Performance review
3Q23 performance is in line with our expectations
Hongteng Precision announced 3Q23 results: revenue fell 9% year on year to US$1,165 million, and net profit increased 10% year on year to US$55 million. The performance is generally in line with our and market expectations. We believe that the main reasons for the company's 3Q23 revenue are still under pressure: 1) the traditional consumer electronics parts business is pressured by market price competition; 2) the company continues to withdraw from the low-margin optical module business, causing the communications business to bear the pressure on revenue growth. However, in the short term, the company completed the integration of Voltaira in 3Q23 and expanded its automotive connector customer base in an orderly manner. In addition, Belkin parts revenue growth remained stable, we believe that the company's 2H23 revenue growth rate will remain steady. Looking at the medium to long term, we are optimistic that Hongteng will focus on the layout of its three types of businesses: automotive electronics, audio, and AIoT, and implement the company's “3+3” strategy. The second growth curve is worth looking forward to.
Development trends
Revenue from the traditional smartphone business is under pressure in the short term, focusing on AI's demand for new smart terminals.
3Q23 Hongteng's smartphone revenue reached US$305 million, down 14% from the previous year, mainly due to price competition pressure on traditional mobile phone products. However, considering that the new 3Q23 mobile phone product from major North American customers converted the lighting interface to Type-C, which is expected to bring new revenue growth to the company, we believe it will hedge some of the competitive pressure on the industry in the future. At the same time, from an innovative perspective, we are optimistic that the maturity of AI technology is driving the continuous upgrading of the interactive experience of consumer electronics terminals: on October 24, Lenovo showcased the first AIPC (artificial intelligence computer) at its Innovation and Technology Conference. We are optimistic that in the future, more technology hardware manufacturers will join the AI innovation field and launch different forms of consumer electronics terminals. As a supplier in the field of traditional smart phones and PC accessories, we believe that Hongteng will participate deeply in the design and development of new AI terminals. Potential future switching trends are expected to drive steady growth in the company's performance.
The “3+3” strategic transformation continues to advance. Looking at the medium to long term, we are optimistic about Hongteng's layout in the three types of automotive electronics, audio, and AIoT businesses: 1) In the automotive electronics field, the company completed the integration of Voltaira (previously known as Prettl SWH) in 3Q23 to supplement its product capabilities and customer matrix for wire and cable connection solutions; 2) in the audio and AIoT field, the company is promoting expansion projects in India and Vietnam as scheduled, while relying on Belkin's mature overseas channels for sales. Looking forward to the future, we are optimistic that the company will continue to promote the “3+3” strategy, and that the company's diversified business strategy is gradually being implemented.
Profit forecasting and valuation
The current stock price of the company corresponds to 7.8 times the 2023 and 7.6 times the price-earnings ratio of 2024. Considering that consumer electronics and computer business demand may remain under pressure in the short term, we lowered the company's 2023/2024 profit forecast 3%/5% to $1.53/165 million. We maintain our outperform industry ratings and maintain our target price at HK$1.47, corresponding to 9.0 times the 2023 price-earnings ratio and 8.7 times the 2024 price-earnings ratio. There is 14.8% upside compared to the current stock price.
risks
Global demand for consumer electronics terminals continues to weaken, and Belkin's offline channel recovery falls short of expectations.