Incidents: The company released the results announcement for the first three quarters of 2023. 2023Q1-Q3 achieved operating income of 947 million yuan, a year-on-year decrease of 8.29%, net profit of 122 million yuan, a year-on-year decrease of 46.89%; net profit after deduction of 106 million yuan, a year-on-year decrease of 45.49%. The third quarter alone achieved operating income of 310 million yuan, a year-on-year decrease of 13.68%, a year-on-year net profit of 0.4 billion yuan, a year-on-year decrease of 44.35%, and net profit of 34 million yuan after deducting non-return to the mother, a year-on-year decrease of 48.32%.

The decline in gross margin and the increase in expense ratio affected profit levels, and the growth rate of sales expenses in Q3 slowed month-on-month. The comprehensive gross margin of the 2023Q1-Q3 company is 42.06%, -5.03pct year on year and +0.14pct month on month. Based on the company's 23H1 experience, we believe that the main reason for the decline in gross margin is due to falling domestic demand combined with increased market competition. In the long run, the company, as a leader in the domestic environmental monitoring field, has been operating steadily for a long time. As demand recovers, the company is expected to continue to take the lead in achieving gross margin repair. In terms of cost rate, the company's period expense ratio for the first three quarters was 30.5%, +3.25pct year over year. Among them, sales/management/finance/R&D expenses were 13.52%/9.47%/0.26%/7.25%, respectively, +2.52/+0.23/ -0.08/+0.59pct. In 23Q2, the company's sales expenses increased by 22.35% year on year, and Q3 increased 7.8% year on year. The company's results in reducing fees and improving efficiency are beginning to show.

The CCER restart+carbon monitoring market may expand, and the company is expected to fully benefit as a leading carbon monitoring leader. Recently, there have been many policies in the field of carbon markets. The Ministry of Ecology and Environment has issued a number of notices, such as the “Notice on Accomplishing the Reporting and Verification of Greenhouse Gas Emissions from 2023-2025” (hereinafter referred to as the “Notice”) and the “Administrative Measures on Voluntary Greenhouse Gas Emission Reduction Transactions (Trial)”, and CCER, which has been suspended for 6 years, has once again restarted. Furthermore, the “Notice” requires that the verification of carbon emission reports of enterprises in the cement, electrolytic aluminum, and steel industries should be completed by September 30 every year, even earlier than December 31, which is larger than that of enterprises in other key industries. We believe this may be a sign that the three industries will be included in the carbon market. As the carbon market expands, the demand for carbon monitoring may increase further.

The actual controller promised not to reduce its holdings within 6 months, demonstrating confidence in the company's long-term development. On September 21, 2023, the company issued an announcement: Mr. Ao Xiaoqiang, the actual controller of the company, promised not to reduce his holdings in the company in any form within six months from the date of the announcement. If during the commitment period there is an increase in shares, such as transfer of capital reserves to share capital, distribution of stock dividends, allotment of shares, or additional issuance, etc., the above commitments will also be complied with. As of 2023Q3, Mr. Ao Xiaoqiang held 58.35% of the company's shares. The actual controller's move demonstrated confidence in the future development of the company and the instrumentation industry and recognition of the company's value.

Investment recommendations and valuation: According to the company's three-quarter report, we adjusted our previous profit forecast. We expect the company to achieve sales revenue of 14.9/18.5/2.15 billion yuan in 2023-2025, a year-on-year decrease of 1.3%, an increase of 24.8% and 15.7%, and realized net profit of 1.95/2.99/373 billion yuan, a year-on-year decrease of 31.2%, an increase of 53% and 24.7%, corresponding to PE of 26X, 17X, and 14X respectively. Maintain an “overweight” investment rating.

Risk warning: Market competition increases risk, policy progress falls short of expectations, risk of technology and talent loss, and R&D projects fall short of expected risk.