Summary The interim report was lower than expected and maintained its overweight rating. The net income of the first half of the year was 2.77/0.34 billion yuan, respectively, which was 4%/-45%, which was lower than our previous expectation. We lowered the 2014-2016 EPS to 0.17/0...
The interim report was lower than expected and maintained its overweight rating. The net profit of the first half of the year was 2.77/0.34 billion yuan, respectively, which was 4%/-45%, which was lower than our previous expectation. We lowered the 2014-2016 EPS to 0.17/0.24/0.35 (previously 0.25/0.36/0.52), considering the company's announcement into the sapphire cutting field, the optimization of product structure will open up the subsequent growth and accelerate the release of profit, maintaining the target price of 7.21 yuan, corresponding to 2015 PE of 30 times, maintaining the overweight rating. The lower-than-expected interim report resulted in a faster increase in fees. In the first half of the year, the financial expenses increased by 14.1 million yuan, a year-on-year increase of 146%, mainly to expand the production capacity of diamond wire and other products, and the growth of borrowings was faster; the administrative expenses increased by 12.87 million yuan, a year-on-year increase of 68%, mainly because the stock options were cancelled in the same period of 2013. Savings of 9.04 million yuan. In addition, government subsidies fell by 10.55 million yuan in the first half of 2014. The increase in costs and the decline in subsidies are the core reasons for the year-on-year decline in performance.
The product structure will continue to be optimized and future earnings will be accelerated. Despite the decline in short-term performance due to cost, the product structure showed a good trend. In the first half of the year, the gross profit of super-hard alloy materials increased by 4%, and the contribution to revenue/profit reached 8%/13%, compared with 4 in 2013. %/6% has improved significantly. On July 15, the company announced that it plans to raise 325 million non-public offering funds for the annual production of 350 million meters of micron diamond line expansion project. We believe that with the rising sapphire downstream industry boom, the company may increase the sapphire project. The investment in diamond wire for cutting, the expansion of diamond wire capacity in the future will accelerate the adjustment of business structure and bring about an accelerated improvement in profitability.
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