1H24 profit forecast is in line with our expectations

Hongteng Precision announced 1H24 performance forecast: The company expects to achieve net profit of 28-33 million US dollars in the first half of 2024. Compared with a net loss of 9 million US dollars in the first half of 2023, it will reverse losses year-on-year. We believe that the company's 1H24 performance forecast is basically in line with our expectations, mainly due to a slight increase in the cost rate due to the introduction of new products; the main reasons for the company's 1H24 profit recovery were relatively healthy: 1) the demand for network facilities and computer business gradually returned to normal; 2) internal quality and efficiency improvements led to a year-on-year restoration of the cost ratio. Looking at the medium to long term, we believe that Hongteng will continue to implement its “3+3” strategy. With the gradual implementation of the company's AI servers and new headsets for major North American customers, the company's medium- to long-term strategy is expected to be implemented at an accelerated pace.

Key points of interest

Hongteng actively lays out connectivity solutions and collaborates with parent companies to enhance the connectivity capabilities of AI computing clusters. According to the company's public results conference, Hongteng is currently actively deploying various new products such as EDSFF connectors, MCIO/MXIO/DA CEM cables, and CAMM memory slots in the AI service field; in 2024, DesignCon will launch the 224G high-speed I/O series products. Judging from industry trends, we believe that the amount of copper cables and connectors used in GB200 NVL72 cabinets has increased to a certain extent compared to traditional AI servers, and the market size continues to expand. Looking ahead to 2H24-2025, considering that Hon Hai itself has a strong industrial position on the GB200NVL72 cabinet assembly side, and Hongteng's past accumulation in physical connection solutions for network equipment, we are optimistic that Hongteng will form a strategic collaboration with parent company Hon Hai, continue to benefit from industry trends, and gradually gain a share in the AI servers of major North American customers.

Announce potential acquisitions of automotive high-voltage power distribution systems and continue to implement the “3+3” strategy. In this performance forecast, the company also announced that it is in negotiations with an independent third party to acquire assets and shares related to automobiles (including high-voltage power distribution systems). We are optimistic that it will form a good collaboration with the company's existing business of automotive connectors, car charging interfaces, etc., which is expected to accelerate the company's automotive electronics revenue growth.

Profit forecasting and valuation

The current company's stock price corresponds to 16.1 times 2024 and 11.1 times 2025 price-earnings ratio. Considering the gradual implementation of the company's new product introduction in 2024, which may lead to an increase in R&D expenses, we lowered our 2024 profit forecast by 11% to 0.178 billion US dollars; however, based on the fact that AI connectivity products and new headphone products may continue to be introduced into the supply chain of major customers in 2025, we raised the company's profit forecast by 3% to 0.257 billion US dollars for 2025. We maintain our industry rating. We believe that the R&D investment in 2024 will drive the company's AI connectivity products and headphone products to major customers in 2025, which will raise the company's valuation level to a certain extent. We switched the valuation to 2025 and raised the target price by 46% to HK$3.62, which corresponds to 13.17 times the 2025 price-earnings ratio, which has 19% room to rise from the current stock price.

risks

Global demand for consumer electronics terminals continues to weaken, and Belkin's offline channel recovery falls short of expectations.