GoerTek: Profits plummet, when will it stand up again?

GoerTek released its Q3 2023 earnings report after the A-share market closed on October 26, 2023 (as of September 2023), with the following highlights:

1. Overall Performance: Decline in Revenue and Gross Profit, but Exceeding Market Expectations.① In this quarter, GoerTek achieved a total revenue of 28.8 billion yuan, a YoY decline of 5.8%, slightly exceeding market expectations (28.3 billion yuan). The decline in revenue was mainly due to the drag from the intelligent acoustic whole machine business. ② The company's gross profit margin for this quarter was 10.1%, a YoY decrease of 3.3 percentage points, slightly exceeding market expectations (9.5%). The decline in gross profit margin was mainly due to the significant decline in the gross profit margin of intelligent acoustic whole machines and intelligent hardware, which directly affected the company's overall gross profit margin.

2. Expenses and Operating Conditions: Basic Inventory Clearance, Potential Improvement in Profit. GoerTek had inventory of 14.245 billion yuan in Q3 2023, a YoY decline of 25%. After the previous inventory clearance, GoerTek currently has a relatively low overall inventory level. The company's core four expense ratio for this quarter was 8.2%, mainly due to the significant cost reduction measures implemented by the company this year. Other expenses, excluding financial expenses, have been effectively controlled.

Overall, GoerTek's Q3 earnings report was satisfactory. The company's revenue and gross profit margin for this quarter were slightly better than market expectations, but it should not be overlooked that both figures still showed a significant YoY decline, mainly due to the impact of the intelligent acoustic whole machine and intelligent hardware businesses.

Considering the current inventory situation, after the inventory clearance in the previous period, GoerTek's inventory has fallen to a relatively low level. Dolphin Research believes that as the industry chain inventory is cleared, the company's business progress is expected to rebound. However, it may be difficult for the company's profitability, which has already declined, to improve rapidly, and it may still be trapped in a situation of increasing revenue without increasing profit.

Although the company will benefit from the recovery of the consumer electronics industry, the current valuation corresponding to the company's market value is still not low after the profit decline.

Here is Dolphin Research's specific analysis of GoerTek's earnings report:

1. Overall Performance: Decline in Revenue and Gross Profit, but Exceeding Market Expectations

1.1 Revenue

In Q3 2023, GoerTek achieved a total revenue of 28.8 billion yuan, a YoY decline of 5.8%, slightly exceeding market expectations (28.3 billion yuan). The decline in revenue narrowed down. Although the company's intelligent hardware still achieved growth this quarter, it ultimately declined due to the impact of the decline in the intelligent acoustic whole machine business.

2.2 Gross Margin

In the third quarter of 2023, GoerTek achieved a gross profit of 2.919 billion yuan, a year-on-year decrease of 28.7%. The significant decline in gross profit was mainly due to a sharp decline in gross profit margin.

The company's gross profit margin for this quarter was 10.1%, a year-on-year decrease of 3.3 percentage points, slightly higher than market expectations (9.5%). The quarter-on-quarter increase in gross profit margin was mainly due to the seasonal increase in shipments of high-margin precision electronic components, such as Apple's smartphones, in the third quarter.

The overall gross profit margin for this year has declined compared to the previous year, mainly due to a significant decline in the gross profit margin of smart acoustic devices and smart hardware (both have dropped to single digits), directly affecting the company's gross profit margin.

2. Expenses and Operating Conditions: Basic inventory clearance, potential improvement in profits

2.1 Operating Indicators

Accounts Receivable: In the third quarter of 2023, GoerTek's accounts receivable reached 17.185 billion yuan, a year-on-year increase of 46.7%. The accounts receivable to revenue ratio for this quarter was 0.6, still relatively high.

Inventory: In the third quarter of 2023, GoerTek's inventory was 14.245 billion yuan, a year-on-year decrease of 25%. The inventory to revenue ratio for this quarter continued to decline to 0.5. After the previous inventory clearance, GoerTek's current inventory level is relatively low. After the inventory clearance in the company and the industry chain, the company is expected to regain growth.

2.2 Expense Ratio

In the third quarter of 2023, GoerTek's total expenses amounted to 2.359 billion yuan, a year-on-year increase of 4.3%. The expense ratio was 8.2%, which increased slightly, mainly due to the increase in interest expenses and the decrease in exchange gains. 1) Sales Expenses: In this quarter, sales expenses were 155 million yuan, a YoY increase of 6.2%, with a sales expense ratio of 0.5%. The company's sales expense ratio remained relatively stable overall.

2) Administrative Expenses: In this quarter, administrative expenses were 605 million yuan, a YoY increase of 0.7%, with an administrative expense ratio of 2.1%. With the company's revenue growth, the administrative expense ratio has been maintained below 2.5% due to economies of scale.

3) Research and Development Expenses: In this quarter, research and development expenses were 1.3 billion yuan, a YoY decrease of 16.4%, with a research and development expense ratio of 4.5%. Research and development expenses account for the largest proportion among the four expenses, mainly invested in the research and development of smart hardware and other precision components. Considering the company's employee compensation payable, the company has clearly controlled employee expenses this year and made significant adjustments in research and development personnel.

4) Financial Expenses: In this quarter, financial expenses were 299 million yuan, a YoY increase of 848%, with a financial expense ratio of 1%. The change in the company's financial expenses is mainly due to the increase in borrowings, resulting in increased interest expenses, and the fluctuation of exchange rates leading to a decrease in exchange gains.

2.3 Net Profit

Geely's net profit attributable to shareholders in the third quarter of 2023 was 470 million yuan, a YoY decrease of 73.3%, lower than market expectations (680 million yuan). The main reason for Geely's lower-than-expected profit this quarter is the impact of financial expenses and other non-operating factors.

The net profit margin of the company in the third quarter of 2023 rebounded to 1.6% MoM, mainly due to the impact of seasonal fluctuations in gross profit margin. However, the company's net profit margin is still at a relatively low level and has not shown significant improvement.

Dolphin Research's historical articles on Geely:

Earnings Season

April 18, 2023, Earnings Report Review: "Geely: Can it withstand the impact of order cancellations on its performance, being Apple's subordinate?" Link

August 30, 2022, Earnings Report Review: "Geely: Why did the VR segment, which was growing rapidly, hit the pause button?" Link

April 27, 2022, Earnings Report Review: "Strong Growth in VR, Geely Continues to Lead Against the Market" Link In-depth Analysis

• March 30, 2022 Earnings Report Review: "GoerTek: 'VR' is just a temporary setback, the future is still bright" (link)
• August 27, 2021 Earnings Report Review: "GoerTek: 'VR' overshadows the 'loneliness' of TWS earphones" (link)

Company In-depth Analysis

• October 11, 2022: "GoerTek's Redemption: Empowered by ByteDance's Pico" (link)
• August 20, 2021: "GoerTek (Part 2): The Metaverse is too far away, VR gaming consoles are already in high demand" (link)
• July 23, 2021: "GoerTek (Part 1): What did the leading fruit chain experience in another round of sharp decline?" (link)

Industry In-depth Analysis

• June 17, 2022: "Consumer Electronics: Apple stands strong, Xiaomi perseveres" (link)

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