Established connector manufacturers, mixed reform stimulates new momentum
Huafeng Technology is a high-tech enterprise engaged in the development and production of electrical connectors. Its products are widely used in communications, defense equipment, new energy vehicles, rail transit and other fields. The company has formed an “integrated two-wing” strategic layout with defense business as the core and equal emphasis on communications business and industrial business. The company originated from the state-owned Huafeng Wireless Equipment Factory, a nationally owned enterprise established in 1958. Entering the 21st century, the company became one of the first batch of state-owned mixed ownership enterprise employee shareholding pilot units in Sichuan Province, enhancing employees' enthusiasm and creativity through the implementation of employee shareholding. The company is a listed company under the Mianyang State-owned Assets Administration Commission, and the shareholding structure is quite concentrated. As of the third quarter report of 2023, Sichuan Changhong Electronics Holding Group holds a total of 37.9% of the shares, and Hubble Investment holds 2.95% of the shares.
The business situation is improving, and R&D expenses continue to be invested
The company's revenue scale continued to expand. The compounded annual growth rate of the company's revenue for 19-23 was 14.34%, mainly due to improved downstream market sentiment and mass production of key products such as high-speed backplane connectors. Huafeng Technology's net profit to mother increased from -97 million yuan to 99 million yuan in 19-22, and its profitability continued to increase. By product, the company achieved revenue of 364 million yuan, 406 million yuan, and 195 million yuan for communications products, defense products, and industrial products in '22, respectively. By customer, the top five customers account for a relatively high revenue share. Huawei is one of the company's most important customers. In 19-21, the company's top five customers accounted for 54.21%, 60.82%, and 57.35% of sales.
The third tier of communications, defense and industry is blossoming
1) Communications products, benefiting from 5.5G expansion. One of the important application scenarios for high-speed backplane connectors is wireless base stations. 2024 is expected to be the first commercial year of 5.5G, and high-speed backplane connectors are expected to benefit. 2) Defense products, high barriers, long-term improvement. The company has more than 60 years of experience in defense interconnection technology and comprehensive advantages, and is qualified to supply leading defense enterprises such as Aerospace Science and Engineering, China Telecom, and China Military Engineering. 3) Industrial products, the industry is improving, and the categories continue to be rich. The total construction investment of urban rail transit across the country from 2014 to 2023 was 4942.350 billion yuan. In 2023, China's annual production of new energy vehicles was 81.51 million, an increase of 28% over the previous year. The continued development of the rail transit and new energy vehicle industries is expected to accelerate the upward trend in the company's industrial product boom.
Demand for computing power has exploded, and high-speed line modules are expected to open up AI growth poles 1) Overseas: GB200 clusters have been released, and “copper connections” have attracted attention. Demand for AI computing power is growing at an accelerated pace, and there may be a lot of room for growth in the next 5 years. NVIDIA unveiled the NVIDIA GB200 NVL72 large cluster at GTC, which connects 36 Grace CPUs and 72 Blackwell GPUs in a rack-scale design. Cables are an important communication connection method for this cluster, and “copper interconnection” has become one of the important characteristics of this cluster. 2) Domestic: Huawei launched a cluster solution, and the company's high-speed line modules are expected to benefit. Overseas manufacturers started their big model business earlier, domestic manufacturers may increase their investment, and domestic demand for computing power is expected to continue to be strong. To target overseas, Huawei has launched the Atlas 900 AI cluster solution, which is expected to expand a larger market with iterative upgrades. Huafeng Technology has developed high-speed line modules and plans to invest in the construction of high-speed line module production lines. The product is expected to benefit from the cluster solution and open up a new growth pole for AI.
Investment advice
The company is an established connector manufacturer under the Sichuan Changhong Electronics Group. Its products are used in the communications, defense and industrial markets. Against the backdrop of bursting demand for computing power, the company developed high-speed line module products based on high-speed backplane connector technology. The business is expected to benefit from AI computing power cluster solutions to accelerate growth and open up new growth poles for the company. The company's revenue for 24-26 is estimated to be 1,345 billion yuan, 2,116 billion yuan, and 2,756 million yuan, and net profit attributable to mother is 108 million yuan, 217 million yuan, and 312 million yuan, giving it a “buy” rating.
Risk warning
1. There may be bottlenecks in the company's production capacity;
2. There is a risk that the competitive pattern will deteriorate in the industry in which the company is located.