According to the Zhitong Finance APP, Soochow Securities released a research report stating that the revenue of the testing service sector is expected to reach 46.8 billion yuan in 2024, a year-on-year decrease of 4%; the net profit attributable to the parent company is expected to be 1.8 billion yuan, a year-on-year decrease of 56%. The sector's growth rate is declining, and the leading company, Alpha, is particularly evident. The macroeconomic growth rate is expected to recover in 2025, and the firm is optimistic about the rebound in demand for the testing service industry. Additionally, local governments are important clients for testing institutions, and the industry is expected to benefit from this round of government debt relief. The report recommends leading testing companies with high brand recognition, mature management systems, and advanced industrial layouts.

Soochow Securities' main viewpoints are as follows:

In 2024, the pharmaceutical and medical, and special industries will experience a downturn, with Alpha being the leading company.

The testing service sector is expected to achieve revenue of 46.8 billion yuan in 2024, a year-on-year decrease of 4%. The sector's growth rate is declining mainly due to the overall slowdown in macroeconomic growth and the continued impact of policies in the pharmaceutical, medical, and special industries. Excluding the high proportion of medical testing from Kingmed Diagnostics and Dian Diagnostics, the sector is expected to achieve revenue of 25.8 billion yuan in 2024, a year-on-year increase of 4%, showing some resilience. In Q1 2024, the sector is expected to achieve revenue of 9 billion yuan, a year-on-year decrease of 9%. Excluding Kingmed Diagnostics and Dian Diagnostics, the sector's revenue growth rate is expected to increase by 2% year-on-year. The net profit attributable to the parent company for the testing service sector is expected to be 1.8 billion yuan in 2024, a year-on-year decrease of 56%, mainly due to the decline in revenue scale while laboratory costs remain rigid, significant impairment losses in medical-related businesses, and a decrease in government subsidies. Excluding Kingmed Diagnostics and Dian Diagnostics, the net profit growth rate for the sector in 2023 is expected to decrease by 20% year-on-year, with a significant narrowing of the decline.

In Q1 2025, the sector is expected to achieve a net profit attributable to the parent company of 200 million yuan, a year-on-year decrease of 16%. Excluding Kingmed Diagnostics and Dian Diagnostics, the sector's revenue growth rate is expected to increase by 3% year-on-year. Among them, the leading company, Alpha, is particularly evident: 1) CTI: external mergers and acquisitions, internal lean management, and steady growth, with revenue/net profit attributable to the parent company/net profit after deducting non-recurring gains and losses expected to grow by 9%/1%/10% respectively (mainly non-government subsidies), significantly leading the industry. 2) GRG Metrology & Test: management change + equity incentives + strategic transformation, with profit margins approaching an upward turning point, expected revenue/net profit growth of 11%/77% in 2024, exceeding market expectations. 3) Soochow Securities: in 2024, affected by special industry policies and laboratory expansion, revenue/net profit growth is expected to be -4%/-27%, while in 2025, the order volume in special industries is expected to rebound, and the integrated circuit sector has strong growth certainty, with performance expected to recover significantly.

The testing service industry is strongly correlated with macroeconomic growth and is expected to benefit from government debt relief and domestic demand stimulus policies.

The inspection, testing, and certification industry widely serves consumer goods, industrial products, pharmaceuticals, and medical industries, covering all links of research and development, production, and circulation, characterized by a large market space, stable growth, and a high correlation with macroeconomic growth. According to BV, the global testing service market size is expected to be approximately 2.3 trillion yuan in 2024, with a CAGR of about 6% from 2021 to 2024. Historically, the combined revenue growth rates of the four major comprehensive testing leaders SGS, BV, Eurofins, and Intertek can be aligned with the actual global GDP growth rate. In 2023, the national inspection and testing market size is expected to be approximately 467 billion yuan, with a CAGR of about 13% from 2014 to 2023 Since the beginning of 2023, the inspection and testing industry has experienced a slowdown in growth due to the impact of macroeconomic growth deceleration. Since late September 2024, China has made significant adjustments to its macro-control policies, launching a series of important measures and incremental policies. The macroeconomic growth is expected to recover in 2025, and the demand for testing services is anticipated to rebound. Additionally, local governments are important clients for testing institutions, and the industry is expected to benefit from this round of government debt relief.

The intensive development of the testing industry is a trend, and leading enterprises with brand, capital, and management advantages are favored.

Due to the decentralized nature of downstream operations and the localized characteristics of business development, the testing industry is highly fragmented, with the leading company, CTI, holding only about 1% market share in 2023. The firm believes that the intensive development of the third-party testing industry is a major trend, favoring leading companies that demonstrate credibility, capital, and management advantages:

(1) The industry has heavy asset characteristics: Third-party testing companies need to continuously establish new laboratories or acquire and integrate quality targets for business expansion, indicating a certain "heavy asset" logic in the industry. Leading companies, especially publicly listed ones, possess capital advantages and have more complete management systems, allowing them to continuously enhance their strength and increase market share through organic growth and external acquisitions.

(2) Since 2021, public health events and other factors have accelerated the exit of small and weak testing institutions.

(3) Domestic regulations and supervision in the testing industry are becoming stricter, addressing false testing reports.

(4) Emerging fields such as semiconductors and the low-altitude economy are developing rapidly, posing new requirements for the capital and technical strength of testing institutions: Chemical testing in areas like food and environment has matured, with many market participants, resulting in a red ocean. The third-party inspection and testing sector with faster growth and better structure is primarily focused on physical testing, including new energy vehicles, low-altitude economy, integrated circuits, electronics, and medical devices. These emerging blue ocean markets have characteristics such as: ① High investment thresholds for laboratories, with investment amounts potentially reaching double that of chemical laboratories; ② High technical barriers, requiring services for the R&D side, with stronger demands on personnel's comprehensive quality. Leading enterprises have already made layouts and are expected to benefit significantly.

Risk Warning: Changes in the macro economy and policies, intensified industry competition, laboratory production not meeting expectations, mergers and acquisitions not meeting expectations, and adverse impacts on brand and credibility, etc