Established optical communications leader, equity mergers and acquisitions have enabled new business expansion. Since its listing, the company has formed several major business segments for products and solutions such as optical communications, smart grids, offshore energy and marine communications, and smart cities.
At the beginning of its establishment, the company was mainly engaged in optical fiber cable production, and later entered the marine energy/smart grid/marine communications field through the establishment, fixed increase acquisition/share acquisition, and new business expansion brought new performance growth points. At the same time, the company maintains its advantages in the field of optical communication. Not only does it maintain its first-mover advantage in many technical fields of optical fiber cables, but it also established Hengtong Rockley in 2017 to enter the field of silicon optical modules and optical chips. Currently, the company's 400G optical module products have been used in small quantities in domestic and foreign markets, and 800G optical module products have been tested by leading switch equipment manufacturers.
The fiber optic cable industry is improving steadily, and demand for submarine cable+UHV power grid construction is growing rapidly. Ordinary optical fiber cables are still the main products collected by operators in the fiber optic cable sector in 2024. It is estimated that the collection demand scale of the three major operators in 2024 is basically the same as in 2023. At the same time, the construction of data centers and 400G backbone networks is driving the procurement demand for special optical fiber cables and optical fiber upgrades to G654.E products. Total investment in the State Grid is expected to increase 10% year-on-year in 2024. Among them, UHV power grids are still an important area of national construction investment. The competitive pattern in the cable and cable industry is scattered, but the increase in leading market share combined with the increase in the scale of the industry will still bring great growth certainty to listed companies. The 2024 policy promotion resonates with the demand for the backlog of seabreeze projects in the early stages. The submarine cable sector is expected to usher in a period of rapid development. The number of construction plans and tenders released in various regions may indicate that in 2024, domestic seabreeze installations will peak. At the same time, against the backdrop of a sharp increase in overseas demand for seabreeze installed equipment, insufficient supply chain production capacity has brought opportunities for domestic wind power equipment leaders such as submarine cables to go overseas. Domestic first-line submarine cable companies have obvious advantages in technology/services/assets compared to second-tier companies. Under the trend of ocean wind moving towards deep sea, first-line submarine cable companies will benefit more from the current development direction of the industry.
The company maintains its leading edge in optical fiber cables, and the submarine cable+power grid business may accelerate development. The company is firmly in the top three fiber optic cable companies, while actively deploying overseas production capacity. Changes in downstream procurement trends have upgraded the company's overall product structure. At the same time, with years of accumulated technology and manufacturing experience, scale effects have been shown, and the gross margin of the company's optical communication products has increased. In terms of smart grid business, according to the company's disclosure, UHV and smart grids will lead the growth of various businesses in 2023. In the procurement of two transmission and transformation projects of the State Grid in 2024, the subsidiary has won a bid of about 300 million yuan, and the bidding process is accelerated in 2024. In terms of the submarine cable business, the company's current technology/assets/service advantages have helped benefit from this round of offshore wind construction growth. Up to now, the company announced that submarine cable and offshore projects have won about 1,186 billion yuan since 2024, leading the scale industry since the beginning of the year.
Investment advice: The company's overall business development is steady. Among them, the optical communication business is undergoing a continuous upward cycle of gross margin, and the submarine cable and smart grid sectors are undergoing a period of growth. We expect the company to achieve net profit of 21.49/26.26/3.104 billion yuan in 2023/2024/2025, an increase of 35.7%/22.2%/18.2% year-on-year. EPS for the same period was 0.87/1.06/1.26 yuan, and the corresponding PE was 10 times higher, maintaining the “recommended” rating.
Risk warning: There is a risk of limiting factors in the development of domestic sea breezes. Domestic cable companies' overseas business may be restricted, and operators' procurement of optical fiber cables in 2024 falls short of expectations.