Ridge Engineering Consulting is a leader in the engineering assessment industry. Its objective and professional services have established good credibility, built a brand moat and continued to accumulate high-quality customer resources. Driven by policy support and demand for engineering quality, the Company’s business has penetrated into government projects, and its corporate business further penetrates into property and insurance customers, continuously expanding space in the blue ocean market. In the process of creating high-quality products and services, the Company has accumulated advantages in talents, technologies, products and services, which empower a sustainable development. Affected by the downturn in the real estate industry, the Company’s performance is under short-term pressure. With the continuous optimization of customer and business structure, it is likely to gradually resume high profitability, and the long-term development is worth expecting. We give it a target market cap of Rmb3.5bn, equivalent to a target price of Rmb23, and initiate our coverage with a “BUY” rating.

Company profile: Engineering assessment business take the lead, and on-site management and consulting business are under expansion.

Established in 2010, Ridge Engineering Consulting pioneered the engineering assessment market and leveraged the first-mover advantages to accumulate high-quality customer resources, and successfully listed on the ChiNext board in Apr 2021. The Company has a concentrated shareholding structure and owns eight subsidiaries and one branch company after the high-efficiency development of more than ten years with its main business radiating across China. As the Company’s leading business, engineering assessment has become a major source of revenue, and on-site management and consulting services are also expanding in an all-round way to promote revenue growth. In 2022, due to the impact of the real estate industry downturn, the Company's performance was under short-term pressure, but as the Company is actively optimizing its customer and business structure, its long-term profitability is likely to improve.

Originating from real estate and expanding to government projects, engineering assessment controls the safety and quality of projects.

Engineering assessment originated from the demand of real estate for improving engineering quality. Different from traditional engineering oversights, engineering assessment is oriented to customer needs, with quality improvement as the core and more emphasis on service to improve the comprehensive benefits of the projects. This industry is featured with obvious marketization characteristics, and local assessment companies are more suitable for the needs of engineering construction in China with relatively prominent competitiveness amid the pluralistic competition pattern. In recent years, the national policy support has continued to deepen, encouraging government to purchase engineering assessment services, and further expanding the application fields of engineering assessments, which will likely drive the new application expansion, such as existing residential property and

infrastructure, creating a broader development space for companies in the industry.

Brands create competitive moats, and competitiveness accumulation furthers growths.

Brand building: The Company has taken multiple measures to build corporate culture, implement integrity and self-discipline, strengthen internal control to ensure its own credibility; actively organize diverse industry activities and continuously increase its influence. As of 1Q23, the Company has established cooperation with more than 500 real-estate customers. And its brand advantage has built a competitive moat for development.

New business: The Company grasps policy dividends and penetrates into the government projects. It has cooperated with more than 150 government departments and eight national high-tech development zones to create a number of high-quality cases. The Company continues to open up new blue ocean markets of its businesses and provides customized services and solutions to meet the demands of self-owned property companies and insurance clients to create new revenue growth points.

Product R&D: The Company pays great attention to innovative R&D, continues to expand the R&D team, and increases R&D investment to promote new product development. As of 1Q23, it has obtained 62 copyrights and 32 patents in total. The Company has carefully created digital products or services including database, engineering assessment app, self-built housing and small-scale project safety supervision platform, and expands the application of its products and services in new business fields to help customers reduce costs and improve quality and efficiency. The Company has participated in the setting of 20 standards by leveraging its experience and resources accumulated in a long term, promoting the industry standardization.

Operating status: As an asset-light company, the Company’s major operating costs are employee salaries. It kept the debt-to-asset ratio below 20% in the past two years and presented high-quality account receivables. Before 2020, the Company had excellent profitability with a gross profit margin (GPM) of more than 30% and a return on equity (ROE) of more than 50%. After 2022, its profitability will likely gradually pick up, following the recovery of the Company’s main business and the continuously optimized costumer and business structure. Driven by the advantages of talents, technology, products and services accumulated over the years, the Company’s long-term sustainable development is worth looking forward to.

Potential risks: The macro economy under pressure; intensified market competition; increasing costs such as employee salaries; continuously declining prosperity of the real estate industry; accounts receivable unable to be collected in time.

Investment strategy: Under the background of improvement in the macro economy, Ridge Engineering Consulting’s three main businesses of engineering assessment, on-site management and consulting services, are likely to recover and improve. Driven by the continuous growth in the demand for engineering quality and the policy encouragement of the engineering consulting service development, the Company will further tap new markets. We forecast the Company’s operating revenue at Rmb665mn/905mn/1,119mn and attributable net profit (ANP) at Rmb56mn/127mn/166mn, corresponding to EPS of Rmb0.37/0.83/1.08. Based on PE and PB valuations, we forecast that the Company’s reasonable market cap is around Rmb3.5bn, with a target price of Rmb23. We initiate coverage with a “BUY” rating.