Incidents:

The company published the 2023 Annual Report & 2024 Quarterly Report. In 2023, we achieved operating income of 2,889 billion yuan, up 10.94% year on year; net profit to mother was 199 million yuan, up 8.39% year on year; net profit after deducting non-return to mother was 174 million yuan, up 78.93% year on year. 24Q1 revenue was 588 million yuan, up 7.82% year on year; net profit to mother was 1.197 million yuan, turning a loss into a profit.

The company grew on a high base of 23Q1 and was profitable for the first time in the first quarter. The company optimized its business structure and appropriately reduced the loss-making business sector; fixed costs such as employee remuneration, equipment depreciation, and amortization of laboratory decoration expenses were relatively balanced, and the increase in cost expenses was lower than the increase in operating income. The performance was in line with expectations.

Company reviews:

Revenue side: The testing and inspection service industry continues to develop, and the company's performance continues to grow. 1) Measurement services: operating income of 718 million yuan, yoy 18.79%, gross profit margin of 48.11%, +4.17pct year on year, thanks to the company's labor cost efficiency improvement and major customer development; 2) Reliability and environmental testing: operating income 663 million yuan, yoy 8.17%, gross profit margin 43.47%, +2.75pct year on year, the company reasonably controls the pace of investment in experimental equipment, outsourcing business, use of tooling jigs and consumables, and won the bid for large-scale aviation test projects; 3) Integrated circuit testing and analysis: revenue of 2.02100 million yuan, YOY 34.21%, gross profit margin of 40.93%, year-on-year -2.71 pct, large-scale integrated circuit test system put into use. High-end complex chip testing capabilities achieved a breakthrough, wafer manufacturing process analysis capability and automotive semiconductor business scale ranked among the highest in the industry; 4) Electromagnetic compatibility testing: operating income of 329 million yuan, YOY 11.31%, gross profit margin of 50.91%, year-on-year -2.31 pct. The whole ship testing market was recognized and became an automotive chip solution verification agency; 5) Chemical analysis: operating revenue of 170 million yuan, accounting for revenue share 5.89%, gross profit margin of 43.65%, +2.28pct, obtained cooperation from many OEMs in the automotive field; 6) Food testing: operating income of 154 million yuan, yoy -14.46%, gross profit margin 24.71%, year-on-year +10.21pct; 7) Ecological environment testing: operating income 161 million yuan, yoy -9.64%, gross profit margin 23.63%, +2.11pct; 8) EHS evaluation services: operating income of 176 million yuan, yoy -10.75%, gross profit margin 44.53%, - 4.88pct, affected by the industry environment, the overall performance is not ideal;? Profit side: The company will strengthen integrated management, which is expected to reduce costs and increase efficiency. 24Q1 gross profit margin 38.7%, yoy+2.9pct. The overall gross profit margin in '23 was 42.28%, +2.65pct. The main reason for the increase in gross margin was the improvement of the company's internal controls and efficiency improvements, such as cost control, reduction in personnel growth rate, and certain personnel adjustments. The company's expense rate for the 2023 period was 32.3%, +0.35pct year-on-year. The net profit margin for 2023 was 6.90%, -0.2pct year over year. The main reason for the decline in profit is that Zhongan Guangyuan's performance did not meet expectations, so the company calculated a goodwill impairment of 506.717 million yuan in 2023.

Layout low-altitude economic testing. Aircraft need to obtain a TC\ PC\ AC certificate from design and manufacture to market sales, and inspection requirements run from design to production and operation of general aviation equipment. In the airworthiness forensics test of Ehang Intelligence's EH216-S unmanned manned aircraft, the company undertook environmental reliability tests and electromagnetic compatibility tests for device-level products with various systems such as flight control, airborne communication, power units, and batteries.

The 24-25 profit forecast was lowered, and the 26-year profit forecast was added, and the “buy” rating was maintained. At the management level, equity incentives were introduced, and an inflection point in the company's operating efficiency was beginning to appear, but the willingness to spend downstream on food and the environment weakened. Zhongan Guangyuan risked impairment of goodwill. The company lowered its profit forecast. The company's net profit to mother for 2024-2026 was 2.97/3.97 billion yuan, respectively, and 4.39/600 million yuan 24-25 years ago. The current stock price (2024/04/23) corresponds to PE 31/23/17 times, respectively. Comparable companies that are also on the third-party testing circuit (Penney Test, Soviet Test, China Test, Credit Test Standard) agree that the average PEG in 24-26 will be 1.08, the average PB will be 2.7x, the PEG in 24-26 will be 0.93, and the PB will be 2.3x. Third-party testing services are in the asset-heavy industry. The company's PB is lower than that of comparable companies in 2024, maintaining a “buy” rating.

Risk warning: Testing the industry's poor innovation ability and brand competitiveness, risk of changes in policies and industry standards, increased risk of market competition, risk of asset impairment, etc.