Incident: The company released its semi-annual report for 23 years. In the first half of 2023, it achieved revenue of 391 million yuan, an increase of 18.48% over the previous year; it achieved net profit of 43 million yuan, a year-on-year decrease of 8.17%. 2023Q2 achieved revenue of 214 million yuan, an increase of 15.96% over the previous year, and net profit of 33 million yuan, an increase of 3.74% over the previous year.

Demand in the main industry continues to grow rapidly, and factors such as the commissioning of new production capacity and changes in product structure disrupt gross profit margins in the short term.

2023H1's third-party testing services and testing and analytical instrument business continued to grow rapidly. Among them, inspection business revenue increased 25.58% year on year to 198 million, and instrument business revenue increased 28.29% year on year to 101 million. The gross margin of the inspection business was 43.60%, down 2.6 pct from the same period last year. We judge that this is mainly due to the fact that the Jiangsu Testing Technology Research Institute invested a lot in the early stages of production and has not yet achieved production results. As its business volume grows, it is expected to drive a recovery in the gross margin of the inspection business; the gross profit margin of the analytical instrument business is 38.09%, down 4.4 pct from the same period last year. We judge that this is due to changes in the product sales structure. Revenue from corrosion protection engineering and products, standard substance/standard samples, and capability verification services was 15.03 million, 47.09 million, and 8.19 million, respectively, up -1.97%/21.54%/7.58% year-on-year, respectively. The gross margin increased by 8.26/2.05/-7.63pct to 45.97%/47.63%/42.96%, respectively, over the same period last year.

Expense increases are hampering short-term results. The main reason for the decline in 23H1's net profit was the rapid increase on the cost side. 23H1's sales/management/R&D expenses ratio was 14.45%/15.57%/10.65%, respectively, an increase of 1.23/4.28/2.48 pct over 22H1. The increase in management expenses is mainly due to an increase in training expenses for new laboratory construction staff and an increase in equity incentives and sharing expenses. The rapid increase in R&D expenses is mainly due to Nak Microbeam's continued investment in instrument development.

The layout of the testing area is improving day by day, and the instrument business is growing. The company continues to promote the national layout of the testing sector. Laboratories in Chengdu and other places have basically achieved production results, and the 23H1 subsidiary Chengdu Nak has achieved 26.16 million yuan and net profit of 11.7 million yuan. With the construction and operation of laboratories in Kunshan, Shenyang, Qingdao, Deyang and other places, it is expected that the performance of the testing sector will continue to grow rapidly in the future. In the analytical instrument sector, Nak Microbeam 23H1 has revenue of 112,800 yuan and net profit of 1.61 million yuan. Research and development of high-end instruments such as scanning electron microscopes is still in the early stages of investment. Considering the broad market demand space and extremely low localization rate of the high-end instrument market, we are optimistic about the company's high volume of high-end instruments.

We adjusted our revenue and gross margin assumptions for 2023-2025, and estimated net profit to be 138/182/238 million yuan for 23-25 (the original net profit for 23-25 was 133/183/241 million yuan). Referring to the average valuation of comparable companies, 32 times PE for 2023, the target price was 11.52 yuan, maintaining the “increase in holdings” rating.

Risk warning

High temperature alloy testing demand fell short of expectations, production capacity release fell short of expectations, and instrument product development progress fell short of expectations