Company Overview: Small but beautiful automobile and electronic and electrical inspection targets

Credit Testing Standards was founded in 2000 and is headquartered in Shenzhen. It is one of the earliest third-party testing agencies engaged in testing services in China; it was listed on GEM in early 2021. The company is a private institution, and the actual controller holds a total of 44.07% of the company's shares; the employee shareholding platform Qingdao Xincexin holds 4.04%; an equity incentive plan was launched in September 2021, and the compound net profit growth rate at the nuclear company level reached 28.7% in 2021-2024 (without taking into account equity incentive costs), exceeding the target in 2022.

The company's revenue in 2022 was 545 million yuan, and the five-year compound growth rate for 2018-2022 was 20.5%; net profit to mother was 118 million yuan, with a five-year compound growth rate of 24.0%; the forecast for 2023 is 159-171 million yuan, an increase of 35%-45% over the previous year; of these, 2021-2023H1 is the accelerated release period for the company's revenue and performance. In terms of business composition, automobile inspection/electronic and electrical product testing/testing equipment accounted for 40%/25%/23% of revenue respectively in 2022; consumer goods testing, health and environmental testing are still relatively small.

Industrial vehicle inspection: New vehicle development has spawned a boom in the industry. Third-party testing is expected to be the mainstream credit testing standard, and the automobile inspection business mainly focuses on the new vehicle development stage. In 2022 to 2023, the number of new NEV products in China was 4014 and 4,839 respectively, up 25.0% and 20.6% year on year. New energy vehicle launches maintained a high growth rate; the trend of electrification, intelligence, connectivity, and sharing of automobiles intensified; the main increase in NEV testing was battery/motor/electronic control testing, and the overall bicycle inspection value was higher than that of traditional oil vehicles. In 2022, China's automobile inspection market is about 19.7 billion yuan.

Automakers' internal inspection laboratories are mainly located in the core commercial secrets of testing, and third-party testing is the mainstream; among them, Huazeng Testing and Radio and Television Metrology lead the vehicle inspection revenue scale, and credit testing standards account for the largest share of vehicle inspection profits.

Credit testing has achieved a comprehensive layout in the field of automobile inspection, and convertible bond raising has expanded production by more than 50%. Credit testing standards provide comprehensive testing services around the needs of automobiles, electronic and electrical products, consumer goods, and industrial products, including environmental reliability testing, electromagnetic compatibility, and physico-chemical testing and analysis.

1) Brand: The company has been established for more than 20 years and has a high influence in the field of automotive parts and functional reliability testing. Customers include Tesla, Ideal, Xiaopeng, Changan, Dongfeng, GAC, etc., as well as Huawei, Lenovo, and Xiaomi in the field of electronic and electrical testing.

2) Network: The company currently has 8 laboratory bases in Shenzhen, Guangzhou, Dongguan, Wuhan, Suzhou and Ningbo, and has also set up marketing outlets covering the whole country; the testing field involves automobiles, electronics, consumer goods, industrial products, environment and food, etc. The testing projects include physical, chemical, and electronic products, providing one-stop testing and certification services.

3) Production capacity: In 2021 and 2022, the original value of the company's testing equipment increased by 29.2% and 14.1%, respectively, leading to a 27%-38% year-on-year increase in revenue; in November 2023, it completed the issuance of 545 million yuan of convertible bonds to raise funds for self-built bases in central China and the expansion of new energy vehicle laboratories in 5 cities. The production capacity expansion was about 52.6%, and 2024H1 began to be gradually released; and Wuhan expanded military testing.

Profit forecasting and valuation

We expect the 2023-2025 revenue to be 689 million yuan, 888 million yuan, and 1,135 million yuan, respectively, up 26.4%, 28.9%, and 27.8% year-on-year; net profit to mother will be 164 million yuan, 210 million yuan, and 274 million yuan respectively, with year-on-year growth rates of 39.2%, 27.6%, and 30.5%, respectively; corresponding PE valuations are 20.7x, 16.2x, and 12.4x. Among them, the increase in the company's revenue growth rate in 2024 but the slowdown in profit growth was mainly due to the fact that more financial expenses began to be confirmed after the listing of convertible bonds, which gradually reduced the profit growth rate; as the capacity utilization rate of the New Investment Laboratory gradually increased, it is expected that the profit growth rate will begin to pick up in 2025. The first coverage gave the credit test standard a “buy” rating.

Risk warning

1. Risk of declining profitability due to increased competition in the industry; 2. Risk that laboratory capacity utilization falls short of expectations; 3. Risk that profit forecasting assumptions are not true or fall short of expectations.