1H22 results miss our expectations

Goodix Technology (Goodix) announced its 1H22 results: Revenue fell 37.15% YoY to Rmb1.83bn, and attributable net profit dropped 94.99% YoY to Rmb21mn. The results missed our expectations due to sluggish smartphone demand and intensified market competition.

Trends to watch

Touch products grew despite headwinds; automotive touch chips boost long-term growth potential. Goodix’s new OLED touch screen controllers boast a high refresh rate, low latency, and low power consumption. In 1H22, the firm’s shipments and market share continued to grow; its medium to large size touch screen controller achieved mass production, commanding the largest market share of Android tablets. Moreover, with the ramping-up shipments, the firm's automotive touch chips have been verified by mainstream tier-1 clients. In particular, its new generation of automotive touch chips covered screens from 7 to over 30 inches and entered the supply chains of domestic brands, joint ventures, and alternative fuel vehicle brands. In our view, due to the transition towards smart and electrical vehicles, demand for automotive touch products is robust. With innovative design and stable supply, the firm continues to launch new automotive products and receive a wide range of orders. Its automotive business will likely become a long-term growth driver.

Multiple product lines to have a balanced development of clients and application market. In 1H22, the firm has achieved a more balanced product mix. Revenue from fingerprint, touch, and new products accounted for 44.9%, 31.8%, and 23.3% of the total revenue. New products’ contribution to revenue rose significantly from 16% in 2021. 1) Wireless connection: The firm successfully implemented the OpenCPU application system to expand its application in water meters, gas meters, and other industries. 2) Smart audio: Its low-power and high-performance audio codec IC was verified by leading Chinese brand TWS headphones, and its clients have commercially adopted CarVoice audio products. The firm will continue to improve in-car voice applications, in our view. 3) Safety: The firm’s NFC and eSE chips have received various safety certifications at home and abroad and will soon be commercialized. In our view, the firm's expansion from the mobile phone market to wearable gear, IoT, automotive, and other areas will reduce its dependence on a single market and clients, providing long-term growth potential.

Financials and valuation

Due to weakened demand for smartphones and tablets, we cut our 2022 and 2023 earnings forecasts by 26.2% and 17.3% to Rmb3.87bn and 4.6bn. Due to rising G&A and R&D expenses, as well as provisions for impairment losses in inventory, we cut our 2022 and 2023 net profit forecasts by 74.2% and 22.1% to Rmb159mnn and Rmb507mn. The stock is trading at 51.4x 2023e P/E. We maintain OUTPERFORM but cut our TP by 21.8% to Rmb62.60 (56.5x 2023e P/E), offering 10.0% upside.

Risks

Global economic downturn; weakened demand for smartphones and tablets; intensifying competition; forex risks.