In the first three quarters of 2020, the company achieved revenue of 656 million yuan, an increase of 6.31% over the same period last year, a net profit of 158 million yuan, a decrease of 1.68% over the same period last year, and a net profit of 145 million yuan, up 1.83% over the same period last year. From a quarterly point of view, 2020Q1, Q2 and Q3 achieved operating income of 1.06,2.93 and 257 million yuan respectively, with revenue of-13.31%, + 1.68% and + 24.34% lower than that of the same period last year, respectively. The revenue of Q1, Q2 and Q3 decreased by 12.07% compared with the same period last year. The net profit of homing Q1, Q2 and Q3 was 1536.07, 8486.09 and 57.296 million yuan, respectively, and decreased by 32.48% compared with the same period last year.

In the first three quarters of 2020, the company's gross profit margin was 42.03%, down 4.14 percentage points from the same period last year; and the net profit margin was 24.00%, down 1.40 percentage points from the same period last year. On a quarterly basis, the gross profit margin of 2020Q3 was 42.85%, a decrease of 6.14% over the same period last year and an increase of 0.45% over the same period last year, while the net profit margin of 2020Q3 was 23.14%, an increase of 0.05% over the same period last year and a decrease of 5.53% from the same period last year.

We believe that the company's lower-than-expected 2020Q3 performance is mainly due to the following three reasons: ① overload control and remote sensing equipment have no revenue due to the lack of bidding by the government this year; ② is affected by the epidemic, which leads to the slow progress of inspection and acceptance of testing stations, and the longer payback cycle of company equipment sales. ③ is affected by the progress of fixed increase, the company reserve testing station has not been acquired on a large scale, the company has invested related costs (such as employee compensation and hospitality expenses, etc.), and the cost has increased during the period.

The impact of the new rules on car testing is limited. On October 22, 2020, the Traffic Administration of the Ministry of Public Security announced the new regulations on motor vehicle testing, including "for non-operating minibuses (except minivans) that have been inspected for less than 6 years and less than 10 years, the inspection will be adjusted from once a year to once every two years." According to our calculations, the impact of the new rules on car testing is limited. Take 2021 as an example, the number of vehicles to be tested under the new policy is 149.57 million in 2021, only 7.63% less than the same period last year. Benefiting from the growth of domestic car ownership and the age of vehicles in stock, except for the decline in 2021, the overall market space for motor vehicle inspection is increasing year by year. Under the new regulations from 2021 to 2026, the market space for automobile annual inspection in China will increase from 44.87 billion yuan to 70 billion yuan, with an average annual compound growth rate of 9.30%.

The prospect of the company is promising from 0 to 1. From the perspective of the company, the current main business of the company is still motor vehicle testing equipment, and the company cuts into the motor vehicle testing service from 0 to 1. The company relies on the acquisition of high-quality sites and self-built sites to copy Linyi's honest management and service model, which will significantly improve the profitability of the acquisition sites. at the same time, the rise in annual inspection fees will further weaken the impact of the new rules and policies. In addition, we believe that the policy landing will also gradually dispel the worries of investors in the new testing station, and the construction of the new testing station will gradually return to normal, leading to the steady growth of the company's main equipment business.

We maintain our profit forecast and expect the company's 2020-2022 net profit to be RMB2.05max, which is 19.1 times PE's closing price on October 29, and maintains a "prudent overweight" rating.

Risk hints: the motor vehicle testing policy has changed more than expected; the progress of mergers and acquisitions is not as expected; the government bidding for excess control and remote sensing is not as expected.