Description of the event

Penney Test released its 2024 three-quarter report. The first three quarters achieved revenue of 1.123 billion yuan, a year-on-year decrease of 36.1%; net profit to mother -0.234 billion yuan, profit of 0.105 billion yuan in the same period last year; 2024Q3 revenue of 0.395 billion yuan, a year-on-year decrease of 30.8%; and net profit to mother of -0.063 billion yuan, with profit of 0.012 billion yuan last year.

Incident comments

The decline in revenue in a single quarter narrowed, and the transformation is in pain. 2024Q3 revenue fell 30.8% year over year, up from -36.4%/-40.5% in 2024Q1/Q2, and the decline narrowed slightly. Since 2023Q3, the company's revenue growth rate in a single quarter has continued to fall below -30%, facing high pressure. The main reasons: 1) special industry events: military testing and biomedicine, which the company has focused on in recent years, were affected by special events in the industry, making it difficult to develop orders starting in 2023Q3; 2) customer restructuring: the company actively adjusted the customer structure of traditional advantageous businesses (environmental testing, food testing, etc.) to reduce the proportion of government orders with greater payment pressure and more intense price competition, increasing corporate customer development efforts at the current stage.

There are multiple reasons that affect net profit to the mother. The net profit of 2024Q3 was -0.063 billion yuan, with a month-on-month loss of 0.01 billion yuan. The main causes of loss: 1) The customer restructuring process had a certain rigid cost, and the decline in revenue greatly affected the gross profit margin. At the same time, along with certain expenses, the gross margin of the life science, health and environmental protection sector to which the environment and food business belong fell 21.43% year on year; 2) Increased competition in the biomedical industry led to losses. The net profit of biomedical subsidiaries in the first half of the year was 40.95 Million yuan; 3) The company's newly expanded field of special equipment testing is still in the process of being developed nationwide. The initial investment was large, and the revenue growth rate did not fully cover the costs, resulting in a small loss; 4) Credit impairment of 10.62 million yuan was calculated in Q3, which is presumed to be mainly due to the lengthening of accounts receivable in some TOG businesses. The company's overall gross profit margin for the first three quarters was 28.2%, down 15.4 pcts year on year; the amount of expenses for the period was 0.534 billion yuan, down 13.8% year on year, but due to a larger decline in revenue, the cost ratio for the period increased by 12.3 pct year on year.

Q3 There was no significant improvement in net operating cash flow. Net cash flows from operating activities in 2024Q1/Q2/Q3 were -0.055/-0.031/-0.03 billion yuan, respectively, and 0.033/0.114/-0.05 billion yuan respectively for the same period last year (accounts receivable from the medical infection business in 2022 were returned in the first half of last year). Accounts receivable at the end of 2024Q3 were 0.985 billion yuan, a slight decrease from 1 billion yuan at the beginning of the year; the Q1-Q3 revenue ratio was 103%, which was basically the same as the previous year.

Development outlook: Penney Testing has more than 30 large-scale test bases and more than 100 wholly-owned subsidiaries and branches across the country. Its business areas include environmental testing, food testing, automobile testing, cosmetics testing, military testing, electronic and electrical testing, biomedical testing, measurement and calibration, etc., making it one of the companies with the richest number of laboratories and business lines in China. Currently, the military and biomedical direction that the company focuses on is under pressure from special events in the industry; in a macroeconomic context, the company actively adjusts its customer structure to reduce the share of government orders. It is expected that the company will still be in a painful period of transformation for some time to come, and we will keep a close eye on the company's inflection point.

Profit forecast and valuation: The company's revenue for 2024-2026 is estimated to be 1.6 billion yuan, 1.77 billion yuan, and 1.96 billion yuan, respectively, with year-on-year growth rates of -35.0%, 10.6%, and 10.9%, respectively; net profit to mother is -0.092 billion yuan, 0.109 billion yuan, and 0.201 billion yuan, respectively; current PB is 1.35x.

Risk warning

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