CHINA BUILDING MATERIAL TEST&CERTIFICATION(603060)：HEADQUARTERS RELOCATION DRAGS FULL-YEAR EARNINGS;SUBSIDIARIES SEE STRONG GROWTH

2021 and 1Q22 results missed our expectations

    China Building Material Test & Certification (CTC) announced its 2021 and 1Q22 results: In 2021, revenue rose 50.5% YoY to Rmb2.22bn and attributable net profit increased 9.3% YoY to Rmb253mn. In 4Q21, its revenue rose 50.9% YoY to Rmb941mn and attributable net profit increased 39.4% YoY to Rmb162mn. As for 1Q22, revenue was Rmb408mn, up 15.1%. The attributable net loss was Rmb28.06mn in 1Q22, up Rmb13.97mn YoY. Due to a COVID-19 resurgence and headquarters relocation, 2021 and 1Q22 results missed our expectations slightly.

    In 2021, GM fell 1.3ppt to 44.6% YoY. The blended expense ratio rose 2.1ppt to 27.0% YoY. Specifically, selling, G&A, financial, and R&D expense ratios increased 0.9ppt, 0.1ppt, 0.5ppt, and 0.6ppt YoY. The firm’s asset and credit impairment losses increased by 73.1% YoY to Rmb26.24mn, mainly due to provisions for bill receivables and bad debt. Net profit margin decreased 4.3ppt YoY to 11.4% in 2021 and 1Q22 GM increased 2.9ppt YoY to 31.4%. In 1Q22, the blended expense ratio rose 5.5ppt YoY to 39.6%, with a net loss of Rmb28.06mn. In 2021, net operating cash inflow totaled Rmb388mn, up 13.5% YoY. Net cash outflow from investing activities reached Rmb677mn in 2021, mainly due to less income from wealth management products and more M&A activity. In 1Q22, operating cash outflow was Rmb112mn, up Rmb85.38mn YoY.

    Trends to watch

    Parent company’s revenue grew steadily; headquarters relocation and increased equity incentive expenses weighed on earnings. In 2021, parent company revenue increased 9.6% YoY to Rmb519mn. Its full-year net profit dropped 3.0% YoY to Rmb133mn. The parent company’s revenue grew steadily, and net profit declined slightly, mainly due to the short-term impact of headquarters relocation and increased equity incentive expenses. Looking ahead, given CTC’s strengths in technique, brands, and qualifications in construction material testing services, we think the impact of the parent company’s relocation on CTC will be limited; we expect CTC’s earnings to grow steadily.

    M&A continues to improve; subsidiaries’ earnings contribution increases. In 2021, CTC acquired ZCET, Liaoning Fengtian, and other testing institutions to improve its testing business. In 2021, engineering, materials, environment, and food & agricultural testing accounted for 45%, 23%, 26%, and 5% of testing revenue. The proportion of revenue from the engineering and materials testing business has gradually decreased in recent years. In contrast, the revenue contribution from environment and food & agriculture testing has steadily increased. Meanwhile, the company acquired Yantai Fangyuan, Shanghai Meinolf, and Anhui Yuanzheng Testing in 2021 to boost its businesses such as metrology & calibration and instrument sales. We believe the company's expansion will continue to progress, supporting its medium- and long-term earnings growth.

    Financials and valuation

    Given the COVID-19 resurgence in eastern and northern China since March may affect the company's operations, we revise down our 2022 net profit forecast by 11% to Rmb318mn and introduce a 2023 net profit forecast of Rmb403mn. The stock is trading at 23.3x 2022e and 18.4x 2023e P/E. Considering the impact of real estate regulations on market expectations, we cut our target price 20% to Rmb16.80 (31.9x 2022e and 25.2x 2023e P/E), offering a 37% upside. Maintain OUTPERFORM.

    Risks

    Unexpected impact from headquarters relocation; earnings from subsidiaries disappoint.