1H22 results indicate the recovery path is on track; diversification will lead to the next rerating round
- YOFC’s 1H22 results show that the profitability of the Company’s optical fiber business recovered from the trough, in line with our expectations.
- The Company’s diversification strategy is expected to lead to the next round of rerating. We raised our net profit forecasts for 2022F–2024F after factoring in higher revenue growth and profitability for the optical fibre business.
- We raise our target price (TP) from HK$14.48 to HK$21.07, based on 12x 2022P/E (our target P/E multiple remains unchanged). Reiterate ADD.
1H22 results highlights
YOFC’s 1H22 revenue was Rmb6.391.4m, up 46.9% yoy from Rmb4,351.7m in 1H21. Its gross profit margin (GPM) was 22.5% in 1H22, up 1.9ppt yoy from 20.4% in 1H21. The Company reported a net profit of Rmb525.4m in 1H22, up 9.6% yoy from Rmb479.2m in 1H21. The slower net profit growth (vs. revenue growth) in 1H22 was due to booking of gains from changes in fair value due to an investment in a semiconductor company in 1H21. By segment, a) revenue from optical fibre preform and optical fibre was Rmb1,881.1m in 1H22, up 39.6% yoy, accounting for 29.4% of the Company’s total revenue; b) revenue from optical fibre cable was Rmb2.918.3m. up 56.2% yoy, accounting for 45.7% of total revenue in 1H22; and c) revenue from other products and services was Rmb1,592.0m, up 40.1% yoy, attributable mainly to substantial growth in revenue in power cable compared to 1H21. By geographical segment, domestic customers accounted for total revenue of about Rmb4,205.5m, up 43.8% yoy, accounting for 65.8% of total revenue in 1H22. Overseas markets reported revenue of Rmb2,185.9m in 1H22, up 53.1% yoy, accounting for 34.2% of total revenue.
Demand for optical communications expected to resume
The continuous rise in network traffic supports the construction of telecommunication networks. We maintain the view that optical communications companies, including YOFC, will benefit from resilient global demand for optical fibre, owing to the global 5G roll-out and resilient demand from the DataCom segment. In the China market, the key projects in China will drive demand for optical fibre, and potential bidding by China Mobile will be a near-term catalyst for industry pricing and shipment volume. We believe YOFC’s internationalization strategy will help it benefit from resuming demand in both China and overseas markets.
Diversification will lead to the next round of rerating
YOFC made several investments in the past two years to drive future growth and diversification. It invested in EverPro (AOC), SunStar & Broadex (optical modules), and Wuhu Tus Semi (SiC materials and foundry). In 1H22, YOFC optimized the strategic planning of major diversification areas, namely compound semiconductors, optical modules and components, industrial lasers and submarine cable engineering. The rapid growth of these sectors will create market opportunities for the Company to integrate its acquired assets and expand its business in diversified fields. YOFC’s investment in Wuhu Tus Semi (renamed Anhui YOFC Advanced Semiconductor Co., Ltd.) has attracted market attention, given its exposure to third-generation semiconductors, represented by SiC and GaN semi. It has a complete 6” production line and a cutting-edge auxiliary system, which manufactures products mainly for new energy vehicles and other fields.
Reiterate ADD with a higher target price
We raised our 2022F, 2023F and 2024F net profit forecasts by 45.5%, 48.2% and 47.1%, respectively, after factoring in higher profitability, given ASP and volume recovery. We raise our target price from HK$14.48 to HK$21.07, based on 12x 2022P/E (our target P/E multiple remains unchanged).