1H24 results are in line with our expectations

Hongteng Precision announced 1H24 results: the company achieved revenue of 2.067 billion US dollars in the first half of 2024, an increase of 16% over the previous year; achieved net profit of 32.67 million US dollars, compared with a net loss of 8.68 million US dollars in the first half of 2023, which reversed the year-on-year losses, falling below the upper limit of previous performance forecasts. The results were in line with our and market expectations. We believe that the main reasons for the company's 1H24 profit recovery were: 1) the demand for the network facility business and computer business gradually returned to normal, and the restoration of the network business showed a good trend; 2) internal quality and efficiency improvements led to a year-on-year repair of cost ratios. Looking forward to the future, we believe that the company will continue to lay out multiple fields such as connectors, cables, and optical modules in the AI field. At the same time, new headphone products from major North American customers are gradually being launched, and the long-term “3+3” strategy is being implemented at an accelerated pace.

Development trends

The new AI server connection solution is progressing in an orderly manner, and the certification progress is being closely monitored. Hongteng is currently deploying various new products such as EDSFF connectors, MCIO/MXIO/DA CEM cables, and CAMM memory slots in the AI service field. Some of these products have been introduced into the North American major customer industry chain; at the same time, the company is actively entering various new product tracks such as Overpass connectors, liquid-cooled quick connectors, and optical modules. Looking ahead to 2025, we are optimistic that Hongteng will rely on the Hon Hai System's superior industrial position in the field of cloud services to form strategic collaborations and further gain share with major North American customers.

Acquire assets related to optical modules and expand the product range in the field of AI cloud infrastructure. According to the company's announcement, the company acquired 70% of Shandong Huayun Optoelectronics's shares for RMB 0.22 billion; according to the company's official website, the company plans to complete the development of multi-mode optical products such as 800G QDD, OSFP AOC, SR8, and LPO (1 to 100 meters) by 3Q24; and complete the development of single-mode optical products by 4Q24. We believe this acquisition will further complement the company's business landscape of communication capabilities on AI servers.

Strengthen automotive high-voltage wiring capabilities, and continue to advance the “3+3” long-term strategy. According to the company's announcement, Hongteng acquired the Germany-based Auto-Kabel Group for 72.5 million euros. We believe that the superior technical foundation and product capabilities of Auto-Kabel will drive Hongteng to complete the full range of high speed+high voltage product layouts in the automotive connector field, but considering that the asset is still in a loss state in 2023, we recommend investors to pay close attention to the asset and the subsequent loss reversal progress.

Profit forecasting and valuation

The current company's stock price corresponds to 12.0 times 2024 and 8.3 times the 2025 price-earnings ratio. We maintain our 2024/2025 profit forecast of $0.178/0.257 billion. We maintain our outperforming industry rating and maintain a target price of HK$3.62, which corresponds to 13.2 times the price-earnings ratio of 2025, with 58.8% room for improvement 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.