Yu Diamond: Single crystal and micro powder business growth is still optimistic

Abstract This report provides an overview of the operational status of the single crystal business, focusing on the supply-side dynamics of the industry. In 2012, the lower equipment prices in Henan led to increased new production capacity, and the demand for single crystals is expected to grow steadily. If new application areas emerge, there is a possibility that actual performance could exceed expectations. Given the current oligopolistic structure of the industry, a severe price war is unlikely, although there may be some upward pressure on prices. Overview of Single Crystal Business Operations

At the industry level, the supply side showed positive signs in 2012. Lower equipment costs allowed for more new capacity, especially in Henan. The demand for single crystals is projected to increase gradually. While the emergence of new applications could lead to better-than-expected growth, the market remains relatively stable due to the concentrated industry structure. The probability of a major price war is low, but pricing pressures are still present. At the company level, the output in 2012 reached approximately 1.3 billion carats, with consistent performance during the single season. Looking ahead, the company expects to produce up to 1.7 billion carats in 2013. The 1.02 billion carat project contributed minimally in 2012, but the company has already installed 200 presses. Once the project is fully completed, total production capacity will reach 2.5 billion carats. Recently, the price of single crystals has seen a slight increase, with low-end materials rising by 10% to 15%. Micro-Powder Business Performance

The micro-powder segment did not operate at full capacity in 2012. This was partly due to a market downturn, as well as challenges related to equipment relocation and the establishment of internal management systems in the newly formed subsidiary. However, the business is now on track. With the market expected to recover in 2013, production of micro-powder is anticipated to rise significantly. In the fourth quarter of 2012, monthly output reached 40 million carats, a 20–30 million carat increase from the third quarter. The company is optimistic that monthly output could reach 100 million carats in 2013. New Business Expansion and Future Growth

The company has been actively expanding into new business areas. In 2011, it entered the micro-powder sector through a joint venture. In 2012, it successfully replicated this model to develop large-scale synthetic diamond (including jewelry-grade single crystals) and resin wire saw businesses. Micro-powder, which is different from crushed material, represents a key product trend in the diamond industry. It is used in precision grinding and functional applications, leveraging its thermal and optical properties. The potential applications are vast. Large single crystals are primarily used in tool manufacturing and are also entering the jewelry market, offering higher profitability than the company’s existing products. Meanwhile, resin wire saws have a much lower cost compared to electroplated wire saws and are being adopted quickly in the market. The company expects these new lines to start contributing profits in May and June 2013. Investment Recommendation: The company's EPS is forecasted to be 0.25 yuan in 2012, 0.33 yuan in 2013, and 0.42 yuan in 2014. Currently, the stock trades at 16 times the 2013 P/E ratio, and we maintain a strong recommendation rating. Risk Warning: There is a risk that the macroeconomic growth rate could fall below expectations, potentially impacting overall performance.

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