Investment highlights

For the first time, Huatong Cable (605196) was given an outperforming industry rating, with a target price of 9.48 yuan. Based on the SOTP valuation method, a target market value of 4.8 billion yuan was given in 2024, corresponding to 11.3x P/E in 2024. We are optimistic about the company's main business of cable+oil and clothing, and the domestic and overseas markets will drive growth together. The reasons are as follows:

The “internationalization+professionalization+customization” strategy promotes high-quality development. The company's revenue/net profit CAGR for 2017-2022 was 22%/24%. We believe that the high quality performance in the company's history was mainly due to a firm differentiation strategy: 1) internationalization of sales, accounting for 64% of overseas sales in 2022 (the United States/Africa/Australia/Middle East each accounted for 53%/10%/10%/9%), which has leading advantages in international certification, high-quality customer cooperation, sales and production localization; 2) Product specialization. The company emphasizes investment in R&D of high-value-added products in segmented fields to achieve leading products such as continuous tubes and smart cables Mass production; 3) Customer customization: In developed markets such as Europe and America, the company cooperates with leading local brands/distributors to provide ODM customized products. The customer stickiness is strong and the threshold for cooperation is high.

The cable business has benefited from increased domestic concentration and vast overseas space. Domestic cable CR10 was only 12% in 2021. Compared with mature markets, there is still a lot of room for improvement in concentration, and higher quality requirements drive industry integration. On the overseas side, re-industrialization, real estate recovery, and new energy investment drive the growth in demand for US cables. Chinese companies have outstanding cost advantages, and the company relies on leading sellers to achieve channel coverage; based on population size, industrialization, urbanization, and electricity demand, Africa may become one of the most promising cable markets. The Middle East, Southeast Asia, and Latin America are also experiencing strong new demand.

The oil industry's prospects are improving, and the company is leading the technology and certification industry. We believe that medium and high oil prices and capital expenditure in the oil and gas industry are driving the oil and gas industry's prospects to improve. The company's submersible pump cables, continuous tubes and other products have broken through high technical and certification barriers (the subsidiary is one of the six continuous tubing manufacturers in the world that have obtained API-5ST certification), entered the high-end overseas market, cooperated with top domestic and foreign oil service companies such as Halliburton, Schlumberger, CNOOC, etc., and is deeply tied to downstream through ODM customized services, and is expected to launch more specialized products and achieve steady growth in the future.

What is our biggest difference from the market? The market generally believes that cable demand is growing slowly and that barriers are low, ignoring the company's overseas channels to open up growth space and increase profitability with high-value-added products. We are optimistic that the company will seize the potential of cable demand in the US, Africa, the Middle East and other regions, while the oil market is improving.

Potential catalysts: Domestic cable industry integration accelerates, overseas layout accelerates, oil and gas capital expenditure exceeds expectations.

Profit forecasting and valuation

We expect the company's 2023-2025 EPS to be 0.73/0.84/1.00 yuan, respectively, and the CAGR will be 16.9%.

For the first time, coverage gave the industry a rating of 9.48 yuan using the SOTP valuation method, corresponding to 11.3x/9.4x P/E in 2024/2025. The current stock price corresponds to 9.3x/7.8x P/E in 2024/2025, with 20.9% upside.

risks

Downstream demand fell short of expectations, raw material prices rose sharply, overseas trade policy risks and exchange rate risks.