Key points of investment:
Announcement: In the first quarter of 2024, the company achieved operating income of 19.312 billion yuan, a year-on-year decrease of 20%, and net profit to mother of 380 million yuan, an increase of 258% over the previous year. The gross margin was 9.20%, up 2.22pct year on year, and the net margin was 1.89%, up 1.44pct year on year. In 2023, we achieved operating income of 98.574 billion yuan, a year-on-year decrease of 6%, and net profit to mother of 1,088 billion yuan, a year-on-year decrease of 38%. The gross margin was 9%, and the net margin was 1%. The performance was in line with expectations.
Insufficient demand for terminals was the main reason for the decline in revenue. According to the company's financial report, 4Q23/1Q24 revenue was 246/19.3 billion yuan, respectively, down 20%/20% year-on-year. The decline in revenue is mainly due to the fact that, on the one hand, the 23 annual report shows insufficient demand for terminals in the global consumer electronics industry, leading to a decline in the company's product shipments. On the other hand, customer game console projects have entered the latter stage of the product cycle, affecting the revenue of the smart hardware business segment. According to the company's annual report for the year 23, by business, precision components revenue was 12.992 billion yuan, down 7% year on year, accounting for 13%; intelligent acoustic equipment was 24.185 billion yuan, down 7% year on year, accounting for 25%; and smart hardware revenue was 58.709 billion yuan, down 7% year on year, accounting for 60%. The important strategic position of the smart hardware business is highlighted.
Changes in the revenue structure led to an increase in the profit side in the first quarter. According to VGCharts, in February 2024, PlayStation 5 sales fell by -28.4%, and the game console business with a low gross profit level declined in the first quarter. Coupled with improving the quality of operations and reducing costs and efficiency within the company, gross margin and net margin both increased year-on-year.
Goertek builds multi-dimensional competitiveness such as brand customers, industrial chain layout, and intelligent manufacturing. (1) Card slots for many high-end VR headsets: such as Meta, Pico, Sony, HTC, etc. (2) Zero integration and upstream investment in the industrial chain: It can provide leading enterprises with design OEM and upstream integrated solutions. (3) We have diverse reserves of optical technology and the ability to mass-produce pancakes. Pancake has reduced the thickness of the VR headset by more than 50%, and already has the capacity to mass-produce Pancake modules.
The company is determined to develop XR and continues to invest in it. Goertek began to lay out the VR/AR industry in 2012, and pioneered the introduction of the world's leading 12-inch nanoimprinting production line to build the world's leading VR/AR high-end optical components industry base. In 2024, the National Virtual Reality Innovation Center (Qingdao) awarded the Optical Laboratory of Goertek Optics Technology Co., Ltd., a holding subsidiary of Goertek Co., Ltd., as the “National Virtual Reality Innovation Center (Qingdao) Optical Precision Inspection Center” and officially inaugurated and operated, with the aim of providing accurate and efficient optical technology support and inspection services for the virtual reality industry. In the long run, Apple's entry into the space computing era will also drive the further development of the entire XR industry, and Goertek is expected to benefit.
The profit forecast was lowered and the buying rating was maintained. The forecast for net profit due to mother for 24-25 billion yuan (taking into account consumer electronics demand and major customer order fluctuations), the original forecast value was 43/58 billion yuan; the estimated net profit for the additional 26 years was 3 billion yuan. The company's current stock price corresponding to PE in 24-26 is 26/21/18X, respectively. Comparable to the average PE31X for companies (Lixun Precision, Zhaowei Mechatronics, Guanghong Technology) in 2024, the average PE31X for 2024, there is room for increase of 23% for Goertek. I am optimistic about Goertek's core competitiveness in fields such as XR and smart wearables, and maintain a buying rating.
Risk warning: downstream demand falls short of expectations; risk of fluctuating orders from major customers; risk of increased competition.