The notion that destiny lies in one’s own hands echoes strongly in various sectors, particularly in technology. Central to the discussion in industries such as semiconductors, robotics, and engines is the critical concept of domestic substitution. Gaining the ability to self-manufacture essential components not only empowers companies but also provides them with significant leverage on pricing strategies. The narrative surrounding fiber optics illustrates this perfectly, as it transitions into common household use with the development of 3G, 4G, and now 5G technology.

The journey to fiber optics being a household utility has been underscored by almost a decade of relentless effort from domestic optical fiber enterprises. The core of this technology lies in the fiber preform, a complex manufacturing process that dominates about 70% of the profit in cable manufacturing. Historically, domestic producers faced hurdles due to a lack of in-house capabilities, which necessitated the importation of expensive fiber preforms.

A turning point occurred in 2006 when Hengtong Optoelectronics resolved to break free from this dependence and initiated its own production of fiber preforms. After nearly a decade of dedicated effort, by 2015, Hengtong successfully commenced mass production of large-sized preforms, establishing itself as a leader in self-manufacturing while effectively reducing fiber costs to approximately 50 yuan per fiber kilometer.

Embedded in Hengtong’s philosophy is a relentless drive for innovation, expressed often as: “Failing to innovate today leads to lagging behind tomorrow, and eventually to elimination.” This sentiment rings particularly true in the fiber optics industry, characterized by its cyclical nature. Periods of technological renewal often lead to stalling investments, intensified competition, declining profit margins, and excess capacity. However, savvy companies utilize every technological shift as an opportunity to prepare for the next cycle.

As the construction of 5G networks in China stabilizes and shifts gears toward growth, the focus of the fiber optics industry is undergoing a transformation. In 2024, there has been a noticeable increase in demand for specialty fibers, as evidenced by China Mobile's tender for specialty fiber contracts, which reached an impressive 7.2 million fiber kilometers at a unit price of 82.6 yuan per fiber kilometer, outpacing the pricing of regular fibers by a notable margin.

Among these innovations, G.654.E fiber—identified for its long transmission distances and reduced relay station requirements—emerges as the favored choice for future high-capacity networks, including the anticipated 400G and 800G backbone networks. Hengtong, aware of the burgeoning opportunities in specialty fibers, has strategically positioned itself by establishing production lines for both land and marine G.654.E fibers and has optimized its manufacturing and cost control processes.

As a result of their robust research and development capabilities, Hengtong has secured a substantial share of the market, claiming 16% of the contract volumes in China Mobile’s tenders for specialty fibers in 2024-2025, placing it in a commendable second position. Moreover, the company’s expertise extends into cutting-edge arenas like quantum secure communication and artificial intelligence; it stands among the select few capable of supplying ultra-low-loss fibers requisite for quantum technologies.

In tandem, Hengtong is also accelerating its research and development in optical module products. The company has already commenced batch sales of its 400G optical modules and is on the brink of mass production for its 800G modules, after passing rigorous testing by major switch manufacturers.

Over the years, Hengtong Optoelectronics has evolved significantly within the fiber optic industry, simultaneously strategizing for a secondary growth trajectory. This new focus is on the expanding underwater cable sector, a vital facilitator of international data transfer.

The period from 2023 to 2028 is expected to witness the installation of 153 new marine communication networks globally, spanning approximately 770,000 kilometers, with about 345,000 kilometers of that potentially assignable to domestic enterprises. Although Hengtong entered the undersea cable market relatively late, it has rapidly carved out a 17% market share, solidifying its status as the third largest player within this domain.

The rapid growth of Hengtong in the undersea cable sector is attributable to its comprehensive industry chain strategy. Through strategic acquisitions, the company has created a vertically integrated operation encompassing research, manufacturing, transportation, integrated piling, laying, and maintenance—consequently enhancing Hengtong's ability to undertake extensive projects.

At present, Hengtong boasts around 20 billion yuan in orders related to energy interconnection, including subsea cables and marine engineering, alongside approximately 6 billion yuan in marine communications contracts. This robust performance in the marine cable segment has significantly bolstered the company’s overall financial results, showcasing a revenue of 42.4 billion yuan in the first three quarters of 2024, representing a 20.8% year-on-year increase. Net profit attributable to the parent company reached 2.32 billion yuan, up 28.3% annually.

Although the marine communications segment generated substantial growth, accounting for only 7% of total revenue indicates that higher margins (around 30%) achieved in that area still do not translate to a significant impact on the company's overall profitability. On the other hand, products like ultra-high-voltage smart grids and the smart energy business, which experience rapid growth yet possess lower profit margins, have pulled down the overall margins for Hengtong.

The company’s gross margin dipped to 15.2% in the initial three quarters of 2024, a decrease of 1.9 percentage points compared to the previous year. Still, there’s little cause for alarm, given the considerable orders in the marine cable segment poised to convert into revenue, which could lead to margin recovery.

Furthermore, to enhance profitability, Hengtong has made vital adjustments on the expense front. Following cost-reduction measures, the company's period expense ratio has significantly decreased from 8.4% in 2020 to 5.3% in the first three quarters of 2024, maintaining a lower rate compared to competitors like Yangtze Optical Fiber and Zhongtian Technology. However, there remains room for improvement regarding financial expenses.

By the end of the third quarter of 2024, Hengtong reported total debts amounting to 33.29 billion yuan, with interest-bearing liabilities reaching 16.99 billion yuan, accounting for 51%. This results in an annual financial expense of about 300 million yuan. The company is actively exploring avenues to widen its financing channels. In a significant initiative in 2023, Hengtong disclosed plans to spin off its subsidiary, Hengtong Marine Optical Network, and pursue an independent listing to facilitate new funding opportunities, thereby stabilizing its asset-liability structure for enhanced competitiveness.

On the asset side, Hengtong’s management remains steady. By the end of Q3 2024, its accounts receivable and notes receivable amounted to 20.71 billion yuan, reflecting a minimal increase of 1.1%, indicating a faster cash turnover compared to revenue growth. The company's net cash ratio stood at 19%, slightly down by 7.5 percentage points year-on-year. As the company prefers to concentrate repayment towards the year-end, this bodes well for potential improvements in its operating cash flow.

In conclusion, various factors collectively suggest that Hengtong Optoelectronics is well-positioned for stronger market growth ahead. By mastering core technologies, leveraging a full-spectrum industrial chain approach, and continually enhancing its operational efficiency and profitability, Hengtong has established itself as a formidable player in both the optical fiber and undersea cable markets, laying a solid foundation for future developments and success.