Lihong Inspection (1586.HK) is a leading company in the energy and commodity testing industry of Hong Kong stocks, with a number of domestic and foreign professional institutions qualification certification, credibility in the industry leading position, was selected as the Dalian Commodity Exchange and Shanghai Futures Exchange designated quality inspection agencies. Innovate the "federal" M & A model, help the company expand rapidly and bind human resources deeply, and support the company's long-term development in the future. The future development of the company will be based on traditional business, actively develop ESG, "double carbon" and other related business, and serve the energy transformation needs of major customers. It is expected that ESG-related business will bring rapid growth to traditional business in the future.

Summary of the report

The leading company in the global credibility industry has been engaged in the energy and commodity trading sector for more than a decade, during which time it has accumulated rich testing experience and strong credibility, participated in a number of national standard-setting processes, and was selected as the designated quality inspection agency of Dalian Commodity Exchange and Shanghai Futures Exchange. The company's branches and laboratories have a number of domestic and foreign professional testing certification: domestic qualification) CMA qualification certification and CNAS qualification certification. International qualification) has ISO, Gafta, FOSFA, PORAM, SOPA and other professional qualifications certification. In addition, the acquisition of established testing company Saybolt Asia business, with the help of its brand influence, the company's credibility in the international market has been further enhanced.

"federalism" improves the capital efficiency of M & A, and deeply binds talents compared with the traditional mode of complete M & A. compared with the traditional mode of complete M & A, the mode of "federalism" allows companies to carry out faster mergers and acquisitions with less capital cost. At the same time, the practice of giving the rights and interests of the shareholders and core employees of the acquired company and a higher degree of operational autonomy ensures the interests of all parties and the vitality of the future development of the enterprise, and increases the retention rate of core technical personnel and team cohesion. Deeply bound to talent.

Dig deep into customer demand to enhance stickiness and expand business diversification. ESG business is expected to be high-growth companies have long-term cooperation experience with industry leading customers (China Shenhua Energy, Petrochina, China Power Construction, Shell, etc.), during which the company also deepens customer demand and continues to develop new business. After putting forward the "ESG development strategy" as the core development strategy for the future, at present, the basic business pattern of "2X" has been formed: with coal and oil energy testing as the pillar, vigorously develop ESG and double carbon related testing business, and serve the energy transformation needs of major customers. It is expected that ESG business will bring high-speed growth for the company in the future.

With a high degree of internationalization, the company accelerates the overseas layout of overseas buyers after 2016; at present, the company's testing service center covers Southeast Asia, Australia, Africa, South America and other regions, with many years of experience in serving customers at home and abroad. Against the backdrop of Chinese companies actively going out to sea, Lihong Inspection has gone out to sea to provide services to bilateral companies, such as providing coal testing business for China Power Construction overseas projects. The rapid growth of the company's overseas business provides a strong guarantee for the smooth development of Chinese enterprises' overseas business.

The business is anti-cyclical and sustainable, and the growth rate of GDP+ 's business focuses on energy bulk trade, focusing on coal and oil testing, which provides a strong guarantee for the national energy supply system, superimposing residents' daily energy consumption as rigid consumption, the detection of energy raw materials has become a key link, and the testing demand has maintained a steady growth. Therefore, the company's main business has strong anti-cyclical characteristics, maintain stable growth; no matter how the economic cycle changes, due to the rigidity of energy demand, the company's business can still maintain a bright growth rate, and the growth rate will be higher than the GDP growth rate.

With a "buy" rating for the first time, with a target price of HK $2.88, we forecast that the company's net profit in 2023, 2024, 2025 will be HK $91 million, 120, 000, 158 million, respectively, corresponding to an EPS of HK $0.18, 0.22, 0.29. The company is given a target price of HK $2.88 per share, and the corresponding PE is 16 times / 13 times / 9.9 times for 2023 Universe 2025, which is 87% higher than the recent closing price, covering the "buy" rating for the first time.

Risk hint: brand credibility is affected by adverse events risk, coal, oil, commodity trade volume growth is not as expected, ESG testing business growth is not as expected, detection of relevant policy changes