Performance declined due to the epidemic, and is expected to improve month-on-month in the second half of the year
We believe that the Academy of Electrical Engineering is leading the testing capacity and qualifications in the electrical inspection industry, and is expected to achieve rapid growth in 2023-2024 after a short-term decline in performance due to the impact of the epidemic. The company's business activities in the first half of the year were affected by the epidemic in Suzhou and surrounding cities. The impact of the epidemic abated in the second half of the year. The company continued to promote “one-stop” testing services. We judge that performance is expected to improve month-on-month. We lowered our profit forecast and estimated net profit for 2022-2024 was $1.64/2.23/305 million yuan (previous value: 2.76/333/398 million yuan), giving 34.5x PE in 2022 (referring to the comparable company's 2022 Wind unanimous forecast that the average PE value was 34.5x), with a target price of 7.59 yuan/share (previous value: 10.19 yuan/share, based on 28.3x PE in 2022) to maintain the “buy” rating.
Revenue from the main business declined across the board. The company's main business mainly provided customers with professional and independent third-party testing and certification technology services. The company's business activities were affected by the epidemic in the first half of the year, and revenue from all major businesses declined across the board. 1H22 achieved revenue of 336 million yuan (-17.2% year-on-year), and net profit of the mother was 21.32 million yuan (-71.8% year-on-year). By business: 1) High voltage appliance testing: 1H22 revenue is 253 million yuan (-18.5% year on year), gross profit margin is 33.8% (year-on-year - 11.1pct); 2) Low voltage electrical inspection: 1H22 revenue is 65 million yuan (-10.0% year on year), gross profit margin is 67.5% (+4.0pct year on year). Transmission and distribution grid construction and product upgrading are expected to drive future growth; 3) Competition in the environmental testing market intensifies, 1H22's environmental inspection revenue is 14 million yuan (-22.0% year on year), gross margin is expected to drive future growth; 3) competition in the environmental testing market intensifies, 1H22's environmental inspection revenue is 14 billion yuan (-22.0% year on year), gross margin is - 18.9pct to 30.2%.
Testing qualifications continue to expand, and the business environment is expected to improve
The electrical inspection industry is a typical asset-heavy industry. The company's high investment over the past few years has enabled it to achieve many world firsts in this field. The main costs were depreciation and labor costs. Depreciation expenses in the first half of the year were 146 million yuan, accounting for 73.0% of the cost. The company passed multiple reviews by ULDAP, CMA, CNAS, CQC and CCC in the first half of the year. Testing capabilities continued to improve, qualifications continued to expand, and participated in the formulation and revision of 4 national standards, leading the industry's voice. We believe that with the effective control of the epidemic in the second half of the year, the company's operating environment is expected to improve, and most construction projects have been completed in 2021. Depreciation costs are expected to stabilize, and the company will transform from high investment to high profit growth.
Maintain the “buy” rating with a target price of 7.59 yuan/share
Considering the blockage of personnel and logistics caused by the epidemic, the company's operating efficiency is lower than expected, and fixed costs account for relatively high cost in the cost structure. We lowered the revenue forecast for electrical inspection and environmental testing, and lowered the gross margin forecast for high-voltage electrical equipment testing and environmental testing in 2022. It is estimated that the net profit of returning to the mother in 2022-2024 will be 1.64/223/305 million yuan, corresponding to EPS of 0.22/0.29/0.40 yuan, giving 2022 34.5x PE with a target price of 7.59 yuan/share, maintaining the “buy” rating.
Risk warning: The impact of the epidemic has exceeded expectations, market development progress has fallen short of expectations, and depreciation of fixed assets has exceeded expectations.