In the competitive landscape of the technology sector, few companies elicit as much intrigue as GoerTek Inc. in Chinese), a prominent player in the consumer electronics supply chain. On January 24, the company revealed its financial projections for 2024, forecasting a significant leap in net profit between 25.57 billion to 27.75 billion yuan, which represents an astonishing increase of 135% to 155% compared to the 10.88 billion yuan reported in the previous year. Furthermore, the anticipated net profit after excluding non-recurring items ranges from 23.22 billion to 24.94 billion yuan, indicating a staggering 170% to 190% growth.
The recent buzz surrounding GoerTek is not solely based on financial predictions. On January 20, the company announced plans to spin off its subsidiary, GoerTek Microelectronics Co. Ltd, with the intent to have it publicly listed on the Hong Kong Stock Exchange. This move is seen as a strategic pivot, especially after a prior attempt to list the subsidiary on ChiNext in China was shelved in 2024 due to unfavorable market conditions.
GoerTek first attempted a spin-off listing for its microelectronics segment in November 2020, and by the end of 2021, the Shenzhen Stock Exchange had accepted the initial public offering (IPO) application for GoerTek Micro. After undergoing two rounds of inquiries, the exchange confirmed in October 2022 that the subsidiary met the necessary issuance and listing criteria. However, as the winds of economic change swept through the market, the decision was taken to withdraw the listing application just months later.
The re-initiation of the IPO is both a hopeful and precarious endeavor. GoerTek Micro is reportedly facing its own set of challenges. The company filed its latest application for an overseas listing as it transitioned from a domestic “A share” listing to an “H share” on the Hong Kong Stock Exchange. This adaptative strategy aims to secure an international capital platform while fostering continued leadership in MEMS (Micro-Electro-Mechanical Systems) and microsystems modules, products crucial to modern electronics.
GoerTek Micro’s core operations include precision components, intelligent acoustic systems, and smart hardware solutions. In a calculated move to prepare for a robust standalone presence, GoerTek separated all MEMS-related operations in 2019, designating GoerTek Micro as the lone entity within the corporate structure responsible for MEMS microelectronics operations. This differentiation has allowed it to inherit GoerTek's established reputation both in China and globally.
Despite their close alliance—wherein GoerTek has consistently been one of GoerTek Micro’s top clients—financial indicators portray a concerning trend. In both 2022 and 2023, sales from GoerTek to GoerTek Micro accounted for approximately 11.7% and 12.7% of the latter's total revenue, respectively. Furthermore, the gross profit from their collaboration saw figures of 79 million yuan in 2022 and 68 million yuan in 2023, yielding gross margins of 21.5% and 17.9%. In comparison, the overall gross profit margins for GoerTek Micro were noticeably lower, at 18.5% and 17.2% in those years.
Additionally, a troubling pattern emerges when examining the consistency of GoerTek Micro’s performance. Since peaking in 2021, the company has been ensnared in declining revenue figures—totaling approximately 30 billion yuan in 2024, down from about 33.48 billion yuan in 2022. The net profits also reflect a similar downward trajectory, with 3.09 billion yuan in 2019 plunging to 2.43 billion yuan in the third quarter of 2024. Yet the underlying issue of dependence on externally sourced chips remains a significant concern, with annual MEMS unit shipments manufactured using internally developed chips witnessing a stark decrease from 238 million units in 2019 down to just 146 million units in 2022.
GoerTek Micro’s reliance on purchasing chips rather than producing them in-house has placed an enormous strain on its financial health. Reports indicate that between 2020 and the first half of 2023, the average gross margin for GoerTek Micro hovered around 22%, while competitors in the same field maintained margins exceeding 45%. This discrepancy underscores the vulnerabilities of GoerTek Micro’s business model, primarily dictated by its over-reliance on a single supplier, Infineon Technologies—accounting for upwards of 55% of its total procurement costs.
As indicated in its risk assessment documentation, GoerTek Micro acknowledges that any diminishment in the ability to secure critical components, especially microchips, would severely impede its operational efficacy. The implications are evident; an inability to access the necessary materials could threaten the quality of its solutions, production efficiency, and ultimately sales performance.
What compounds the precarious nature of GoerTek Micro’s outlook is its escalating dependence on a limited number of large clients. Following GoerTek’s entry into the Apple supply chain over a decade ago, revenue growth has soared, but this has come with a significant drawback: an over-reliance on a handful of key clients, notably Apple Inc. Reports from 2022 revealed that over 56% of GoerTek Micro's revenue stemmed from its largest client alone, with reliance increasing into 2024.
It’s essential to understand the ramifications of such dependence. Any fluctuations in Apple’s demand or production strategies could lead to substantial revenue shocks for GoerTek Micro, as illustrated in the past by the suspension of specific product lines due to shifts in Apple’s purchasing behavior. The looming threat of losing major contracts brings an urgent need for diversification and strategic repositioning within the landscape of consumer electronics.
Domestic competitors like AAC Technologies and Sensing Technology, along with global entities such as Knowles Corporation and Infineon, present formidable challenges in the high-stakes MEMS market. Each of these companies has carved out significant market positions, incessantly striving to outpace one another in technological developments.
GoerTek Micro, proudly self-identified as the “leading MEMS sensor company in China,” confronts a pressing struggle to maintain its status. Difficulties have become increasingly apparent since achieving record figures in 2021, with consecutive drops in performance threatening stability. The pressing question remains: what motivates the current push for an IPO amidst such pressures?
Amid reports indicating a decrease in R&D spending—historically a cornerstone of GoerTek’s innovation—pressures mount. The company had prominently invested in R&D, even outpacing its net profits to cultivate cutting-edge innovations. However, in 2023, R&D expenditures saw a decline, further signaling challenges within their operating environment. The financial landscape reflects struggles, with total revenue for the first three quarters of 2024 dropping by 5.82%. Simultaneously, the net cash flow plunged, indicating operational constraints.
The debt load as of the third quarter of 2024 stands at a concerning 170 billion yuan, entwined with an asset-to-liability ratio that suggests financial fragility compared to industry norms. As GoerTek embarks on ambitious plans to list GoerTek Micro, the resilience of its strategic vision will face rigorous testing.
Future developments in the tech space will demand keen navigation to balance the interests of both the parent company and its subsidiaries while mitigating risks tied to over-dependence on major clients. The journey ahead for GoerTek and GoerTek Micro will be defined by their ability to strategically maneuver through the shifting tides of the global electronic component landscape.