Description of the event
Huazue Testing released the 2024 mid-year report performance forecast. Net profit for the first half of the year was 2.76-2.82 billion yuan, up 8%-10% year on year; net profit to mother was 0.433-0.44 billion yuan, up 1%-3% year on year; net profit after deducting non-return to mother was 0.4-0.407 billion yuan, up 4%-6% year on year; among them, Q2 revenue was 1.568-1.628 billion yuan, up 9%-13% year on year; net profit to mother was 0.3-0.307 billion yuan, up 6% year on year -8%; net profit without return to mother was 0.287-0.294 billion yuan, up 7%-10% year-on-year.
Incident comments
Q2 revenue increased 9%-13% year over year, and demand recovery was initially evident. The median year-on-year revenue growth rate of 2024Q2 was 11%, up from 5.7%/0.5%/6.7% in 2023Q3-2024Q1, up about 4.30pct month-on-month, and demand has begun to recover. By business: 1) Life sciences (environmental testing+food testing): Revenue in 2023 increased 8.72% year-on-year, and multiple product segments such as pet food and agricultural products grew well. The growth trend is expected to continue in 2024, and the current soil three applications have entered an accelerated implementation period. Huatest has begun receiving relevant samples and starting related testing work in December 2023. It is expected that this aspect will bring a certain increase to the company's 2024 performance; 2) Industrial testing: 2023 revenue increased 20.72% year on year, dual carbon and ESG services and digital implementation Rapid growth, which is expected to perform well in 2024 against the backdrop of accelerated carbon peak; 3) Consumer goods testing: including automobile testing, semiconductor testing, etc., and is expected to maintain steady growth in 2024H1 revenue; 4) Trade assurance: 2023 revenue increased 5.63% year on year, and is expected to grow steadily in the first half of this year; 5) Medicine: 2023 revenue fell 38.85% year on year, mainly due to declining demand for infectious businesses and special medical treatment actions affecting demand release. Currently, there is still uncertainty about the impact of the relevant business impact on pharmaceutics, which the company entered through acquisitions in 2023 The development trend in the field of CMC research and medical devices is good.
Profitability has improved, and the performance growth rate is expected to perform well under a low base in the second half of the year. 2024H1's comprehensive gross margin increased year-on-year, with government subsidies reduced by 10.59 million yuan compared to the same period last year, and net profit without return to mother is expected to increase by 4%-6% year on year higher than the current net profit growth rate; Q2 net profit to mother had a median year-on-year growth rate of 7%, which achieved steady growth on the basis of a high base figure (17.8%) for the same period last year, which is significantly higher than 3.4%/-29.3%/-8.1% of 2023Q3-2024Q1. The main reason is:
1) The company implements efficiency improvement plans: build lean laboratories, improve operational efficiency, and formulate loss correction plans for loss-making laboratories; 2) Weisbo reduces losses; 3) reduces losses in the medical and pharmaceutical business.
Release a repurchase plan to demonstrate confidence in development. On July 2, 2024, the company announced a repurchase plan. It plans to use no more than 50.49 million yuan to repurchase no less than 2 million shares and no more than 3 million shares (accounting for about 0.12%-0.18% of the company's total share capital at the time) to later implement an equity incentive plan or employee stock ownership plan; the first repurchase of 0.3 million shares was announced on July 4.
Efficiency improvement and mergers and acquisitions are the key development directions, and revenue and profit margins are expected to continue to improve in the second half of the year. Currently, the company continues to improve the quality and efficiency of operations through various measures; insists on investment and development, and turns mergers and acquisitions integration into the company's new core competition. Demand is expected to recover in the second half of the year, and it is expected that the company's performance will continue to improve under a low base.
Profit forecast and valuation: We believe that the long-term logic of the company is expected to become the Chinese version of SGS has not changed. Pain in the pharmaceutical business is dragging down profitability. Weisbo's profit repair expectations are impressive. It is estimated that HuaTest's 2024-2026 revenue will be 6.468 billion yuan/7.275 billion yuan/8.097 billion yuan, respectively, with year-on-year growth rates of 15.4%/12.5%/11.3%; net profit to mother is 1.002 billion yuan/ 1.155 billion yuan/1.333 billion yuan, year-on-year growth rates were 10.1%/15.3%/15.4%, respectively; the corresponding PE valuation was 17.5x/15.2x/13.1x. Maintain a “buy” rating.
Risk warning
1. Risk of declining profitability due to increased competition in the industry; 2. Risk that revenue recovery in the medical pharmacy sector falls short of expectations.