The company released its 2022 annual report and the first quarter report of 2023. It achieved operating income of 2,428 million yuan in 2022, an increase of 9.5%; net profit of 253 million yuan, an increase of 0.09%; net profit of 217 million yuan after deducting non-attributable net profit of 217 million yuan; the first quarter of 2023 achieved revenue of 468 million yuan, an increase of 14.68%, and net attributable profit - 24 million yuan, an increase of 13.87% after deducting unattributed net profit - 29 million yuan, an increase of 14.71%. The short-term testing industry boom is expected to recover as the economy recovers. In the future, the company's key businesses such as dual carbon, process industry intelligent laboratories, soil surveys, and stock house structure appraisals will all have growth flexibility and maintain the “buy” rating.

Matters: The company released its 2022 annual report and the first quarter report of 2023. It achieved operating revenue of 2,428 million yuan in 2022, an increase of 9.5%; net profit attributable of 253 million yuan, an increase of 0.09%; net cash flow from operating activities after deducting net profit of 217 million yuan, a decrease of 0.63%, net operating cash flow of 276 million yuan; discounted fourth quarter operating income of 940 million yuan, a decrease of 0.1%, and net attributable profit of 175 million yuan, an increase of 8.52%, after deducting net profit of 162 million yuan, an increase of 11.74%, net operating cash flow from operating activities 270 million yuan; in the first quarter of 2023, the company achieved revenue of 468 million yuan, an increase of 14.68% over the same period, net profit of 24 million yuan, an increase of 13.87%, after deducting net profit of -29 million yuan, an increase of 14.71%, and net cash flow from operating activities - 106 million yuan.

The company achieved steady revenue growth under the influence of multiple adverse factors. In 2022, the company's various businesses achieved steady growth under the influence of factors such as real estate policy regulation, a sharp decline in new construction area, and a slowdown in external mergers and acquisitions. By business, the company's engineering inspection/material testing/environmental testing (including medicine) /agricultural testing/certification business/inspection instruments and intelligent manufacturing/measurement and calibration/scientific research and technical service business achieved revenue of 7.4/3.8/4.77/1.48/0.97/3.71/0.23/188 million yuan, respectively 3%/4%/0.03%/ At 75%/15%, revenue from all businesses maintained positive growth (the slowdown in engineering and materials testing revenue was mainly affected by falling demand, the slowdown in instrument and intelligent manufacturing business growth was mainly affected by the decline in capital expenditure in the upstream steel and cement industries, and the faster growth in the food and agriculture sector came mainly from Yunnan Cloud Test). Looking at the structure, the revenue share of the new home testing business is expected to decline further in 2022 (we estimate it will drop to around 12%), the share of revenue from diversified businesses will continue to rise, and the structure will be further optimized.

The gross margin was basically stable year over year, and the increase in the cost ratio affected profits. The company's overall gross margin in 2022 was 44.58%, the same as the previous year. The decline in net interest rate was mainly affected by the increase in the expense ratio. The cost rate for the company period in 2022 was 29.52%, an increase of 2.56 pcts over the previous year. Among them, the sales/management/finance expense ratio was 0.44/1.24/0.88pct year-on-year.

The increase in the management fee rate was mainly due to the increase in equity incentive expenses and the increase in the number of employees (11% increase over the previous year); the increase in the financial expense ratio was mainly due to an increase in bank loans, which increased interest expenses by about 20 million. It is expected that in the future, as equity incentive fees fall and convertible bond issuance are issued, the company's fee ratio is expected to continue to decline.

The revenue growth rate recovered in the first quarter, and we are optimistic about the growth elasticity of businesses such as Dual Carbon, Intelligent Laboratories, Soil Surveys, and Stock House Structure Assessment throughout the year. The company's revenue increased 14.6% in the first quarter. It is expected that all sectors of the test business will achieve steady growth under economic recovery, and the signing of new contracts exceeded expectations. Looking at the whole year, the company's key businesses, such as the dual carbon, steel/cement intelligent laboratory, soil survey, and stock house structure assessment, are all expected to continue to contribute to revenue elasticity. Furthermore, extended mergers and acquisitions that have slowed down earlier are also expected to accelerate the contribution of additional volume.

Risk factors: Risk of large fluctuations in macroeconomic growth; risk of increased competition in the industry; risk of the company's acquisition progress and integration ability falling short of expectations; risk of impairment of the company's accounts receivable.

Profit forecasting, valuation and ratings: The company's internal and external extension continues to improve testing capabilities and move towards leading comprehensive inspection and testing. In the future, businesses that the company focuses on, such as dual carbon, intelligent laboratories for process industries, soil surveys, and inventory house structure assessment, are all resilient to growth. It is expected that the revenue scale will continue to grow rapidly, and the market share will continue to increase. Considering that the macroeconomy is still in a weak recovery stage, and the demand for the testing industry is more related to macroeconomics, we slightly adjusted the company's 2023-2024 net profit forecast to 316.385 million yuan (the original forecast was 378/466 million yuan), adding the 2025 return net profit forecast of 467 million yuan, and the corresponding EPS forecast was 0.43/0.53/0.64 yuan, referring to the company's historical valuation center (the valuation center for the past 5 years is 38x), considering that demand is still in the weak recovery stage. Based on the principle of prudence, it will be given 2023 35 times PE per year, corresponding to the target price of 15 yuan, maintaining the “buy” rating.