Event: The company announced that it has signed a "Joint Venture Agreement" with Zhengzhou Diamond Abrasive Co., Ltd. in Zhengzhou. The two parties agreed to establish a joint venture company. The registered capital of the joint venture company is 50 million yuan. The company invests 80 million yuan with its own funds, accounting for 51% of the registered capital of the joint venture company. Hengxiang Abrasives evaluates the value confirmed by the evaluation agencies agreed by both parties to 4,007,670. Yuan’s fixed assets and inventories are capital contributions, accounting for 49% of the registered capital of the joint venture company. Comments: Hengxiang Abrasives is mainly engaged in the production and sales of synthetic diamond micropowder. Diamond micropowder is a kind of superhard material obtained by crushing diamond single crystal material under special process conditions. It can be prepared into high-quality abrasive pastes, high-grade diamond sprays and suspensions for direct use in demanding finishing and polishing applications, and as an intermediate product for the preparation of superhard composites. Therefore, the establishment of a joint venture between the company and Hengxiang Abrasives is another step taken by the company after the diamond line to the middle and lower reaches of the diamond superhard material industry chain. It is of great significance for the company to continue to expand into the middle and lower reaches of the industrial chain in the future. According to the joint venture agreement, Hengxiang Abrasives promised that the joint venture company's total net profit after tax from July 2011 to June 2014 will reach 132.7 million yuan. If this commitment is not fulfilled, Hengxiang Abrasive will transfer the equity of the corresponding joint venture company to the company without compensation according to the contractual agreement. Assuming that the joint venture company can achieve this goal, it is expected to bring at least 22 million equity gains to the company each year, and the company's earnings per share will increase by about 0.07 yuan/year. Referring to Sifangda's micronized products, the gross profit margin of such products is 30%, and the profitability is acceptable. Due to the advantages of pre-diamond in the field of single crystal, the profitability of the joint venture company will be more secure. As a result, the joint venture company has reached expectations and is even more likely to exceed expectations. We raise the company's 2011, 2012, and 2013 earnings per share to 0.45, 0.65 and 0.96 yuan respectively, corresponding to the closing price of 18.23 yuan on June 16, 2011, the price-earnings ratio is 40.51, 28.04 and 18.99 times. The company's short-term valuation is still slightly higher, so it still maintains a short-term cautious recommendation for the company, a long-term recommended rating. Risk: Short-term attention to the risk of the downside shift of the GEM valuation center and the risk of small non-reduction. Long-term can be involved in dips.
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