2023 results fall short of our expectations
Hongteng Precision announced 2023 results: revenue fell 7% year on year to US$4.196 billion, which is basically in line with our expectations; net profit to mother fell 24% year over year to US$129 million, lower than our and market expectations.
We believe that the company's 2023 performance is still under pressure mainly due to: 1) poor prosperity in the traditional smartphone business, 2H23 new machine preparation efforts for major North American customers may have declined slightly year-on-year; 2) poor demand for traditional servers and personal computer terminals has led to short-term growth pressure on the company's network equipment and computer business revenue.
However, looking ahead to 2024, we believe that the company's revenue share in AI infrastructure construction may increase. At the same time, the company is actively globalizing or boosting its revenue from major North American customers: 1) Thanks to FIT's past accumulation in physical connectors for network devices, we believe that the company can gradually enter new customers and increase revenue related to AI servers in 2024; 2) The company's overseas production capacity will gradually be implemented, and capital expenditure will reach 510 million US dollars in 2023, part of which is mainly used for the development of new overseas production bases, which is expected to be promoted in the future Revenue growth in the consumer electronics business. Looking at the medium to long term, we are optimistic that Hongteng will focus on its layout in the three categories of automotive electronics, audio, and AIoT businesses, implement the company's “3+3” strategy, and superimpose the company's introduction of products related to AI server components. The company's revenue growth is worth looking forward to.
Development trends
Capital expenditure is expected to increase in 2024 to expand the overseas presence of the consumer electronics business. At the public results meeting, the company indicated that capital expenditure in 2024 is expected to reach US$900 million (US$510 million in 2023), mainly for the construction and development of overseas production sites. At present, the company's acoustic product production lines in Vietnam and India have gradually been implemented and mass-produced. We believe that if additional production capacity is added in the future to closely cooperate with major North American customers, it may promote a significant increase in the company's revenue related to consumer electronics products.
Actively develop accessories related to AI servers. Hongteng Precision launched 224G high-speed I/O series products at DesignCon in 2024. At the same time, the company successively launched high-speed connectors and cable solutions for AI servers. We believe that the current industry is still at the peak of AI infrastructure construction, and Hongteng is expected to actively participate in it. At the same time, relying on the customer resources of the parent company Hon Hai Group, it will continue to benefit from industry trends.
Profit forecasting and valuation
The current company's stock price corresponds to 7.6 times the 2024 price-earnings ratio and 6.4 times the 2025 price-earnings ratio. We basically maintained the company's 2024 profit forecast at $166 million, while introducing a 2025 profit forecast of $198 million. We maintain our outperforming industry rating and maintain a target price of HK$1.47, which corresponds to 8.3 times the price-earnings ratio of 2024 and 7.0 times the price-earnings ratio of 2025, with 9.7% 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.