacity is expected to exceed 2 million km/month by the end of the year, and the 2023Q1 will reach the target of 3 million km/month, that is, an increase of 3.75 times over the beginning of 2022. The company's on-hand orders are full, and as production capacity continues to be marketed, its performance is expected to grow rapidly.
In line with downstream “thinning” requirements, the layout of smaller wire diameter+tungsten wire products is arranged. The high price of silicon materials is driving silicon wafers to reduce silicon consumption. Thinner silicon wafers mean using thinner diamond wires when cutting to reduce damage to silicon wafers during processing and improve product yield. However, thinning can lead to a decrease in the breaking force of the diamond wire and insufficient cutting capacity, which increases the amount of wire used to cut the same number of silicon wafers. Therefore, it is expected that the future growth rate of demand for diamond wire will be greater than the growth rate of PV installations. Combining silicon wafer demand and diamond wire consumption data, we estimate global demand for diamond wire in 2022-2025 to be 1.4/1.7/21/250 million kilometers, respectively, up 25.2%/20.1%/19.3%, respectively. In line with the industry's demand for thinner lines, the company continues to launch small-diameter products. Currently, 40 μm/38 μm/36 μm/36 μm/product sales account for 20%/50%/20% in that order. Compared with the mainstream technical level of 38 μm to 42 μm in the industry, it has a certain leading advantage. At the same time, the company is proficient in tungsten wire and gold steel wire production technology, and existing products are sold in batches and may fully benefit from industry trends in the future.
Investment advice
Considering that the company is expected to benefit from the release of diamond wire production capacity in the short term, it will continue to benefit from the high level of prosperity in the global photovoltaic industry in the long term. We expect that in 2022/2023/2024, the company can achieve revenue of 75,128,1.79 billion yuan; net profit attributable to the parent company of 1.2, 2.0, and 270 million yuan; EPS of 1.0, 1.6, 2.2 yuan/share; based on the calculation of the closing price of 37.5 yuan on August 12, the corresponding PE will be 38, 23, and 17 times, respectively. The first coverage gave a “recommended” rating.
Risk warning
Production capacity fell short of expectations; industry competition exceeded expectations; product sales fell short of expectations, etc.
