GOODIX TECHNOLOGY(603160)：EARNINGS UNDER TEMPORARY PRESSURE;WATCH RAMP-UP OF NEW PRODUCTS

2021 and 1Q22 results miss our expectations

    Goodix Technology (Goodix) announced its 2021 results: Revenue fell 14.57% YoY to Rmb5.71bn, and attributable net profit fell 48.16% YoY to Rmb860mn, missing our expectations. The company also announced its 1Q22 results: Revenue decreased 38.39% YoY to Rmb874mn, and attributable net loss was Rmb51mn (down 132.26% YoY), missing our expectations. We attribute the disappointing results to rising supply chain costs and intensified competition. However, as the firm is gradually launching new products, we maintain our OUTPERFORM rating and cut our TP to Rmb80.

    Trends to watch

    Earnings from traditional business continued to decline, but Goodix maintained its leading market share. Smartphone shipment was weak in 1Q22. Due to the downturns in downstream sectors, revenue fell 38.39% YoY. Gross margin (GM) fell 3.80ppt YoY or 3.42ppt QoQ to 44.52% in 1Q22 due to intensified competition and upstream price hikes. For cell phone and tablet-related products, Goodix’s OLED touch screen controllers boast high performance with low power consumption. The firm also maintained its leading position in in-display fingerprint sensors, light sensors, multi-interactive sensors, among others. As for wearable devices, health sensor shipment soared over 300% YoY in 2021. We expect this segment to maintain high growth in the future with rising consumer awareness of health.

    Increasingly balanced structure of products, clients and revenue bodes well for long-term growth. The company continues to invest heavily in R&D. In 1Q22, its R&D expense ratio rose to 39.26%, and the efforts started paying off: 1) Internet of things (IoT) related products: Shipment of bluetooth low energy (BLE) products increased nearly 5x YoY in 2021 thanks to its high performance, low energy consumption, and advantages in radiofrequency. Such products have penetrated into a number of downstream applications, including smart watches, active capacitive pens, and electronic shelf labels. In addition, narrowband Internet of things (NB-IoT) products feature high stability and low energy consumption. 2) Automotive touch chips and audio products are poised to benefit from the transition towards smart vehicles. With high quality and superior electromagnetic compatibility (EMC), the company's automotive touch chips have been recognized by mainstream customers and its shipment has been growing rapidly. CarVoice audio products have been commercially adopted in many mainstream car models and first-tier automobile manufacturers. 3) Safety products. The company's near-field communication (NFC) chips and smartphone embedded secure element (eSE) chips were certified in 2021, and a number of trial runs have begun.

    Financials and valuation

    Due to the declining earnings from traditional business, we cut our 2022 revenue forecast by 23.5% to Rmb5.25bn, and attributable net profit forecast by 52% to Rmb617mn. We introduce our 2023 revenue forecast of Rmb5.56bn and net profit forecast of Rmb651mn. The stock is trading at 42.0x 2022e and 39.8x 2023e P/E. Given our earnings forecast revisions and a potential ramp-up of new products in 2023, we maintain an OUTPERFORM rating and cut our TP 36.5% to Rmb80 (59.7x 2022e and 56.3x 2023e P/E), offering 41.62% upside.

    Risks

    Global economic downturn; weakened demand for smartphones and tablets; fiercer competition; supply chain disruptions from COVID-19; foreign exchange risk.