The 30% increase in Q1 performance was in line with expectations, and the boom in automobile testing drove annual profit growth. 2024Q1 achieved operating income of 180 million yuan, an increase of 20%; net profit attributable to mother was 41.04 million yuan, an increase of 30%; net profit after deducting non-return to mother increased by 31%. The performance continued to grow rapidly on a high basis during the same period (23Q1 performance increased by 41%), which was in line with expectations, and the growth rate was significantly faster than revenue, mainly driven by a sharp decline in sales management rates.

Currently benefiting from the accelerated iteration of new energy models, car companies' R&D expenses are increasing year by year, and R&D and testing demand continues to be strong. The company has significant advantages in the field of parts R&D and testing, and has been recognized by many OEMs such as SAIC, Ideal, and TESLA. It has high business barriers, strong customer stickiness, and is expected to continue to grow rapidly throughout the year.

Sales management rates continued to be optimized, and net interest rates rose significantly. 2024Q1's comprehensive gross profit margin was 57.05%, down 2.27pct year on year. Prices are expected to decline mainly due to increased competition for environmental testing projects. The cost ratio for the period was 29.86%, down 3.43 pct from the previous year. Among them, the sales/management/R&D/finance expenses ratio changed by -2.25/-1.22/ -0.43/+0.47pct respectively, and the marketing management rate declined sharply, mainly due to: 1) high revenue growth and gradual economies of scale; 2) equity incentive expenses declined, and the increase in financial rates was mainly due to a decrease in interest income. The income tax rate was 13.55%, up 0.71 pct year over year. Minority shareholders accounted for 7.22% of profit and loss, a year-on-year decrease of 1.27pct. Net profit margin was 22.72%, up 1.8 pct year over year. Q1 The company's net operating cash flow inflow was 36.34 million yuan, an increase of 6.55 million yuan over the previous year. The cash flow continued to be excellent.

Actively laying out a new “low-altitude economy” track is expected to benefit from the accelerated development of the low-altitude industry in the Bay Area. Since the Central Economic Work Conference defined strategic emerging industries for the low-altitude economy at the end of last year, the Civil Aviation Administration predicts that China's low-altitude economy market size will reach 1.5/3.5 trillion in 2025/2030, respectively. Among them, Guangdong is one of the regions with the earliest low-altitude economy and the most complete industrial chain. The Guangdong-Hong Kong-Macao Greater Bay Area, with Guangzhou and Shenzhen as the core, accounts for more than 90% of the country's consumer drone production, and related policies are strong, and the development of the low-altitude industry is expected to accelerate significantly in the future. The company has more than 20 years of testing experience in the fields of electronic and electrical, automotive industry chains, and reliability, safety, and electromagnetic compatibility of industrial products. Currently, it has carried out low-altitude drone-related test sites, test capabilities, technical teams, and standard approval applications in Shenzhen, Guangzhou, Suzhou, Wuhan, etc., which can provide equipment companies with environmental weatherability tests, electromagnetic compatibility tests, radio frequency testing, and failure analysis when applying for TC, PC, and AC certificates from the Civil Aviation Administration. In the future, as the low-altitude industry in the Bay Area accelerates and related inspection demand is released, it is expected to drive the company to expand its low-altitude business on a low altitude scale Zhang .

The conversion of debt to raise 300 million dollars to develop the military inspection business is expected to create a new growth point. In 2023, the company raised about 300 million dollars in dual-use military and civilian base construction projects to develop military inspection projects. It is expected to contribute an average annual revenue of 110 million, accounting for 16% of 2023 revenue. Currently, Wuhan Telecom has obtained weapons equipment quality management system certification, equipment supplier qualification certificate, and weapons equipment research and production unit second-level confidential qualification unit certificate, and has a business undertaking foundation. It is expected to gradually release new production capacity (which is expected to be put into operation one after another in 2025), which is expected to help the company create new performance growth points.

Investment advice: We predict that the company's net profit for 2024-2026 will be 2.2/27/340 million yuan, an increase of 33%/25%/26% year-on-year, and the corresponding EPS will be 1.91/2.39/3.01 yuan, respectively. The current stock price is 19/15/12 times PE, respectively, maintaining a “buy” rating.

Risk warning: the risk of automobile companies' R&D investment falling short of expectations, the risk that the low-altitude economy industry will fall short of expectations, the progress of production expansion projects will fall short of expectations, etc.