Core views

In 2022, the company achieved total revenue of 1.15 billion yuan, an increase of 5.1% over the previous year, and achieved net profit of 160 million yuan to the mother, an increase of 0.4% over the previous year. The reason why the growth rate of the company's performance was less than the growth rate of revenue was due to the increase in sales management and R&D expenses, and the increase in the share of credit impairment losses in operating income. In the first quarter of 2023, the company achieved total revenue of 200 million yuan, a year-on-year decrease of 24.5%, and the net profit of its mother was 0.3 billion yuan, a year-on-year decrease of 39.6%. The decline in revenue in the first quarter was mainly affected by the progress of the project. The project started late, and progress was relatively slow. The reason why the decline in performance in the first quarter was greater than the decline in revenue was a decrease in gross margin and an increase in management expenses ratio.

occurrences

The company published its 2022 annual report and 2023 quarterly report. Total revenue in 2022 was 1.15 billion yuan, up 5.14% year on year, net profit of 160 million yuan, up 0.4% year on year; total revenue of 200 million yuan was achieved in the first quarter of 2023, down 24.5% year on year, and net profit of Fumo was 0.3 billion yuan, down 39.6% year on year.

Brief review

Results remained stable in 2022. Total revenue in 2022 was 1.15 billion yuan, up 5.1% year on year, and net profit of the mother was 160 million yuan, up 0.4% year on year. The reason why the growth rate of the company's performance was less than the growth rate of revenue was: 1) the increase in sales management and R&D expenses. The sales, management, and R&D expenses rates in 2022 were 5.3%, 12.1%, and 5.7% respectively, up 1.1, 1.7, and 0.5 percentage points from the previous year; 2) Credit impairment losses accounted for 2.2% of operating income in 2022, an increase of 0.8 percentage points over the previous year.

The results for the first quarter of 2023 declined due to factors such as the progress of the project. The first quarter of 2023 achieved total revenue of 200 million yuan, a year-on-year decrease of 24.5%, and net profit of the mother was 0.3 billion yuan, a year-on-year decrease of 39.6%. The decline in revenue in the first quarter was mainly affected by the progress of the project. The project started late, and progress was relatively slow. The reason why the decline in first-quarter results was greater than the decline in revenue was: 1) gross margin declined, and gross margin for the first quarter was 36.8%, down 1.5 percentage points from the same period last year and 1.5 percentage points from the full year of last year; 2) Influenced by share payments due to the implementation of equity incentive plans, the management fee rate for the first quarter was 21.4%, up 10.5 percentage points from the same period last year and 9.2 percentage points from the full year of last year.

In-hand orders are growing steadily, and the regional industrial layout of the testing business is expected to expand further.

In 2022, the company's inspection and testing business achieved revenue of 630 million yuan, an increase of 14.7% over the previous year; by the end of the first quarter of 2023, the company's on-hand orders were 740 million yuan, an increase of 18.4% over the previous year. Through the acquisition of Shandong Yiyuan's shares and capital increase in 2022, the company's testing business successfully entered the food sector. The current inspection fields mainly include construction engineering, environmental protection, and food safety. In December 2022, the company signed a letter of intent to acquire 55% of Southwest Testing's shares. After the acquisition is completed, the company's business strength in Zhejiang Province will be strengthened, and the nationwide layout is expected to be further developed. By the end of the first quarter of 2023, the company's monetary capital was 360 million yuan, and the balance ratio was only 15.9%. Adequate capital reserves and room for expansion lay the foundation for further expansion of the regional industrial layout in the future.

Equity incentives stimulate development momentum. In October 2022, the company issued a restricted stock incentive plan. The total number of shares used in the incentive plan was 5.4 million shares. Of these, the number of shares granted for the first time was 5085,000 shares, accounting for about 2.75% of the company's current total share capital. The incentive plan assesses the company's 2023-2025 performance indicators. Based on revenue and performance in 2022, the growth rate of revenue and net profit attributable to the mother in 2023 will not be less than 15%, 2024 will not be less than 30%, and 2025 will not be less than 45%. The equity incentive plan is expected to further stimulate the enthusiasm of management and core cadres to work and enhance the company's development momentum.

The buy rating and target price of $39.54 remained unchanged. We forecast the company's 2023-2025 EPS to be 1.04/1.19/1.36 yuan (previously predicted that the company's 2023-2024 EPS would be 1.29/1.63 yuan). As a leader in the testing industry in Jiangsu Province, the company will fully benefit from the good economic recovery since the beginning of the year, and on-hand orders are expected to grow further; the equity incentive plan will increase the company's development momentum, and future performance is expected to continue to improve.

The increasing concentration of leaders in the testing industry is the general trend. The company is actively promoting the expansion of the regional and industrial layout of the testing business. Adequate capital and expansion space have laid the foundation for expansion. The scale and coverage areas of the testing business are expected to continue to expand in the future, driving the company's valuation level to rise further. We are optimistic about the company's endogenous expansion and extended mergers and acquisitions, and keep the purchase rating and target price of 39.54 yuan unchanged.

Risk warning:

The main risk facing the company comes from the fact that future regional market expansion falls short of expectations. If the company is unable to successfully establish testing laboratories and carry out testing business in markets outside of Jiangsu Province in the future, the progress of various structured businesses, including special engineering services and sales of new engineering materials, will also be affected.

The resistance that companies may face in expanding their markets may come from high competitive barriers from competitors in markets outside the province, and occasional outbreaks of the epidemic have caused inconvenience in business development. If market expansion is greatly affected by the above factors, the company's revenue growth rate may decline in future years.

In addition, the company may also face the risk of a significant decline in profit levels during market expansion. In the process of expanding markets outside the province, the company may adopt certain price reduction measures to seize the market. If the price reduction is too large, it may cause the company's gross margin to decline significantly.