Goertek:Mixed results and outlook

The same story likely to repeat; strong top-line but margin on downtrend

    Goertek reported inline 3Q16 EPS with strong top-line growth offset by GPMcontraction. 4Q16 EPS guidance seems softer than expected, due to one-offassets write-off. Although strong top-line growth is likely to persist, GPM couldkeep trending down on product mix. We expect the same trend (strong top-linebut weak margin) to continue in coming quarters; maintaining Hold.

    Mixed 3Q16 results, largely in line with corporate guidance and our estimates

    Goertek reported inline 3Q16 EPS of RMB0.37 (+67% YoY; +103% QoQ) andoperating profit of RMB742m (+78% QoQ; +52% YoY) on sales of RMB6.1bn(+56% QoQ; +65% YoY). Sales came in 10% higher than our estimate, butoperating profit/EPS was only in line, due to opex hike and GPM decline.Goertek attributes strong top-line to VR headset ramp-up (Sony PS VR), as wellas spec upgrades/ASP increase for acoustics (such as iPhone 7 earpod,speaker box and receiver box). However, gross margin declined 1.1ppt QoQ to21.5% (vs. our estimate of 22.9%), due to unfavorable product mix (risingcontribution from low-margin VR headset assembly).

    Soft 4Q16 guidance (due to non-core) and long-term growth drivers

    Goertek expects 4Q16 EPS to reach RMB402-653m. The mid-point of thisguidance (RMB527m) represents 33% YoY growth but 6% QoQ decline. Theguidance is lower than our estimate of RMB783, due to extra costs andexpenses with the discontinuation of non-core product lines (smartphoneCCM, and TV component/accessory). Goertek remains positive about its longtermbusiness outlook, and highlights three key growth drivers: 1) acousticscomponents (spec upgrades on the demand for stereo sound, waterproofing,etc) and smart audio system (Google Home-like devices); 2) VR and ARheadsets (Goertek is the key ODM/EMS partner of Oculus, Sony and localsmartphone brands); and 3) wearable devices (Goertek is the key ODM/EMSpartner for smart watch, wristband from LG, Huawei) and MEMS sensors.

    Valuation and investment risks

    We trim 2016E EPS by 9% (to reflect the discontinuation of non-coreproducts), but leave 2017/2018 EPS forecasts largely unchanged. We keep ourtarget price at RMB30, still derived from 20x 2017E EPS. Upside/downsiderisks include market share gain/loss and ASP increase/decline.