Key points:
Using optical fiber communication as a starting point, Zhongtian Technology has formed a diversified industrial pattern such as optical communication, smart grids, new energy, marine equipment, and new materials. As the company's traditional main business, the power transmission and optical communication and network business always accounts for a high proportion of the company's total revenue. In 2023, the power transmission business accounted for 37.15% of the company's total revenue, and the optical communication and network business accounted for 20.22%.
As the company's second growth curve, the marine series and new energy materials business is rising year by year. The marine series CAGR was 17.02% in 2019-2022, and the marine business revenue was -48.93% in 2023 due to the slow installation progress of the sea breeze; the CAGR for new energy products was 52.70% in 2019-2023, which is expected to continue to grow at a high rate; the company completely divested its commodity trading business in 2023.
The company's performance grew steadily, and gross margin fluctuated due to business restructuring. The company's revenue has been rising steadily in recent years. In 2023, the company continued to optimize its business structure and achieved revenue of 45.065 billion yuan, an increase of 11.91% over the previous year; Q1 revenue in 2024 was 8.242 billion yuan, which is basically the same as the previous year. The company's profitability is relatively stable. The company's net profit to mother in 2022 to 2023 was 3.214 billion yuan and 3.117 billion yuan, respectively. The decline in net profit to mother in 2021 was prepared for impairment in high-end communications business. The company's comprehensive gross margin has been rising steadily in recent years. The gross margin in the marine sector has fluctuated greatly, and the gross margin in the power transmission and optical communication fields is relatively stable. The company's comprehensive gross margin in 2023 was 16.22%, of which the ocean series gross margin was 26.65%, the gross margin of optical communication and network and new energy business was 27.12% and 11.35% respectively, the gross margin of the power transmission sector was relatively stable at 14.97%, and the gross margin of copper products decreased by 1.47 pct to 3.26% year on year.
We expect China's submarine cable market size to be 130.0/162.5/16.25 billion yuan in 2024-2026, with year-on-year growth of 81.0%/25.0%/0.0%, respectively. In 2023, global offshore wind power achieved the second-highest new installed capacity in history. For six consecutive years, China has added the highest number of new offshore wind power installations in the world. Submarine cable manufacturing is located in the middle of the Haifeng industry chain, accounting for about 8% of Haifeng's total investment. The competitive pattern of leading domestic submarine cables is stable, and the high requirements for submarine cable products and technology are compounded by a high regional production capacity layout to build industry barriers, causing the gross margin of submarine cables to be at a high level. The future trend of the ocean wind industry is going deep, and flexible transmission and floating wind power can be expected in the future.
Offshore sector: The company continues to break through overseas markets, and there are sufficient orders in hand for submarine cables. The company has been deeply involved in the submarine cable business for many years, and continues to lead R&D and technical capabilities; it has outstanding terminal resource advantages, lays out production bases in Jiangsu, Guangdong and Shandong, and uses regional advantages to expand terminal resources and the sea breeze market; it has a complete submarine cable laying and fan hoisting team to form service capabilities throughout the marine engineering and submarine cable industry chain, and has rich experience in submarine cable laying and fan installation and construction projects; the company has rich customer resources and has become a core supplier of leading domestic power systems and energy companies, and continues to receive large orders from overseas customers to further expand its international position in the submarine cable market until March 2024 On the 31st, the company's marine series had on-hand orders of about 11.5 billion yuan; the company's offshore sector (submarine cable+offshore business) revenue continued to lead the industry, and gross margin was affected by the offshore sector and is at the midstream level of the industry. As the company expands overseas markets and deep-sea business areas, the gross margin of the marine sector is expected to increase further.
Optical communication sector: Competition in the optical fiber optic cable market is highly concentrated. From the demand side, 5G, optical fiber entry, gigabit optical network, and “East Digital West Computing” projects are driving a new wave of demand; from the supply side, after experiencing early contraction, fiber optic cable production gradually increased along with rising demand, and the interaction between the two is expected to drive fiber optic cable prices to bottom up in 2023-2024. The company has “prefabricated rod-fiber-optical cable” integration capabilities; the company's optical communication business revenue and gross margin have gradually rebounded since 2021, achieved revenue of 9.114 billion yuan in 2023, and the gross margin was restored to 27.12%, leading the industry; the company closely follows the needs and investment pace of operators, and its collection share is in a leading position in the industry.
New energy sector: The company's hydrogen storage is developing in a coordinated manner, driving the rapid growth of new energy sources. In the field of photovoltaics, the company has full life cycle service capabilities from resource development, turnkey services, and plant operation and maintenance. By the end of 2023, the company owned 61 photovoltaic power plants, with total installed capacity and power generation capacity of 390.26 MW and 424 million kilowatt-hours respectively. In the field of energy storage, the company has formed a “material-core-pack-station” integrated product supply and service for the entire industry chain, covering all aspects of power grid generation, transmission, distribution, and use. It can achieve an internal autonomous support rate of more than 95% of the equipment required for grid-side energy storage power plants, and an internal autonomous support rate of over 99% for equipment required for user-side energy storage power plants. The company won the bid for the project with impressive results, ranking sixth in global energy storage system shipments. The company seizes the opportunity of rising demand for overseas energy storage and actively lays out the overseas electricity and energy storage market. The company is deeply involved in the field of communication and energy storage, and has deep cooperation with representative customers such as China Mobile and China Tower. In the field of hydrogen energy, the company uses the advantages of localization to actively promote the industrialization of hydrogenation and hydrogen production equipment.
Power transmission sector: The company has the advantage of an integrated transmission and distribution industrial chain, and actively participates in the construction of UHV power grids and smart grids. In 2023, major products such as ordinary wires, special wires, OPGW, and ADSS will maintain the largest market share in the country. The company is increasing technology research and development, enriching the product matrix, aiming at the development of UHV and MV power grid products to high-end and intelligent distribution network products, and serving the digital and intelligent construction of China's power grids.
Investment advice:
We expect the company's net profit for 2024-2026 to be 3.61/4.314/4.917 billion yuan, EPS 1.06/1.26/1.44 yuan, respectively. The PE corresponding to the current stock price is 14.35/12.01/10.54 times, respectively. Considering that the company is a leading enterprise in the submarine cable and optical fiber cable industry, it has now formed a diversified industrial pattern such as optical communications, smart grids, new energy, marine equipment, and new materials. The optical communication and power grid business is growing rapidly, and the marine and new energy business is growing rapidly. In the future, with the smooth development of the Seabreeze project and continuing to expand overseas markets and deep-sea business, the company's performance is expected to grow steadily, so the first coverage gave it a “buy” rating.
Risk warning:
Raw material price fluctuation risk; policy risk; industry competition exacerbates risk.