Gol shares: Will the little brother of Apple survive the performance collapse caused by order cutting?

Geer Holdings released its 2022 annual report and Q1 2023 financial report (ending in March 2023) after the close of trading on the A-share market of Changqiao on the evening of April 17, 2023. The key points are as follows:

I. Overall performance: revenue is steadily growing, but gross margin is plummeting.① Geer Holdings.SZ's total revenue for this quarter is RMB 24.1 billion, a year-on-year increase of 20%, exceeding market expectations (RMB 22.1 billion). The growth is mainly driven by the growth of smart hardware businesses such as VR virtual reality and smart game consoles.② The company's gross profit margin for this quarter is 7%, a year-on-year decrease of 6.7 percentage points. It is significantly lower than market expectations (12.4%). The gross profit margins of all three major businesses have declined due to cost pressure in the manufacturing process where the company is located.③ The company's net profit attributable to shareholders this quarter was RMB 110 million, a year-on-year decrease of 88%, far lower than market expectations (RMB 880 million);

II. Progress of various businesses: smart hardware is the core, and acoustic whole machines are a large burden. For the first time, the revenue and gross profit of smart hardware have exceeded 60%, becoming the company's largest source of performance. In the case of production problems, the intelligent acoustic whole machine has a more significant decline, especially the gross profit margin of this business has fallen sharply. Under the pull of smart hardware, the precision zero-component business has also turned the corner from decline to growth. Overall, as the smart hardware business grows, the impact of the sluggish consumer electronics business on the company has weakened, and the company's business has undergone transformation;

III. Expenses and business situation: inventory turnover has shown effective results, but profit release is still difficult. Through large-scale asset impairment, the company's inventory has been significantly optimized, and the inventory level has fallen from a high level to a reasonable level. The company's core four expense ratios for this quarter are only 7%, which is at a low level compared to the same period last year. This is mainly due to the company's scale effect and cost control measures. Due to the rise in costs, the company's profit is difficult to release and has shown significant decreases.

On the whole, Geer Holdings' financial report is not very ideal. Looking at this report, the company's only bright spot is revenue. Despite the weak industry demand and production problems, revenue still achieved 20% growth, exceeding market expectations. However, compared to revenue, the gross profit margin and profit in this report are terrible. This is mainly due to the combined effects of rising costs and production problems, which led to a significant decline in the gross profit margin of the company's intelligent acoustic whole machine business. The "plummeting-style decline" of gross profit margin and profit has overshadowed the bright spot of revenue.

Since the poor performance of this report is mainly due to the gross profit margin, can gross profit margin rebound? Dolphin Jun believes that gross profit margin has the opportunity to rebound, but there is currently no significant chance of improvement. After experiencing a large amount of asset impairment, the company's inventory has fallen to a reasonable level. The alleviation of inventory pressure is expected to restore the company's output efficiency, which will help the gross profit margin to rebound. However, the significant repair of gross profit margin still requires a significant rebound in downstream demand.

Combining the current situation of the company, although the stock price is still at a low level, this report did not bring more confidence to the market. The significant decline in gross profit margin has seriously affected the release of profitability. This is due to reasons within the industry and the company itself, which has affected the market's medium and long-term expectations for the company's performance. Performance expectations and valuation centers are inevitably pushed downward.

The following is Changqiao Dolphin's specific analysis of the Geer earnings report:

I. Overall Performance: Stable Revenue Growth, Gross Profit Plunge

1.1 Revenue Side

In the first quarter of 2023, Gerchip's total revenue was 24.1 billion yuan, a year-on-year increase of 19.9%, exceeding market expectations (22.1 billion). Although the company was previously affected by the production of intelligent acoustic whole-machine products, the revenue side still achieved nearly 20% growth, mainly driven by the growth of intelligent hardware business.

2.2 Gross Margin Side

In the first quarter of 2023, Gerchip's gross profit was 1.683 billion yuan, a year-on-year decrease of 39%, and the decline in gross profit was mainly due to a sharp decline in gross profit margin.

The company's gross profit margin this quarter is 7%, a year-on-year decrease of 6.7 percentage points, significantly lower than market expectations (12.4%). The main reasons for the sharp decline in the company's gross profit margin this quarter are: 1) the direct material cost in the cost item rises, directly squeezing the company's gross profit margin; 2) the gross profit margin of intelligent acoustic whole-machine drops significantly, dragging down the overall gross profit margin.

II. Business Progress: Intelligent Hardware Becomes Core, Acoustic Whole-Machine Huge Burden

In the intelligent hardware business, it is mainly composed of AR & VR equipment (Meta's Oculus, Pico, etc.), PS game consoles, and other products. With the continuous high growth of the business, the proportion of intelligent hardware business (revenue and gross profit) in the company has exceeded 60%. The impact of Gerchip's "Apple volume" and "headphone volume" has decreased, and the influence of new applications of intelligent hardware has increased.

2.1 Intelligent Hardware Business

In the second half of 2022, Gerchip's intelligent hardware business achieved revenue of 38.27 billion yuan, a year-on-year increase of 77.2%. With the increase in shipments of Oculus, Pico, and PS products, the company's intelligent hardware business has become the largest source of revenue.

In the second half of 2022, Gerchip's gross profit margin for intelligent hardware business was 10.1%, a year-on-year decrease of 3.7 percentage points. Under the influence of inflation, the company faced greater cost pressure in the manufacturing link, thereby squeezing the company's gross profit margin. Integrated view of the gross margin of intelligent hardware and the overall gross margin, the change of both tends to converge more and more. This is mainly due to the increase in the proportion of intelligent hardware business, which increases the impact of intelligent hardware on the overall gross margin. In the future, the change of the overall gross margin of the company will primarily depend on the change in the gross margin of intelligent hardware.

2.2 Intelligent Acoustic Products

In the second half of 2022, Goertek's intelligent acoustic products achieved revenue of CNY 13.54 billion, a year-on-year decrease of 23.9%. Goertek's intelligent acoustic products mainly include the Apple Airpods series products.

In this quarter, the revenue of Goertek's intelligent acoustic products declined, mainly due to weak shipments in the wireless earphone market and a production problem with one of the company's intelligent acoustic products. As the business of intelligent acoustic products continues to decline, its contribution to the company's revenue decreased to 22% in this quarter.

In the second half of 2022, Goertek's intelligent acoustic product gross margin "collapsed" to 2.5%, a year-on-year decrease of 7.7%. While the manufacturing cost increased, a product with production problems seriously affected the company's shipments in this quarter.

Dolphin believes that intelligent acoustic products such as Airpods are no longer able to achieve high growth in the past and their importance in the company's business will continue to weaken.

2.3 Precision Components Business

In the second half of 2022, Goertek's precision components business achieved revenue of CNY 8.32 billion, a year-on-year increase of 6.9%. Goertek's precision components business mainly includes electronic devices such as MEMS and mic. Originally, this business was mainly used in the mobile phone field, but with more use in intelligent hardware, it brings some support to the component business.

In the second half of 2022, Goertek's precision components business gross margin was 20.5%, a year-on-year decrease of 2.4%. The decline in the gross margin of the company’s precision components business is mainly due to the increase in manufacturing costs.

Dolphin believes that as the company shifts its business focus to the intelligent hardware field, downstream of the intelligent component business will gradually shift from mobile phones to intelligent hardware. The double-digit growth of intelligent hardware is expected to drive the growth of component businesses.

3. Expenses and Financial Situation: Inventory Turnover Brings Positive Results, But Profit Release Remains Difficult

3.1 Operational Indicators

①Accounts Receivable: In Q1 2023, GoerTek's accounts receivable amounted to RMB 11.412 billion, representing an increase of 46.7% YoY. From the accounts receivable to revenue ratio, GoerTek's figure for this quarter was 0.47, remaining at a relatively reasonable level.

②Inventory: In Q1 2023, GoerTek's inventory amounted to RMB 12.782 billion, representing a decrease of 0.1% YoY. From the inventory to revenue ratio, GoerTek's figure for this quarter continued to decrease to 0.53. Previously GoerTek's overall inventory level was relatively high, with risks of inventory backlog. However, after certain inventory depreciation in this financial report, the inventory level has dropped significantly and returned to a reasonable level.

3.2 Expense Ratio

In Q1 2023, GoerTek's total four expenses amounted to RMB 1.697 billion, representing a decrease of 4.6% YoY. The four expense ratio was 7%, with the decline mainly due to the decrease in sales expenses and increase in exchange gains.

1) Sales Expenses: RMB 0.145 billion for this quarter, representing a YoY increase of 2.8%, with a sales expense ratio of 0.6%. The decrease in the sales expense ratio was mainly due to the good customer relationships and the driving force of economies of scale, with the ratio remaining stable at less than 1%.

2) Management Expenses: RMB 0.553 billion for this quarter, representing a YoY increase of 16.7%, with a management expense ratio of 2.3%. With the growth in revenue, the management expense ratio decreased to less than 3% under the effect of economies of scale.

3) Research and Development Expenses: RMB 0.961 billion for this quarter, representing a YoY decrease of 13.7%, with a research and development expense ratio of 4%. The company's research and development expenses were the largest part of the four expenses, primarily invested in the R&D of intelligent hardware and other precision components.

4) Financial Expenses: RMB 0.038 billion for this quarter, representing a YoY decrease of 22.4%, with a financial expense ratio of 0.2%. The change in the company's financial expenses was mainly due to fluctuations in exchange rates.

3.3 Net profit

Guangzhou Guanggao Technology Co., Ltd.'s net profit attributable to shareholders in the first quarter of 2023 was RMB 106 million, a year-on-year decrease of 88%, far lower than the market expected RMB 880 million. The main reason why the company's profit this quarter was lower than expected was that the gross profit margin declined more than expected, mainly due to the increase in manufacturing costs and the significant decline in gross profit of acoustic whole machine.

The company's net profit margin fell sharply to 0.4% in the first quarter of 2023, mainly due to the low gross profit margin. The inventory turnover will help the company's gross profit margin to recover, but significant rebound still needs to pay attention to the improvement of downstream areas.

Changqiao Dolphin Guanggao Technology Co., Ltd. historical articles retrospective:

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April 27, 2022 Financial Report Review "VR High Growth, Guanggao Technology Co., Ltd. Strong Guidance Against the Market | Read the Financial Report"

March 30, 2022 Financial Report Review "Guanggao Technology Co., Ltd.: “Stall” is only temporary, and the future is still VR"

August 27, 2021 Financial Report Review "Guanggao Technology Co., Ltd.: "VR Light" Conceals the "Loneliness" of TWS Earphones"

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On July 23, 2021, the Longbridge App published a comprehensive report titled "GEL Stock (Part 1): What Has Happened to the Supply Chain Leader That Experienced Another Massive Selloff?".

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