Description of the event

On July 1, 2024, Radio and Television Measurement issued the “Notice on Granting Rights to Incentive Recipients of the 2023 Stock Options and Restricted Stock Incentive Plan”. The company granted 8.625 million shares of stock options to 623 incentive recipients at an exercise price of 14.56 yuan/share, and granted 8,625 million restricted shares to 623 incentive recipients at a price of 8.68 yuan/share.

Incident comments

The equity incentive plan has been implemented, and profit-oriented growth has strong certainty. 1) October 18, 2023: The company first released the “2023 Stock Options and Restricted Stock Incentive Plan (Draft)”, which plans to grant stock options and restricted shares (no more than 8.625 million shares) to 623 employees, covering the company's 6 deputy general managers/financial leaders/other management personnel and core backbone; 2) December 2023: The company changed the chairman, general manager, and director to establish a profit-centered assessment model; 3) May 8, 2024: Guangzhou Municipal State-owned Assets Administration Commission approved the incentive plan ; 4) May 29, 2024: Revise the equity incentive draft to include new executives in the incentive list; 5) June 19, 2024: The shareholders' meeting passed the incentive plan; 6) July 1, 2024: The board of directors and supervisors passed the incentive plan. The implementation of the equity incentive plan is conducive to improving the medium- to long-term incentive and restraint mechanism, fully mobilizing the enthusiasm of the core management team and core cadres, implementing the “quality and efficiency as the center, comprehensively implementing refined management, and vigorously promoting the reduction of operating costs and increasing efficiency”, and lays the foundation for the company's long-term healthy and healthy development.

Equity incentive plan with profit and cash flow assessment as the core: 1) Incentive targets: 623 managers and core executives, including the chairman, general manager, director, and financial director; 2) Assessment conditions: Based on the average net profit deducted from the mother in 2020-2022, the net profit growth rate in 2024-2026 is not less than 82%/128%/175% (that is, the year-on-year increase of about 34%/25%/21%), return on net assets (EOE) is not less than 25%/27%/28.5%, and the cash operating index is not less than 25%/27%/28.5%. At 0.93/0.95/0.97, based on the average R&D investment in 2020-2022, the 2024-2026 R&D investment growth rate is not less than 52%/75%/100%; 3) Equity incentive costs: Refer to the closing price of 12.18 yuan/share on July 1. The incentive plan generated a total equity incentive cost of 40.92 million yuan, and 736/1473/1135/573/1.74 million yuan respectively in 2024-2028.

A national high-end manufacturing and testing enterprise, 2024 ushered in multiple highlights. 1) Good qualifications provide momentum for subsequent growth: the company is a national, comprehensive high-end manufacturing and inspection enterprise. The total original value of testing equipment at the end of 2023 was 2,464 billion yuan (up 10.47% year on year), with abundant production capacity; 2) Demand improvement expectations for superior sectors: reliability and environmental testing/electromagnetic compatibility slowed to 8.2%/11.3% due to special events in the military industry in 2023, and military inspection orders in 2024 are expected to bottom out. Furthermore, benefiting from the development of new automobile models, the company's automobile inspection business has potential to grow; 3) Net profit margin Raising expectations: ① Reducing losses in weak sectors: In 2024, the company adopted a contraction strategy for food and environmental loss laboratories to adjust the management team of Zhongan Guangyuan (EIA business); ② Personnel control: the number of employees at the end of 2023 was 6304, a decrease of 11; ③ Slowing capital expenditure: the company plans to invest 298 million yuan in technical reform capital in 2024, a decrease of 21.9% year on year.

Profit forecast and valuation: The company's revenue for 2024-2026 is expected to be 3.325 billion yuan/3.806 billion yuan/4.363 billion yuan, up 15.1%/14.5%/14.6% year on year; net profit due to mother was 323 million yuan/423 million yuan/538 million yuan, up 61.9%/31.0%/27.1% year on year, corresponding to PE valuation of 21.7x/16.6x/13.0x; maintaining the “buy” rating.

Risk warning

1. Ecological environment and food testing losses fall short of the expected risk; 2. The net interest rate falls short of the expected risk due to insufficient capacity utilization.