Yu Diamond: Diamond faucet with undervalued stock price

Summary 2012 underperformance analysis: The company's 2012 results fell significantly below our prior expectation of 4 cents per share, primarily due to three key factors. First, the micro-powder business did not deliver the expected performance boost, contributing little to profits and falling short of our previous forecast of 1 dime. Since acquiring the micronized joint venture in Q4 2011, the company has made significant progress in restructuring, relocating operations, and optimizing import/export tariffs, laying a solid foundation for recovery in 2013. Second, the slowdown in fixed asset investment growth led to lower prices for low-grade single crystal products, negatively impacting profitability. Third, equity incentive expenses totaled 10.67 million yuan, which affected earnings by nearly 2 cents. These costs will be amortized over time, with 7.34 million in 2013 and 2.66 million in 2014, gradually reducing their impact. Looking ahead to 2013, the company’s core businesses show promising signs. First, the single crystal segment: While industry supply continues to grow, the top three suppliers remain strong in the mid-to-high-end market. The price of low-grade broken materials has stabilized, and with the commissioning of the 1.02 billion carat project, production is expected to rise by 30% this year. Second, the micro-powder business: After a year of optimization, the company has refocused its efforts on this segment, aiming to turn it into a new growth driver. We are optimistic about its expansion, especially in precision grinding and functional applications that leverage its thermal and optical properties—offering a bright future. Third, the wire saw division: Despite the ongoing challenges in the photovoltaic industry, the company has paused construction on the wire saw business. However, with signs of improvement in the PV sector and supportive policies, the company plans to adjust its strategy accordingly. In the recent market rebound, the stock price has only risen 20% from its low point. As a functional new material company with strong earnings potential, the current valuation appears attractive, with the stock still in a bottoming phase. Investment recommendation: We expect EPS for 2012, 2013, and 2014 to be 0.25 yuan, 0.33 yuan, and 0.42 yuan, respectively. With a current P/E ratio of 17 times 2013 earnings, we maintain a "Strong Buy" rating. Risk warning: A sharper-than-expected slowdown in macroeconomic growth could affect the company's performance.