Huafeng Technology's revenue in 2023 was 903.3695 million yuan, down 8.17%; net profit belonging to the parent company was 72.3692 million yuan, down 26.74%, mainly affected by the decline in defense and communications business revenue. 1Q24's revenue was 226 million yuan, up 27% from the same period, and net profit to mother was 10.36 million yuan, down 11% from the same period. The company plans to distribute a cash dividend of 0.5 yuan (tax included) to all shareholders for every 10 shares, accounting for 31.85% of net profit returned to mother in 2023.
Revenue growth resumed in 4Q23 and 1Q24, and rising product structures and line modules affected profits. 2023Q4 and 2024Q1 revenue growth are positive, reflecting the company's recovery from the impact of the decline in defense demand in 2023. The company's 2024Q1 profit decline was mainly due to changes in sales product structure and low gross margin of high-speed line modules, which led to a decline in the company's overall gross margin. At the same time, the company's overseas revenue increased significantly in 2023, with a year-on-year increase of 60.84%, and the gross margin of overseas sales increased by 25.45 pcts. R&D personnel accounted for 18.9% in 2023, up 4.48pct from 2022, and R&D expenses increased 13.77% compared to 2022.
The company's operating cash flow was healthy in 2023, up 9.75% from the same period.
Master the core technology and consolidate the layout around “high speed and system”. In 2023, the company won titles such as Sichuan Technological Innovation Demonstration Enterprise, High-tech Enterprise, Sichuan Industrial Quality Benchmark, and Sichuan Engineering Research Center. Huafeng Technology also received honors such as the Technology Breakthrough Award, Best Quality Award, GM Wuling Gold Benchmark Supplier, and Excellent Supplier for Key Defense Customers. In 2023, the company obtained 69 invention patents, and obtained a total of 133 invention patents. It can be seen that R&D implementation is accelerating, and many technological breakthroughs have been achieved: 1) Defense field: As one of the most important domestic defense connection product suppliers, the company's technical indicators for products such as FMC series high-speed data connectors, JVNX series high-speed bus connectors, and JH series environmentally resistant connectors have reached the international advanced level. A 48-channel semiconductor integrated solution optoelectronic transceiver module that realizes a 100% localization solution and passes verification tests at the end customer. The high temperature performance can reach an ambient temperature of 75°C, which is 10°C higher than the industry standard level. 2) Copper signal transmission for liquid-cooled exchange servers: The company has completed the development and small-batch production of 112G high-speed backplane products with an orthogonal architecture, and the 224G products have reached a state where the sample trial production has passed. Completed the development of a liquid-cooled cable tray for servers to achieve blind insertion and robot maintenance. 200-pin dual LGAIC socket successfully replaced domestic production. 3) New energy sector: In 2023, we successfully developed high-current high-voltage connectors for NEV chip terminals, which can carry a maximum current of 280A/pin. Vehicle high-speed products have applied for more than 20 patents and have reached the advanced level in China. At the same time, temperature/vibration composite sensor products have been developed, incorporating various professional equipment and process technologies such as laser welding, resistance welding, high-precision thermostatic oil/water tanks, negative pressure defoaming machines, acceleration sensor calibration systems, and multi-channel insulation pressure resistance testing devices.
High-quality customer resources have clearly benefited from the expansion of Huawei's AI computing and communication services. Huafeng Technology is qualified to supply leading defense companies such as Aerospace Science and Engineering, China Telecom, and China Military Engineering, and has received commendations from national ministries, departments, and key research institutes and units many times. The communications sector earlier became a global supplier for Huawei, ZTE, and Nokia, and became its qualified supplier when companies such as Fenghuo Communications and Xinhua were founded. Rail transit products are supplied to CRRC China. The company's high-voltage connectors, high-voltage wiring harnesses, and charging and distribution system assemblies cover all SAIC-GM-Wuling electric models. The company is one of the main suppliers of BYD's high-voltage power distribution modules. Huawei Shengteng servers are leading domestic solutions in terms of performance and ecology, and demand is expected to accelerate in the context of AI industry promotion and domestic substitution promotion. Hubble Investments is the company's eighth largest shareholder, and Huawei is the company's largest customer. The company's high-speed backplane connectors account for about 20-30% of Huawei's share. Following the trend of domestic substitution, the company's share of supplies to Huawei is expected to increase further in the future. Meanwhile, the third phase of the company's connector industrial park is expected to be put into use in the third quarter of 2024, and plans to build a new 38,000 square meter building, which will significantly increase production capacity.
Profit forecast and investment advice: The company's total revenue for 2024-2026 is expected to be $1,302/1,806/2.03 billion, respectively, with a corresponding growth rate of 44.08%/38.70%/27.51%; net profit to mother is 1.09/1.24/148 million, up 50.28%/13.85%/19.56% year-on-year. The corresponding EPS is 0.24/0.27/0.32 yuan, corresponding to PE 101/89/75. Maintain a “Recommended” rating.
Risk warning: risk of major customer concentration, risk of communication business development falling short of expectations, market competition and technology development risk.