GoerTek:Mass production of new products and lower expense ratios supported rapid earnings growth

9M16 net profit grew 21% YoY

    9M16 revenue and net profit were Rmb12.6bn and Rmb1.04bn, respectively, up 39%and 21% YoY. Q3 revenue and net profit were Rmb6.06bn and Rmb560m,respectively, up 39% and 21% YoY. The company is guiding for full-year net profit togrow 15-35% to Rmb1.44-1.69bn, which implies Q4 net profit of Rmb400-650m, up1-64% YoY.

    Revenue growth boosted by new products entering production

    In 9M16, revenue from acoustic devices and electronic accessories totaled Rmb6.8bnand Rmb5.4bn, respectively, up 11% and 97% YoY. This included Q3 revenue fromacoustic devices and electronic accessories of Rmb3.4bn and Rmb2.6bn, respectively,up 64% and 55% YoY. We believe the strong growth was mainly due to: 1) upgradedacoustic components in the newly launched iPhone resulted in higher ASP and boostedrevenue from acoustic components; and 2) higher shipments of VR products helpeddrive an increase in revenue from electronic accessories.

    GPM fell slightly, but NPM improved

    Overall gross margin came to 21.6% in Q3, down 0.4ppt QoQ. We believe this wasmainly due to rapid growth in revenue from low-margin electronic accessories.However, net margin rose to 9.3% in Q3, rising by a sizable 2.1ppt QoQ, which wasbetter than we expected. We believe this was mostly due to completing R&D of newproducts, as lower R&D outlays led to a 1.9ppt drop in the administrative expense ratio.

    Valuation: Maintain Neutral rating

    We maintain our Rmb31.00 price target, which is based on applying 23x PE to our2017E EPS. This valuation is comparable to industry peers' and roughly 1 SD below thecompany's historical mean. Our Neutral rating remains unchanged.