The GEM of the Hong Kong Stock Exchange has welcomed another new stock subscription!

China Test Con (08629.HK) will be listed in Hong Kong from August 26, 2024 to September 3, with an expected listing date of September 6. The company plans to issue 10.179 million H shares, accounting for about 30% of the total share capital, with an offer price ranging from HK$8.6 to HK$10.4 per share, and a board lot size of 500 shares, with an entry fee of about HK$5252.

As a comprehensive testing service platform, China Test Con was established in 2000 and is headquartered in Xinyi City, Maoming, Guangdong. It will also become the first state-owned enterprise listed in Hong Kong in Maoming.

Prior to this issuance, the Xinyi Housing and Urban-Rural Development Bureau's Xinyi Construction Engineering Quality and Safety Affairs Center, a subsidiary of a state-owned enterprise, held 80% of the shares; the Xinyi Finance Bureau held 20% through Xinyi Xinhui. The image of a state-owned enterprise makes China Test Con more likely to win customers' trust and favor, making it the preferred choice for key testing and inspection services.

1

Doubled growth in performance in 2023, with a gross margin of over 70%.

China Test Con's performance is quite impressive.

The prospectus shows that in 2023, China Test Con's revenue and net income were approximately 41.5 million yuan and 13.254 million yuan, respectively, with year-on-year growth reaching 107.9% and 355.2%; the company's revenue and net income continued to grow in the first half of 2024.

In addition to the doubling growth of revenue and net income, the company's gross margin and net profit margin are also at a high level. In 2023 and the first half of 2024, Jixin Guokong's gross margin reached 71.8% and 70.8% respectively, and the net profit margin was 31.9% and 32.2% respectively.

The company's performance achieved significant growth last year, not only because the adverse impact caused by the epidemic has dissipated, but also because of the growth in the provision of foundation testing services for public sector projects, as well as the development of the company's diversified business.

Jixin Guokong's business can be divided into three major areas: construction engineering testing services, inspection services, and food testing services. The service areas have expanded from the real estate field to the food and agriculture, transportation, and fire protection fields.

The main services provided by the company, image source: prospectus

Among them, construction engineering testing services include foundation testing services, infrastructure and public road testing services, building materials testing services, and building structure testing services, covering major stages of private commercial and residential construction projects, as well as public building and infrastructure projects.

It is worth noting that starting from 2022, Jixin Guokong has shifted its focus to providing more testing and inspection services to clients involved in public sector projects, such as providing infrastructure and public road testing services for municipal road projects, and using physical testing to evaluate the quality and integrity of various road components.

From 2021 to 2023, the revenue from infrastructure and public road testing services of Jixin Guokong increased significantly from 0.893 million yuan to 5.837 million yuan, and the revenue proportion also increased from 2.2% to 14.1%.

In addition, Jixing State Control also started to provide food testing services in May 2024, conducting government-mandated sampling tests on various foods such as fruits, vegetables, tea, and eggs to assess whether these products comply with relevant national statutory quality and safety standards. In the first half of 2024, the food testing service brought in 2.8 million yuan in revenue for the company, accounting for 12.3% of the total revenue.

For enterprises engaged in testing services, having relevant qualifications is very important, and Jixing State Control has a significant advantage in this area. As of August this year, Jixing State Control has obtained qualifications for 39 categories of testing services approved by the Guangdong Provincial Market Supervision Administration, covering five major areas of construction projects, products and materials, environment, food and agricultural products testing, with testing services covering over 2700 parameters.

With a diversified range of service projects and extensive parameter coverage, Jixing State Control's diversified business has developed rapidly, thereby forming its own competitive advantage.

Furthermore, Jixing State Control's dividend policy is particularly attractive. The company mentioned in its prospectus that, under the overall principle of maintaining a healthy level of operating capital, it aims to distribute profits to shareholders each year, with a distribution rate not lower than 20% of the taxable profits available for distribution in that year. Such a dividend policy is rare in the GEM, and investors also tend to prefer stocks with high dividend yields for long-term holds.

2

Deeply cultivating the emerging market with great development potential

Jixing State Control's service targets are customers in Maoming, Guangdong Province. From 2021 to the first half of 2024, all of the company's revenue came from Maoming. The company plans to consolidate its current market position in Maoming while expanding its service scope to third to fifth-tier cities in western Guangdong.

With the accelerated urbanization process, new construction projects such as residential communities, commercial buildings, and industrial facilities continue to emerge, leading to a growing demand for testing and inspection services to ensure the quality, safety, and compliance of projects.

Currently, the policies strongly support the development of third- to fifth-tier cities, as Guangdong accelerates the 'One Hundred Thousand Ten Thousand Project,' which will stimulate new vitality in county development. In addition, the construction potential of third-tier and below cities has not been fully developed. With the implementation of government-led municipal services, water conservancy projects, and other construction projects, the demand for inspection and testing services is expected to continue to grow.

In recent years, the independent inspection and testing industry in Maoming has shown a continuous growth trend. From 2019 to 2023, the market size increased from 0.9 billion yuan to 1.4 billion yuan, with a compound annual growth rate of 11.3%. It is estimated that by 2028, the industry size will reach 2.6 billion yuan, with a compound annual growth rate of 12.4%.

It can be seen that Jixin State Control still has a considerable room for development in the industry. Furthermore, in the future, with the expansion of the company's business scope, it will have contact with more potential customers beyond Maoming.

Jixin State Control ranks second in the independent construction testing and inspection companies in Maoming.

Image source: Prospectus

Currently, the independent inspection and testing service industry in western Guangdong presents a small and fragmented pattern. Based on revenue, in 2023, the top five independent inspection and testing service providers in western Guangdong occupied 9.4% of the market share, with Jixin State Control ranking fifth. In the future, with the increase in industry concentration, listed state-owned enterprises like Jixin State Control are expected to rapidly expand through mergers and acquisitions, thereby achieving high performance growth.