custom single.php not working

Read Template Hierarchy article in the codex, especially pay attention to Single Post Display part.

As you can see you have only three options:

1. single-{post_type}.php
2. single.php
3. index.php

It means that you can’t create a template for posts related to blog category. So you shouldn’t use single-blog.php template, use single.php instead and add there something like this:

<?php get_header(); ?>
    <?php if ( has_category( 'blog' ) : ?>
        <h1>TEST HERE</h1>
    <?php else : ?>
        <h1>Else posts</h1>
    <?php endif; ?>
<?php get_footer(); ?>