Key points of investment
Profitability improved, and the company's performance entered a growth channel
According to the 2023 performance forecast issued by the company, the company expects to achieve net profit of 35 to 50 million yuan in 2023, an increase of 123%-219% over the previous year; net profit after deducting non-operating profit and loss of 200-17 million yuan, an increase of 120%-273% over the previous year. 2023Q1-3's gross sales margin and net margin were 38.76% and 12.43% respectively, up 1.66pct and 9.67pct respectively from the end of 2022. As the real estate industry continues to bottom out and the capital chain of some cooperative developers is tight, the company continued to adjust its customer structure. In the first half of 2023, the company's state-owned enterprises, central enterprises and government customers accounted for more than 58.06% of revenue, an increase of 5.83 pcts over the previous year, driving the company's profitability improvement. In addition, the company significantly increased the amount of impairment in 2021. From 2021 to the end of September 2023, it has accumulated asset and credit impairment of 132 million yuan. With the gradual adjustment of the company's customer categories, the 2023Q1-3 impairment amount was 17 million yuan, a decrease of 48.4% over the previous year. We believe that in the current situation where the real estate industry continues to bottom out, the amount of the company's assets and credit impairment is sufficient, and actively adjusting the customer structure is of great significance to the company's sustainable development. In the long run, it can help the company's performance enter a continuous growth path.
The innovative business has gradually entered a period of harvest, and the IDI-TIS business has become a new growth pole. The company has entered the TIS field of quality risk control services with many years of expertise in the field of engineering evaluation, and has now become a leader in TIS service organizations. The TIS business covers the entire cycle of engineering project construction from design to the end of construction to the use stage, and provides risk management and control services for IDI insurance against potential defects in project quality.
IDI insurance has a longer insurance period and can reduce the accumulation of social funds and relieve pressure on construction units. It is gradually replacing property guarantees in protecting the interests of owners. China began piloting IDI insurance in 2002. Under the active impetus of the central government and local governments, after more than 20 years of development, cities such as Guangzhou, Shanghai, Beijing, and Chongqing have enforced it in residential projects. In September 2023, the Ministry of Housing and Construction held a training and pilot work site meeting on the three urban housing safety management system frameworks in Ningbo. It was determined that the housing safety insurance system will be piloted in 14 cities including Beijing, Shanghai, and Shenzhen. Currently, IDI insurance implementation is progressing rapidly from point to point, and we are optimistic that the IDI insurance market will continue to expand.
As of September 2023, the company and its subsidiary Guangdong Ruicheng have business cooperation with mainstream domestic insurance companies and some insurance brokerage companies such as Human Insurance, Ping An, Taibao, China Life Insurance, and Dadi. They have provided more than 170 service targets, provided nearly 1,000 risk reports, and discovered more than 5,000 risk issues, effectively helping insurance companies control risks and reduce the probability of claims settlement.
According to our estimates, the total premiums of IDI insurance nationwide are about 7.4 billion yuan in 2022, and the total premiums of the national IDI insurance market are expected to reach about 20 billion yuan by 2025, or about 38% CAGR. Among them, considering that IDI insurance is expected to be applied to government guaranteed housing projects as a priority, we expect future guaranteed housing construction to contribute more strongly to IDI premiums. We estimate the 2023-2025 guaranteed housing premium CAGR of about 36%, accounting for about 23-26% of the national IDI insurance market.
We assume that the company's TIS business service fee accounts for 15% to 30% of the IDI premium amount, and that the growth rate of TIS business order volume in 2023-2025 is 20%, 40%, and 60%, respectively. TIS revenue accounts for 6.1%, 10.0%, and 11.5% of the corresponding company's revenue, respectively, and TIS's net profit accounts for 13.0%, 19.3%, and 18.2% of the company's net profit.
Profit forecasting and valuation
We believe that China's IDI-TIS market space has great potential for growth. As a benchmark in the third-party testing industry, the company's professional evaluation capabilities are recognized by the market, and it has a first-mover advantage in competition within the industry. Furthermore, TIS services have higher gross margins than traditional engineering management businesses, which can help the company continue to improve its performance. The company's active adjustment of customers and business structures has had remarkable results. It is a solid foundation for the company's sustainable development, and the company's performance is re-entering the growth channel. The company's net profit for 2023-2025 is estimated to be 50 million yuan, 75 million yuan, and 114 million yuan respectively, corresponding to the 2024 EPS of 0.49 yuan, giving it a “buy” rating.
Risk warning
The real estate market declined beyond expectations, and the company's new business expansion fell short of expectations.