Apple has been "cutting orders" for nearly two years, and Goertek has not made any progress

The stock price performance of the contract manufacturing industry is mostly driven by profits. In 2021, Goertek earned 78.2 billion yuan, with a profit of 4.3 billion yuan, a year-on-year increase of 51%, leading to a peak market value of nearly 200 billion yuan. However, in the first half of this year, despite a significant increase in performance and profits, the stock price did not reverse. This is because Apple, as the largest source of revenue, has not been doing well recently. TF International Securities analyst Ming-Chi Kuo stated that the latest iPhone 16 series is estimated to have a pre-order sales volume in the first weekend that is about 12.7% lower than the iPhone 15 series last year. Given Apple's market position, its performance is almost a microcosm of the current situation in the global consumer electronics industry, where soft consumption and slowing growth are the current trends. Relying on Apple no longer helps Goertek achieve high-speed growth. The dilemma the company is currently facing is similar to the "Apple cutting orders" incident in 2022, fundamentally due to its weak technology, leaving the fate of development entirely to the downstream consumer market, resulting in performance fluctuations with industry cycles. However, nearly two years have passed, and Goertek seems to have made no progress at all.

I. Falling into Utopia Goertek is one of the giants in the domestic fruit chain contract manufacturing industry. In 2010, it successfully entered the Apple supply chain and gained fame for providing acoustic zero components for the iPhone. Around 2019, it entered the high-end Bluetooth earphone AirPods supply chain system, securing a 30% contract manufacturing share and becoming the second largest contract manufacturer for AirPods. In addition, the company is also the core contract manufacturer for many leading VR companies, holding close to 80% market share in the high-end VR/AR complete machine contract manufacturing field as of 2022. The stable cooperation with major customers has enabled the company to form three main businesses: intelligent acoustics, smart hardware, and precision zero components. Currently, the smart hardware business has replaced intelligent acoustics as the company's largest source of revenue. With the continuous positive feedback of the "fruit chain" dividend and the unique supply position among top VR manufacturers, the company's revenue and stock price have surged. In 2021, the company's market value reached a peak of 198.2 billion yuan. In the utopian development vision, the company was expected to achieve continuous breakthroughs in market value along with the global development of Apple and VR products, leading the stock price into a long bull trend. However, observing the historical stock price trend of the company reveals that this is not the case. The peak market value of 198.2 billion yuan did not last long. In 2022, the company's stock price fell by nearly 70% for the whole year. During this year, the company not only experienced the largest "black swan" event of Apple cutting orders since its establishment, but also suffered from factors such as the immaturity of AR and VR headsets, limited supply of high-quality content, and high prices. The commercialization has always been ineffective, with a significant decrease in shipments. Source: BT Finance     The new products of major clients have not been able to find a business model to realize profits, leading to a significant slowdown in upstream procurement efforts, and Apple's order cuts directly resulted in a company-wide loss of 3.3 billion. With the collapse of the two pillars supporting performance, this is the main reason for the company's significant market value decline. Looking back, whether it is the opportunity for soaring or the heavy blow of plummeting, the company's performance and stock price are closely related to the industry's prosperity. Only when the industry warms up, can the company's performance and profits hope to return to an upward trend. However, there are companies in the market that have crossed industry cycles, and the reason Goertek failed to do so is because its own strength is not that strong. Second, it is difficult to return to its peak. In the first half of this year, thanks to the recovery of the global consumer electronics industry and the resurgence of demand for some emerging smart hardware products, although the company's operating income decreased year-on-year, its profitability significantly increased, rising by 190% year-on-year.    However, the market's response to this was mediocre, and the stock price dropped significantly after the Q2 performance announcement. This is because the prosperity of the consumer electronics industry is often driven by innovative products or technologies, but the industry currently lacks this key catalyst. Apple's AI features are delayed to be launched in the iPhone 17 series rather than 16; in the second quarter of 2024, global AR/VR headset shipments decreased by 28.1% year-on-year to 1.1 million units. These two latest market news are enough to prove that the industry still lacks innovative products. Unlike the sluggish sentiment this year, in 2021, the simultaneous appearance of "Apple launching a multi-product line series + global high shipments of headphones and VR + home office consumption scenarios derived from epidemic control measures" created the company's market value peak. Even looking a hundred years ahead, it is difficult to encounter such a huge positive factor again. Therefore, from an industry perspective, it is difficult to reproduce the glory of the past. In terms of company performance, compared to Luxshare Precision, another well-known contract manufacturing company in the Apple supply chain, Luxshare Precision's net profit has maintained stable long-term growth. In comparison, Goertek's performance appears to be very abrupt The weak manufacturing capabilities of the company are the main reason for this gap. Luxshare Precision entered Apple's assembly line in 2020, forming a vertical industry chain of "parts - modules - systems." Drawing on experience accumulated in consumer electronics, Luxshare Precision, through internal growth and external mergers and acquisitions, extended its business footprint and manufactured products with a wider range of applications. (Main business of Luxshare Precision) More comprehensive manufacturing capabilities mean more products that can be manufactured, which largely ensures a stable production pace, reduces the risk of idle capacity and cost increases due to insufficient demand. The more goods produced, the lower the unit cost, and profits steadily increase with economies of scale. Goertek's products, on the other hand, are relatively thin, usually relying on concentrated shipments of a single product, running at full capacity, and quickly boosting profits in the short term. However, the early investment in production lines is fixed, and when market demand declines, the cost of starting and stopping production lines with demand fluctuations amounts to millions. As a result, profits can easily collapse. Although the company's profit margin rebounded in the first half of this year due to the industry recovery, the global headphone market growth has almost peaked, the commercialization of metaverse-related products is still a long way off, and downstream markets cannot drive demand to surge again due to the lack of revolutionary new products. At the same time, Goertek has temporarily failed to break free from the dilemma of weak manufacturing capabilities and difficult cost control. Based on this assessment, it is highly unlikely that the market value peak of 2021 will be revisited. Perhaps realizing the weakness of its own technological strength, Goertek has begun to spin off its semiconductor business GoerTek Micro for a separate listing in order to break the cycle. Three, spinning off a "Little Goertek" is meaningless On the evening of September 13, Goertek announced that it plans to spin off its holding subsidiary GoerTek Micro to list on the main board of the Hong Kong Stock Exchange. This comes after GoerTek Micro's GEM IPO was withdrawn for 4 months, restarting the IPO process. GoerTek Micro is a company in the semiconductor field mainly engaged in the research, development, production, and sales of MEMS devices and microsystem modules, covering key links in the industry chain such as chip design, product development, packaging testing, and system applications In the wave of the AI era, upgrading microphone functionality is a key step in applying AI technology to voice assistants and enhancing human-machine interaction. The advantage of high signal-to-noise ratio MEMS microphones is that they can achieve better audio capture effects to optimize human-machine interaction experiences, explore broader application scenarios, and continuously break through the commercial application ceiling. In terms of industry competition, the MEMS acoustic sensor industry has a high concentration, with Goertek leading the global market share. The reason for leading globally is that Goertek's largest customer is also Apple. The company's MEMS acoustic sensors entered Apple's global supply chain for the first time in 2011, and by 2019, with excellent quality performance, they occupied over 40% of Apple's market share. This timeline is in line with Goertek's performance. Similarly, it is not surprising that in the downstream demand market, the largest application area for MEMS remains smartphones, and the largest growth prospects are still in VR/AR. Despite appearing to be separated, Goertek's business maintains a high degree of independence from its parent company's other business segments. However, for investors, Goertek is like a mini version of Goertek, and the associated feature is still tied to the sluggish consumer electronics industry, with performance declining for three consecutive years. What's even less optimistic is that Goertek lacks sufficient chip self-research capabilities, with third-party chip purchases accounting for nearly 50% of the company's MEMS chip procurement. Also, due to its reliance on third-party chips, the company's overall gross margin has been somewhat affected. If Goertek had strong chip self-research capabilities, the development prospects would be different. However, at present, from development prospects to technological strength, Goertek is no different from its parent company Goertek, and fundamentally has not broken free from the shackles of the industry cycle. In the long-lasting capital winter, many people have been extremely averse to risks due to market conditioning, and the market valuation of Goertek will also change based on performance growth rates In 2021, the domestic semiconductor industry is in full swing, and GoerTek has taken advantage of this momentum by submitting its prospectus. Its pre-IPO valuation has exceeded 20 billion RMB. However, 2021 marks the peak of the company's performance, and it has since fallen significantly from that peak. Naturally, its valuation is finding it difficult to return to its peak. The stock price needs continuous performance to be realized, and in order to reverse its market value, the key lies in reversing its performance. Currently, both GoerTek and its parent company, GoerTek Corporation, are facing the challenge of relying entirely on the downstream consumer market due to their weak technology. Their performance and profits have always struggled to achieve stable growth across cycles. Conclusion Over the past decade, GoerTek Corporation has gone through several important development stages, but each stage has been influenced by industry technological innovations, leading to being left behind by competitors. The consumer electronics industry is characterized by clear cyclicality, and as a result, GoerTek Corporation's stock price often experiences stagnant or sharp declines. Looking optimistically, one can also anticipate that leading companies will bet on cutting-edge technologies to launch innovative products that can shake up the consumer market and boost the company's performance once again. However, as the saying goes, "Once bitten by a snake, one is scared all one's life at the mere sight of a well rope." From a product perspective, the company's position in the industry value chain is shorter. The depth of the manufacturing services provided for Apple's headphones is certainly not as deep as that for smartphones, and the binding relationship is naturally not as strong. Therefore, the "order cutting" curse remains the biggest hidden risk for the company's stock price