Description of the event

Credit Testing Standard released its 2024 mid-year report. The first half of the year achieved revenue of 0.367 billion yuan, an increase of 11.3% year on year; net profit to mother was 0.093 billion yuan, up 13.1% year on year; net profit after deducting non-return to mother was 0.086 billion yuan, up 15.9% year on year. Basically, it is in the middle of the previous forecast range.

Among them, Q2 achieved revenue of 0.187 billion yuan, an increase of 3.92% year on year; net profit to mother of 0.052 billion yuan, up 2.32% year on year; net profit after deducting non-return to mother of 0.048 billion yuan, up 5.99% year on year.

Incident comments

There is still good growth under a high base, and it is speculated that the revenue growth rate is slowing down due to price factors. By business segment: 1) Vehicle inspection:

Revenue was 0.147 billion yuan, up 12.6% year on year. Based on the rapid growth of 20.8%/30.8% year on year in the past 2 years, the 2024H1 car inspection revenue growth rate has slowed down. It is speculated that the unit price of the low-threshold car inspection business unit price or pressure is mainly due to downstream automobile inspection; 2) Electronic and electrical product testing: achieved revenue of 0.088 billion yuan, an increase of 8.96% year on year; 3) Test equipment: achieved revenue of 0.085 billion yuan, an increase of 11.4% year on year. The equipment subsidiary Sansi Zongheng 2024H1's revenue increased 13.1% year on year; 4) Consumer goods testing: achieved revenue of 0.025 billion yuan, up 6.39% year on year; 5) Health and environmental testing: achieved revenue of 0.023 billion yuan, up 34.2% year on year, growing rapidly. The net profit growth rate of the return to mother is higher than the revenue growth rate, which is estimated mainly due to the increase in scale effect due to the process of climbing production capacity.

Automobile production capacity was expanded and competition intensified, and the overall net interest rate in the first half of the year fell 0.55pct year on year to 26.41%. Gross margin fell 0.51 pct year on year in the first half of the year. Main reasons: 1) Production capacity climbing is ongoing: depreciation and amortization costs are estimated to increase due to Q4 capacity investment. 2023Q4/2024Q1/2024Q2 gross margin is 54.3%/57.1%/61.4%, respectively. Gross margin is expected to increase sequentially from quarter to quarter. It is expected that gross margin will continue to improve in the future as capacity utilization climbs; 2) Vehicle inspection price competition has spread to suppliers. There may be a decline, first half of the year The gross margin of the automobile inspection sector decreased by 1.78 pct year on year; 3) Net profit of Sansi Zongheng fell 25.4% year on year, with a high base for the same period last year (2023H1 net profit growth rate was 215% year over year). 2024H1

The fee rate decreased by 1.71 pct year on year during the first half of the year. Sales expenses and management expenses decreased due to the lifting of the ban on equity incentives for some restricted stocks and the reduction in incentive fees.

Net operating cash flow was good, and the cash to revenue ratio declined slightly. 2024H1 achieved net operating cash flow of 0.086 billion yuan, up 4.8% year on year; revenue ratio decreased 4.9% to 83% year over 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 0.545 billion yuan convertible bonds to raise funds for self-built bases in central China and the expansion of new energy vehicle laboratories in 5 cities, increasing production capacity by about 52.6%; and Wuhan expanded new military testing.

Profit forecast and valuation: The company's 2024-2026 revenue is expected to be 0.808 billion yuan/0.942 billion yuan/1.068 billion yuan, up 18.9%/16.6%/13.4% year on year; net profit to mother 0.18 billion yuan/0.204 billion yuan/0.23 billion yuan, up 10.3%/13.2%/12.8% year on year, corresponding to PE valuation of 16.5x/14.5x/12.9x; maintenance “Buy” rating.

Risk warning

1. Risk of declining profitability due to increased competition in the industry; 2. Risk that laboratory capacity utilization falls short of expectations.