James Fletcher of Ethos Investment Management presented his investment thesis on Centre Testing International (China: 300012) at Best Ideas 2022.

Thesis summary:

Centre Testing International (CTI) is the largest player in the testing and inspection services industry in China, which is a structural growth industry growing at 2-3x GDP.

The company is especially strong in the life sciences segment, where it has 8% market share and is 2x bigger than any of their local competitors. TIC market size to GDP in China is 0.35% but growing quickly, and quite underpenetrated still (the global average is 2.5%).

Publicly listed TIC companies have proven to be long-term compounders due to their strong cash generation, wide moats, and structural growth. Global leaders such as SGS, Eurofins, Bureau Veritas, and Intertek are trading at 30x-40x P/E (ttm), with mid- to high-single digit topline growth. On the other hand, CTI can grow the top line at a 20% CAGR for the next five to ten years, and James forecasts that their market share will reach 1.8% from 1.0% in 2020.

CTI’s business model is so robust that since the IPO in 2009 the company has been in a net cash position and has financed M&A projects with internally generated cash. They earn the highest margins and have the strongest return profile in the industry, which they invest back into R&D and the salesforce.

CTI grew revenue by 30% in 2009 (financial crisis), 27%/19% in 2018/19 (US-China trade war), and 12% in 2020 (Covid-19 pandemic).

CTI is privately owned and well-managed compared to their main peers which are state-owned. Mr. Wan Feng, the founder, chairs the board, and Mr. Shentu Xianzhong has been CEO since 2018. He was formerly CEO at SGS China and is a well-regarded CEO in the TIC industry in China.

Trading at 52x 2021E P/E and 2% FCF yield, James forecasts double-digit annualized returns over the next five years and believes this exceptional business is attractive due to the overall sell-off in China.

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About the instructor:

James Fletcher is the founder of Ethos Investment Management. He is a portfolio manager with nearly two decades of equity research experience. Prior to starting Ethos Investment Management in 2021, James was Director and Senior Portfolio Manager of the EM SMIDcap fund at APG Asset Management where he oversaw $1 billion AUM through a concentrated, high-conviction approach. James earned a B.S. in Finance from Brigham Young University, where he graduated summa cum laude and with University Honors. He is a CFA charterholder. He is also the founder of Young Investors Society (www.yis.org), a non-profit organization that teaches financial literacy and investing concepts to over 8k high school students across the world.

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