Key investment points

Incident: Hengtong Optoelectronics released its report for the third quarter of 2024. 1) The company achieved revenue of 42.4 billion yuan in the first three quarters of 2024, a gross profit margin of 15.1%, a year-on-year net profit of 2.31 billion yuan, and a net profit of 2.31 billion yuan, +28% year-on-year; 2) 24Q3 achieved revenue of 15.79 billion yuan, +32% year-on-month, +6% month-on-month, gross profit of 12.8% year-on-year, -5pct month-on-month, 4pct month-on-month, net profit to mother 0.71 billion yuan, same +27% compared to -36% month-on-month.

The offshore wind power boom is gradually picking up, and order delivery is expected to contribute to growth momentum. According to the Global Wind Energy Council, the total installed capacity of offshore wind power in 2023 was 10.8 GW, and the new installed capacity of China's offshore wind power was 6.33 GW, up 25.36% year on year, accounting for 58.36% of the world's new offshore wind power installed capacity, +1 pct year on year. China's cumulative installed capacity exceeded 36 GW. Since 23Q4, Jiangsu and Guangdong have approved a number of offshore wind power projects. Zhejiang, Hebei, Liaoning and other provinces have successively announced offshore wind power plans for provincial and national management areas. From January to April 2024, the country added about 8.8 GW of offshore wind approval, which has reached 73% of the approved amount in 2023. It is estimated that the average annual installed capacity will exceed 15 GW.

Since 2024, the company has continued to win bids for domestic and foreign marine energy projects with improved offshore wind power system solutions and service capabilities, including the Shenneng Hainan CZ2 offshore wind power demonstration project, Shandong Energy's Bozhong offshore wind power G site project, and a Danzhou offshore wind power project in Datang, Hainan. As of 24Q3, the company had on-hand orders of about 20 billion yuan in energy interconnection fields such as submarine cables, marine engineering and land cable products. There are plenty of on-hand orders. As the offshore wind power boom continues to improve, it is expected that orders will gradually be implemented to maintain a high increase in performance.

There are plenty of orders in the marine communications business, and 800G optical modules are progressing smoothly. According to data from the China Academy of Information and Communication Technology, the length of the world's newly built submarine cables in 2023-2028 is about 0.77 million kilometers. It is estimated that Chinese companies can participate in submarine cables with a market size of 10 billion US dollars. The company is currently one of the top three companies in the world with R&D and manufacturing capabilities for submarine optical cables, submarine connection boxes, repeaters, and splitters. As of 24Q3, the company has an on-hand order amount of about 6 billion yuan for the marine communications business, and the current order amount for the PEACE trans-ocean cable communication system operation project exceeds 0.3 billion US dollars.

In addition, the company is actively promoting research and development of optical modules and integrated optical interconnection solutions. Currently, 400G optical module products have been applied in batches in domestic and foreign markets, 800G optical module products have been tested by leading switch equipment manufacturers, and it is expected that they will gradually be mass-produced in the future.

Profit forecast and investment rating: Considering the company's leading domestic optical cable manufacturer, the submarine cable business is expected to recover steadily, and the smart grid and optical communication industry is booming, we raised the company's anticipated net profit for 2024/2025/2026 from 1.95/2.47/2.88 billion yuan to 2.85/3.45/3.95 billion yuan, and PE corresponding to the closing price on November 13, 2024 was raised to 16.2/13.3/11.7 times, respectively.

Risk warning: downstream demand falls short of expectations, industry competition intensifies, overseas policy changes.