Leading automotive R&D and testing company with excellent profit quality. The company was founded in 2000. The initial main business focused on electronic and electrical reliability testing, electromagnetic compatibility testing, etc.. In 2015, it acquired Wuhan Meisu to enter automotive R&D and testing, and in 2021, it developed mechanical testing equipment business along the upstream. The layout continued to diversify. The inspection/equipment revenue share in 2022 was 77%/23%, respectively, of which automobile and electronic testing accounted for 38%/26%, contributing the main revenue. 2022/2023Q1-3 The company's revenue increased 38%/27%, respectively, and performance increased 48%/40% (same increase of 40% according to the predicted median performance for the full year of 2023); the gross profit margin was 59%/61%, which was significantly higher than that of its peers. The company's cash flow performance has been excellent in recent years, with a net present ratio of 127%/147% in 2021-2022. As of the end of 23Q3, the company had about 500 million yuan in cash, an interest-bearing debt ratio of only 4.7%, a healthy capital structure, and excellent comprehensive profit quality.

The scale of the inspection industry is growing steadily, and the boom in emerging fields such as automobiles and military industry is rising rapidly. In 2022, China's testing market surpassed 400 billion, and the CAGR reached 13% in the past 9 years, with steady growth; CR5 is about 3%, and the head concentration is low. By sector, traditional inspection industries such as construction, building materials, environmental protection, etc., account for a relatively high growth rate, but the overall growth rate is slowing down, and the rise in emerging fields provides the main growth impetus. Among them: 1) Automobile R&D and inspection will benefit from the increase in R&D expenses of car companies, and demand for automobile R&D and testing will exceed 32 billion in 2022. In the future, as the penetration rate of new energy vehicles rises and model iteration accelerates, it is expected that the demand for automobile R&D and testing will remain high. 2) Demand for military third-party testing has increased significantly since 2021 (same increase of 119%), reaching 3.2 billion in 2022, accounting for about 5.4% of the total military inspection market. In recent years, China's defense spending has increased year by year, and the share of equipment costs has continued to rise. Subsequently, with the increase in the penetration rate of third parties, demand for military inspection is expected to maintain a relatively rapid growth rate.

Automotive R&D and testing capabilities are leading, and the field and regional layout continues to improve. 1) Auto parts inspection has significant advantages: The company provides “software design, mechanical development, standard testing” integrated services for parts testing in the automotive R&D stage, which can save car companies 50% of the R&D cycle, and has been recognized by most OEMs such as SAIC, Ideal, and TESLA. Compared with mandatory off-line inspection of new vehicles, R&D and inspection technology barriers are high and inspection is difficult. Therefore, customers are more sticky, gross margin is significantly higher than mandatory inspection businesses, and business profitability is excellent. 2) The regional layout continues to improve: Key cities across the country (Shenzhen, Guangzhou, Dongguan, Wuhan, etc.) set up 8 key laboratory sites. The laboratory testing area during operation at the end of 23H1 was 68,300 square meters, an increase of 16,300 square meters over the end of 22Q3, and production capacity continued to expand. 3) The business layout is gradually diversified: Currently, the company's testing business covers various fields such as automobiles, electronics, consumer goods, agricultural environments, etc., and downstream demand continues to diversify; in 2021, the company acquired Sansi Zongheng to develop the upstream equipment business. The market share of Sansi metal mechanical testing equipment is about 13%, ranking second in the country, with outstanding comprehensive strength. The overall equipment market share is expected to increase at an accelerated pace.

The booming circuit continues to expand production, and military inspection has created a new growth point. In November 2023, the company issued convertible bonds to raise 545 million yuan to invest in NEV laboratory expansion and military and civilian base construction: 1) The total investment in NEV inspection is about 260 million yuan, and production capacity is expected to be gradually released in 2025. After full delivery, the vehicle inspection and production expansion ratio is about 22%. It is expected to increase annual revenue of 157 million yuan, accounting for 29% of 2022 revenue. 2) The military inspection project plans to invest 290 million yuan, with an average annual revenue of about 110 million, accounting for 20% of 2022 revenue. After the two major debt conversion projects reach delivery, the company's total production capacity is expected to increase by 42%. Looking at the field of production expansion, both NEV and military testing are booming, and there is strong certainty that demand is growing steadily. Currently, the company has obtained military secrecy qualifications and has a foundation for undertaking business. In the future, with the gradual release of new production capacity, it is expected to help the company create new performance growth points.

Investment advice: We predict that the company's net profit for 2023-2025 will be 1.6/2.2/280 million yuan, an increase of 38.5%/34.9%/27.9% year-on-year, and the corresponding EPS will be 1.44/1.94/2.48 yuan, respectively. The current stock price corresponding to PE is 22/16/13 times, respectively, giving a “buy” rating for the first time.

Risk warning: Risk of falling R&D investment by car companies, risk of production expansion projects falling short of expectations, risk of new business development falling short of expectations, uncertainty in calculation assumptions, etc.