Backplane connectors in the communications field are more valuable, and the automotive business continues to deepen customer cooperation

Dingtong Technology focuses on the research and development of high-speed communication connectors and automotive connectors and their components. In 2023, communication connectors (including components) and automotive connectors (including components) accounted for 50.97%/31.16% of revenue, respectively. The company's communication connector component products are mainly Amphenol, Morse and China Aviation Optoelectronics; customers for automotive connector components include Halbak, Moss, and Tyco Electronics. The company's communication connectors and components mainly include high-speed backplane connector components and I/O connector components. Backplane connectors are mainly used to provide reliable signal connections and conversion between the backplane and the single board, while I/O connectors are mainly used for signal transmission between the single board and the external port. The high-speed backplane connector component process is relatively complicated, there are few manufacturers with stable mass production capacity, the added value of the product is relatively high, and the corresponding value is higher.

Currently, the company is expanding its horizontal category mainly with shell cage products. In the field of automotive connectors, the company continues to deepen cooperation with existing customers such as BYD and Changan in China. At the same time, it has also developed new customers such as FAW and Saichuan Electronics, tried to develop new business fields, developed the Morse BMS business module, and obtained the BMS Gen6 battery project.

The 2023 results declined significantly due to the boom in the communications industry, and the recovery in demand indicates that an inflection point is gradually approaching

In 2023, the company's operating income/net profit attributable to mother/ net profit after deduction were 683 million yuan/67 million yuan/59 million yuan respectively, down 18.65%/60.48%/62.43% year-on-year respectively.

The main reasons are: 1) Affected by the global macroeconomic downturn and weak communications market, demand for cage (cage) products declined significantly under the dual influence of weak business demand and consumption of previous inventories, leading to a significant decline in communications revenue; 2) automotive connector products are in good demand but competitive bidding is intense; 3) under the dual effects of unsaturated demand and cost pressure, the company's overall gross margin declined, and profits declined.

Downstream demand is gradually picking up, and equity incentives have boosted further confidence. Demand for communication connector products gradually picked up in Q3 2023, and the business situation increased month-on-month. Q1 revenue in 2024 was 194 million yuan, up 19.73% year on year. Net profit due to mother/ net profit after deduction was 18 million yuan/016 million yuan respectively during the same period, down 45.11%/48.18% year on year, and the weak market situation improved. At the same time, the company is steadfastly bucking the trend and expanding product categories, and is expected to reach an inflection point in performance as demand picks up. In addition, the company issued a draft restricted stock incentive plan on March 16, and on April 8, 933 million second-class restricted shares were awarded to 52 incentive recipients at a price of 24.00 yuan/share, accounting for about 0.94% of the current total share capital. For the first time, the net profit growth rate target values for 2024/2025/2026 compared to 2023 were 50%/110%/173%, respectively.

Amphenol's industrial chain has benefited from GB200 expansion and is developing a new generation of 224G products

Nvidia unveiled the large-scale server DGX GB200 (also known as NVL72 rack server) at the 2024GTC conference in March of this year. The interconnect mode is implemented through NV Switch. Among them, the GPU and NVSwitch use copper interconnect (high-speed backplane connector), while the exterior uses an optical interconnect form (optical module to I/O connector). Blackwell architecture chips will be shipped in the second quarter of this year and production will increase in the third quarter. They are expected to be installed in customer data centers in the fourth quarter, and are expected to be launched within this year. Amphenol may be the core supplier of Nvidia's GB200 copper connectivity solutions. As the company's main customer, Amphenol contributed 26.24% to the company's revenue in 2020, up from 35.33% in 2018.

In terms of transmission rate, high-speed communication connectors are also continuously developing in the direction of “56G-112G-224G”, while putting forward higher requirements in terms of signal density, signal integrity, heat dissipation, and power consumption. Along with customers, the company is focusing on developing series products such as QSFP112G and QSFP-DD and continuously optimizing radiator components. The demand for single-channel speed has now reached 112G, and the new 224G product is currently in the development stage, benefiting from the high-speed interconnection needs of the AI industry.

Profit forecasting

We are optimistic that the company is deeply tied to downstream customers, and is expected to enter the Nvidia Blackwell architecture industry chain and benefit from its expansion. The company's revenue for 2024-2026 is estimated to be 9.41, 14.38, and 1,809 million yuan, respectively, and EPS is 1.04, 1.41, and 1.55 yuan respectively. The current stock price corresponds to PE of 39.9, 29.5, and 26.7 times, respectively. This is the first coverage, giving it a “buy” investment rating.

Risk warning

(1) Risk of a sharp decline in performance or loss; (2) risk of technology iteration; (3) risk of declining gross margin; (4) risk of equity incentive progress falling short of expectations