1H23 performance is below our and market expectations.
Hongteng reported 1H23 results: revenue fell 15 per cent year-on-year to $1.784 billion, with a net loss of $9 million, slightly below our and market expectations. Subdivided into a single quarter, the company's 2Q23 revenue fell 12% year-on-year to $922 million, 2Q23 achieved a net profit of $350000, quarter-on-quarter 1Q23 turned a profit. We believe that the company's lower-than-expected 1H23 performance is mainly due to:
1) continued weak consumer electronics demand is a drag on related income performance; 2) New business (automotive electronics, smart audio, etc.) and global layout create short-term additional expenditure.
Trend of development
The outlook of 2H23 mobile phone business is relatively conservative, waiting for the turning point of the mobile phone industry chain. The company shared at the public results meeting that considering that global mobile phone shipments may still face a year-on-year decline of about 9% in 2023, the company, as one of the major suppliers of charging accessories for major customers in North America, is guiding that its mobile phone business 2H23 revenue may be flat compared with the same period last year, converging with the overall pulling momentum of the industry chain. However, looking ahead to 2H23, North American major customers may have a potential change in charging wire interfaces, which we believe will help hedge against the impact of weak overall demand, and investors are advised to pay close attention to the innovative trend of charging accessories products.
Continuous investment in capital expenditure has promoted the company's "3-3" strategic transformation. At 1H23's public results meeting, the company shared its investment plan for capital expenditure: it is expected to invest $800 million in 2023, grow to $900 million in 2024, and fall back to a steady state of $400 million to $500 million in 2025; capital expenditure will focus on capacity expansion and global production line layout in automotive electronics, audio, and AIoT businesses, which are expected to account for 40% of revenue by 2025. We believe that in the automotive electronics business, the company has previously acquired Prettl SWH to complement its product capability and customer matrix in the wire and cable connection solution, as well as the global production capacity layout and automation production line upgrade of audio + AIoT, the growth momentum of the company's second growth curve is worth looking forward to.
Profit forecast and valuation
The company's current share price corresponds to 7.0 times 2023 and 6.3 times 2024 earnings. Considering that consumer electronics demand may still be under pressure in the short term, we reduce the company's 2023 / 2024 profit forecast by 20% to $175 million. We maintain an outperform industry rating, but as investor demand for 2H23 consumer electronics is still in the wait-and-see stage, we cut our target price by 33.2% to HK $1.47, corresponding to 8.8 times 2023 price-to-earnings ratio and 7.9 times 2024 price-to-earnings ratio, which is 25.6 per cent higher than the current share price.
Risk
Global consumer electronics terminal demand continues to be weak, Belkin offline channel recovery is not as expected.