Description of the event
On October 30, 2023, the National Inspection Group released its 2023 three-quarter report. Q1-3 achieved revenue of 160 billion yuan, an increase of 7.54% over the previous year; net profit of 74 million yuan, a year-on-year decrease of 4.66%; net profit after deduction of 52 million yuan, a year-on-year decrease of 6.88%.
Among them, Q3 achieved revenue of 595 million yuan, a year-on-year decrease of 1.39%; net profit of 46 million yuan, a year-on-year decrease of 25.07%; and net profit of non-return net profit of 36 million yuan, a year-on-year decrease of 33.22%.
Incident comments
Q3 Order progress and demand recovery fell short of expectations, so the company's quarterly revenue fell 1.39% year over year. The year-on-year decline in the company's Q3 revenue is mainly due to the following reasons: 1) Reduced government procurement, and phased pressure on the environmental and agricultural testing sectors; 2) Soil survey orders are progressing less than expected: at present, soil surveys in most provinces have progressed to the field sampling stage, and revenue is usually confirmed after the inspection of results is completed. Poor progress as expected has an impact on the company's environmental food and agriculture sector revenue; 3) Downstream recovery in the engineering sector falls short of expectations: -1.2%/-11.4% of newly started housing area in the country in 2020-2022, -1.2%/-399% before 2023 Month-on-month ratio -22.3%, the construction materials industry weakened, and testing demand was low; 4) Affected by the epidemic, some of the company's orders for the first half of 2022 were postponed until Q3, resulting in a high Q3 base last year.
The decline in Q3 gross margin led to a year-on-year decline of 3.01 pct to 9.45% in net profit margin. Q3 gross margin fell 5.84pct year on year to 38.4%. Referring to data for the first half of the year, the gross margin of the engineering/materials/environment/food and agriculture sector of the 2023H1 company was +4.47pct/+0.21pct/-3.02pct/-3.02pct/-3.60pct, respectively. The profitability of the environmental and agricultural sector was damaged by subsidiaries (National Inspection, Jingcheng (environment), Anhui Tuowei (food and agriculture), and Liaoning Fengtian (food and agriculture) dragged down the decline, leading to a decline in the company's overall gross margin.
Market development and joint restructuring led to an increase in the absolute value of personnel costs and service expenses, and the increase in interest-bearing debt led to an increase in financial expenses. The Q3 sales/management/R&D/financial expenses ratio changed year-on-year by +0.40pct/-3.87pct/+0.38pct/+1.04pct.
Operating cash flow improved, cash to cash ratio improved markedly, and balance ratio increased. The net cash flow from 2023Q1-3 operating activities was $24 million, compared to $0.07 billion for the same period last year, a significant improvement over the previous year; the cash to cash ratio increased by 41pct to 99%, and the company increased its efforts to collect repayment of accounts receivable. The cash flow performance was good, and the cash flow ratio returned to the normal range; interest-bearing debt has continued to rise in the past 3 years, driving the balance ratio to 50.4% from the beginning of the year.
It is proposed to publicly issue 800 million yuan of convertible bonds to supplement capital and optimize the structure. At the end of June 2022, the company announced that it plans to issue 800 million yuan of convertible bonds for Hunan Huake Laboratory, Hunan Company, Hebei Xiong'an Laboratory, carbon emission management platform construction and some acquisition projects to supplement capital to help the company's future development while also optimizing the company's financial structure; on October 9, 2023, the Development and Review Commission approved it.
Profit forecast and valuation: The company announced target revenue of 2.94 billion yuan for 2023, up 21.1% year on year; total profit of 440 million yuan, up 18.5% year on year. It is expected that Q4's “cross-regional+cross-sector” mergers and acquisitions will continue to advance, real estate industry demand recovery, and subsidiary profits will improve. The company's revenue for 2023-2025 is expected to be 26.6/31.4/3.72 billion yuan, up 9.4%/18.2%/18.5% year on year; net profit is 2.57/2.97/345 billion yuan, up 1.7%/15.5%/16.0% year on year, corresponding to PE valuation of 27.5x/23.8x/20.5x. Maintain a “buy” rating.
Risk warning
1. The risk that credibility and brand will be affected by adverse events;
2. Decision risk of mergers and acquisitions and post-merger integration risk.