Management is upbeat on 2017-2018 outlookWith VR headset, acoustics, and wearable momentum, Goertek holds apositive tone on its 2017-2018 outlook and expect to see a 30% earningsCAGR in the following 2-3 years. For VR, Goertek anticipates its shipmentvolume to double on a YoY basis in 2017 thanks to aggressive orders forecastfrom its major customer (e.g. Sony). For acoustics, management views thesequential ASP increase stemming from Apple's speaker box spec upgrade inthe upcoming iPhone model as the major growth driver. To meet customers'robust order forecasts, Goertek expects 2017 capex to reach RMB2bn with themajority capacity expansion coming from acoustics and VR sides (50%/50%split).
Acoustics: focusing on the enhanced stereo sounds qualityGoertek expects its major U.S. Handset customer (Apple in our view) toupgrade its receiver box power output to speaker box level (e.g. like a dualspeaker box design) to enhance stereo sound quality in the upcoming premiumhandset model in 2H17. Management anticipates the new models acousticsASP will double on a YoY basis given the aggressive spec upgrade. Goertekbelieves both AAC and itself will remain as the dominant acoustics suppliers tothis model given their extended technology leadership over smaller suppliersresulting from increased manufacturing difficulty.
Virtual Reality: it's about to come trueForeseeing major customers' orders forecast in 2017, Goertek has expandedits VR handset capacity to 2.5-3mn units per month currently vs. 1-1.5mn unitsin 2016. In 2016/2017 Goertek anticipates its VR shipment will reach 1.5/3-4mm units (mainly on Sony contribution and persistent new customers win inchina) The company indicates that worldwide VR penetration rate willaccelerate in the following 5-10 years driven by the transition from just a pureconsumer electronics devices into more commercial/industrial applicationsthanks to continued content increase. As the major ODM with both productionscale advantage and in-house component offering capabilities (e.g. acoustics,optics), Goertek view itself as the major beneficiary to enjoy the hyper growthtrend ahead.
Valuation and investment risksOur target price is at RMB30, derived from 20x 2017EPS. Its valuation could bejustified by a better sector growth outlook. Upside/downside risks includemarket share gain/loss and ASP increase/decline.