Description of the event

Credit Testing Standard released its 2023 annual report, achieving full year revenue of 679 million yuan, an increase of 24.6% year on year; net profit to mother was 164 million yuan, up 38.0% year on year. Among them, Q4 revenue was 169 million yuan, up 17.1% year on year; net profit to mother was 30 million yuan, up 29.6% year on year. The company previously predicted net profit of 159 million yuan to mother for the full year, and the results were in line with expectations.

Incident comments

Revenue continued to grow at a high rate in 2023, and vehicle inspection performance was still impressive. For the full year of 2023, the company achieved a year-on-year increase of 24.6% in revenue. By business segment, automobile inspection revenue was 272 million yuan, up 30.8% year on year; electronic and electrical product inspection revenue was 157 million yuan, up 12.3% year on year; test equipment revenue was 163 million yuan, up 30.0% year on year; health and environmental testing revenue was 42 million yuan, up 115.6% year on year; and consumer goods testing revenue was 41 million yuan, up 11.3% year on year, maintaining steady growth. Supported by strong demand for automobile R&D and testing, the company's revenue in the field of automobile inspection continued to grow at a high rate; the test equipment subsidiary acquired by the company in 2021 also performed well.

Net profit margin in 2023 was 25.9%, up 3.30pct year-on-year. The company's overall gross profit margin was 59.1%, up 1.96pct year on year; of these, the gross profit margin for automobile inspection was 72.1%, up 1.51 pct year on year; the gross profit margin for electronic and electrical product testing was 58.8%, up 0.78 pct year on year; and the gross profit margin of test equipment was 46.0%, up 2.51 pct year on year. The company's strong downstream demand is driving rapid revenue growth, and capacity utilization is expected to continue to increase (the input-output ratio of testing equipment will increase from 1.44 in 2022 to 1.61 in 2023), driving up gross margin. The expense ratio decreased by 2.67 pct year-on-year during 2023. Among them, only the financial expense ratio increased slightly due to the issuance of convertible bonds; the remaining sales/management/R&D expense ratios all showed a downward trend; the financial expense ratio is expected to maintain a slight upward trend in 2024.

Accounts receivable management was good, and net operating cash flow increased 18.4% year over year. The balance of the company's accounts receivable in 2023 was 259 million yuan, lower than the revenue growth rate. The share of accounts receivable in total assets decreased to 12.1%, and accounts receivable management was better. The company's net cash flow from operating activities for the year was RMB 255 million, an increase of 18.4% over the previous year.

The construction of the convertible bond raising project went smoothly, and the expansion of production capacity provided battery life for revenue. 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. The company currently has multiple laboratory bases in Shenzhen, Guangzhou, Dongguan, Wuhan, Suzhou, Ningbo, etc., and has also set up marketing outlets covering the whole country in major large and medium-sized cities. In 2021-2023, the original value of the company's testing equipment increased by 29.2%, 14.1%, and 9.1%, respectively; 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%. 2024H1 is expected to gradually release production capacity; and Wuhan is expanding new military testing.

Profit forecast and valuation: The company's 2024-2026 revenue is expected to be 800 million yuan/1.12 billion yuan/1.29 billion yuan, up 29.9%/26.6%/24.5% year on year; net profit to mother 210 million yuan/273 million yuan/354 million yuan, up 28.3%/29.9%/29.8% year on year, corresponding to PE valuation of 18.6x/14.3x/11.0x; maintaining the “buy” rating.

Risk warning

1. Risk of declining profitability due to increased competition in the industry;

2. The laboratory capacity utilization rate falls short of the expected risk.