Q3 revenue continued to improve, share payment fees led to a decline in profits. 2023Q1-3 achieved operating income of 850 million yuan, down 4.3%, and net profit of 77.37 million yuan, down 41%. The sharp decline in performance was mainly due to the increase in management fees due to share payment fees (the annual share payment fees are estimated to be 53.84 million yuan).

From a quarterly point of view, Q1/Q2/Q3 's revenue is-25% compared with the same period last year, and the growth rate is 5%. The growth rate recovers quarter by quarter, and the net profit from home is-40%, 34%, 46%, respectively, year-on-year. According to the company's 2022 restricted stock incentive plan, the annual performance evaluation target for 2023 is to achieve a year-on-year growth rate of operating income or home net profit of more than 15%. Assuming that the annual revenue growth meets this target, Q4 revenue is expected to reach 474 million yuan (expected to be driven by consolidation of acquisition targets such as Southwest testing and Crown bid testing), an increase of 80% year on year, and a significant increase compared with Q1-3.

The gross profit margin is down, and the expense rate is under short-term pressure. The comprehensive gross profit margin of 2023Q1-3 is 36.55%, down 2.6 pct from the same period last year. It is expected that the gross profit margin is expected to stabilize and pick up as the business areas continue to be diversified and economies of scale are released. The expense rate for the Q1-3 period is 29.93%, an increase of 8.6 pct compared with the same period last year, of which the sales / management / R & D / financial expense rates are respectively year-on-year changes + 1.5 pct. The sharp increase in the management expense rate is mainly due to the impact of the provision of share payment fees, which is expected to decline significantly from 2024 (the share payment fees for 2023-2025 are 0.52 pct, respectively). The profit and loss share of minority shareholders fell by 1.6 pct compared with the same period last year. The net interest rate was 9.10%, down 5.6 pct from the same period last year. The net operating cash outflow of Q1-3 company is 112 million, which is 30 million more than that of the same period last year, which is expected to be mainly affected by the lag in repayment from the main construction industry.

The process of M & An expansion will be accelerated and the transformation to a comprehensive testing institution will be accelerated. The company is the leader in the testing of building materials in Jiangsu Province, and in recent years, relying on the extension and endogenesis, the company continues to increase its expansion efforts: in the regional aspect, the company plans to initially complete the national layout within 3 years. Build five regional centers in Sichuan and Chongqing, Zhejiang, Lianghu, Yunnan and Guangdong. In August this year, the company announced that it would buy 55% of Hangzhou Southwest Inspection with 80 million to improve the layout of construction testing business in Zhejiang Province. The revenue / profit of Southwest Inspection in 2022 was 170,000,000 respectively. If it is estimated on the basis of 2022, it is expected to lead to an increase of more than 70 per cent in revenue outside the province. In terms of the field, in January this year, the company cooperated with the Sino-US Green Fund to set up Sino-US Green Construction testing to explore investment opportunities for green, low-carbon, new energy, industrial and other testing targets; in October, it announced that it planned to acquire 83 million yuan of automobile testing institutions to broaden the scope of business. As of the end of Q3, the company's cash on hand totaled 880 million yuan, excluding the crown mark test 80 million, the acquisition still had about 800 million to be used, the liquidity was abundant, the interest-bearing debt ratio was only 3.67%, and the table space was sufficient. The follow-up is expected to rely on acquisitions, the establishment of regional companies and other forms to continue to expand the regional layout, at the same time open up areas other than construction, environmental protection testing, and gradually transform to a national comprehensive inspection and testing institutions. There is plenty of motivation for growth in the medium and long term.

Investment suggestion: we expect the company to achieve a return net profit of 1.1 trillion yuan in 2023-2025, with a year-on-year change of-32%, 20%, 21% (taking into account the impact of share payment fees), and an EPS of 0.60, 0.72 and 0.87, respectively. The current share price is trading at 29-24-20 times PE, maintaining a "buy" rating.

Risk tips: M & A progress is not as expected, goodwill impairment risk, order execution is not as expected risk and so on.