Yellow River whirlwind: increase holdings and performance growth to build investment opportunities

I. Event Overview Based on the confidence in the company's future development prospects, the Yellow River Group plans to increase its holdings by no more than 10 yuan per share in the next 12 months from November 29, 2012. At 0.5%, no more than 2% of the company's total share capital. Second, analysis and judgment should not be overly concerned about the overcapacity of single crystal, which is also the inevitable way to expand the application of new diamond fields. The increase in shareholding of major shareholders indicates its optimism about the future of the company and the industry. At the beginning of November, the company announced that it plans to re-open the non-public fixed-income financing to no more than 773.5 million yuan to continue to expand the single-crystal production capacity of about 1.4 billion carats. The market is generally worried about overcapacity in the single crystal industry, affecting its performance. However, from 2001 to 2011, domestic synthetic diamond production increased from 1.6 billion carats to 12.4 billion carats, with an average annual compound growth of 22.72%. The fear of overcapacity is somewhat over-considered. Secondly, the rapid development of production capacity in the past 10 years has forced the cost of diamonds to drop and become an alternative material in many fields, successfully ensuring the balance between supply and demand in the industry. The single-time output rate and quality of the company's fixed-income projects have been improved, and the corresponding costs are expected to decline. The increase in scale will help ensure the company's industry status. The company's economic weakness is expected to maintain a growth of about 30% for the whole year. With the economic Q3 bottoming out in 2012, the company's Q4 operation is expected to be better than Q3. The annual profit growth rate is expected to be nearly 30%, significantly higher than the profitability of most industrial sectors. As of Q3, its inventory increased by approximately 13% year-on-year, which was lower than the revenue growth rate of 17%, indicating that sales and operations are all normal. Technology forward-looking is the source of the company's guaranteed steady growth. The 2013 revenue increase was due to the doubling of production of metal powder and composite sheets. The company's pre-alloyed metal powder, micro-powder and composite sheet and other existing project technologies and gem-grade large single crystal, photovoltaic cutting wire and shale gas drill bit and other composite materials are forward-looking, which is the source of the company's stable growth. The company continues to improve the industrial chain, and strives to achieve a "50%: 50%" ratio of synthetic diamond deep processing products and single crystals in the future, to get rid of the simple and rough development model. The company's 2013 growth will mainly come from the double production of metal powder and composite film projects. In 2012, the capacity utilization rate of the two projects is expected to be around 30%. In 2013, we expect to reach 60-70%. III. Earnings Forecast and Investment Proposal The prospects for the company's fundraising projects are promising and the production is going smoothly. After the issuance, we conservatively expect the company's EPS for 2012-2014 to reach 0.33 yuan, 0.37 yuan and 0.5 yuan respectively. IV. Risk Warning 1) The production capacity growth is out of control and there is a serious excess; 2) The economy continues to be sluggish and the downstream is weak.

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