2Q24 results exceeded our expectations

Hengtong Optoelectronics released its 2024 mid-year report: 1H24 achieved revenue of 26.614 billion yuan, a year-on-year increase of 14.83%, and net profit to mother of 1.609 billion yuan, an increase of 28.80% year-on-year. After deducting non-net profit of 1.515 billion yuan, a year-on-year increase of 25.82%. Corresponding to the single quarter of 2Q24, the company's revenue was 14.829 billion yuan, up 20.46% year on year, up 25.84% month on month; net profit to mother was 1.096 billion yuan, up 28.30% year on year, up 113.66% month on month. The performance exceeded our expectations and that of the market. We judge that it was mainly due to the increase in UHV-related revenue exceeding expectations and the improvement in the profitability of the optical communications sector.

Development trends

Marine business: Submarine cable capacity and orders are gaining momentum, and marine communications are growing steadily. By the end of June, the company's on-hand orders for submarine cable, offshore and land cable products were about 21 billion yuan, a net increase of 2.5 billion yuan over the end of 2023. Since 2024, the company has continued to win bids for many domestic and foreign sea breeze projects, covering Hainan, Shandong and other provinces in China, as well as countries such as Croatia and Iceland. In terms of production capacity, the company accelerated the production capacity increase of Sheyang Phase I, promoted the construction of the Sheyang Phase II and Jieyang base projects; at the same time, it successfully delivered a new generation of deep-sea large-scale fan installation platform ships (20MW installation capacity). Looking ahead to the future market, we believe that a number of 2H24 Jiangsu seabreeze projects are expected to enter the delivery period. Among them, the Longyuan Sheyang project is expected to fully contribute to the company's revenue and profits; the company's ability to take orders in overseas markets and domestic regions such as Hainan and Fujian is expected to fully benefit from the continued construction of the global seabreeze market in the long term. Furthermore, the PEACE project accelerated the upgrading of operational capacity, built an extension section in Singapore, and achieved relatively rapid growth in the marine communications business. By the end of June, the amount of orders in hand for the company's marine communications related business was about 5.5 billion yuan.

Smart grid: UHV construction and digital intelligent upgrading of power grids drive a relatively rapid increase in related revenue. 1H24 accelerates the overseas launch of key power products, lays out markets in Europe, Latin America, Southeast Asia, the Middle East, North Africa, etc., and achieves breakthroughs with overseas customers. In terms of product structure, the company is deepening the transformation of special cables distributed in major infrastructure, engineering construction, rail transit, and new energy markets.

Optical Communications: Accelerate global capacity deployment and drive improved profitability through cost optimization. In recent years, Hengtong has achieved communication network industry layout in various regions around the world, including Europe, South America, South Asia, Africa, and Southeast Asia. In 2024, the company will actively promote the increase in production capacity in Egypt, Indonesia and India, accelerate the construction of an optical communications industry base in Mexico, and continuously improve global industrial layout capabilities. At the same time, the company controlled the cost of core products, optimized production efficiency, and improved profitability.

Profit forecasting and valuation

The profit forecast for 2024 is basically maintained. Considering the high potential of the Sea Breeze business, which is expected to boost next year's performance, we have revised the profit forecast for 2025 7% to 3.324 billion yuan. The current stock price corresponds to 2024/25 12.1/9.6 times P/E. Maintaining an outperforming industry rating and target price of 17.13 yuan, corresponding to 16.1/12.7 times P/E and 33% upward space in 2024/25.

risks

The pace of progress of the Sea Breeze project falls short of expectations; competition for submarine cables is fierce; and the price of optical cable collection is falling.