A few days ago, Transsion Holdings, known as the "king of African mobile phones", 688036. SH) held an online briefing for the third quarter of FY2024.

According to the financial report, the company's revenue in the first three quarters was 51.252 billion yuan, an increase of 19.13% year-on-year; the net profit attributable to the parent company was 3.903 billion yuan, an increase of 0.5% year-on-year; The non-net profit was 3.248 billion yuan, a year-on-year decrease of 7.44%.

Source: Transsion Holdings' third quarter report in 2024

The Blue Whale News reporter noticed that although the company's profits increased in the first three quarters, the performance in the third quarter suffered a waterloo, not only the company's revenue declined, but its net profit attributable to the parent company plunged sharply. After careful investigation, it is found that this may be caused by the double blow of intensified market competition and rising supply chain costs.

At the same time, the company's R&D expense ratio declined in the first three quarters, and the number of patents was far inferior to that of its peers and it was involved in a number of patent disputes.

Behind the cold performance in Q3

Transsion Holdings focuses on the smart terminal business with mobile phones as the core, covering design, R&D, production, sales and brand operation. The three major brands of mobile phones founded by him, TECNO, itel and Infinix, are widely sold in emerging markets such as Africa, South Asia, Southeast Asia, the Middle East and Latin America, and enjoy the reputation of "the king of African mobile phones" because of its high share in the African market.

In the first half of this year, Transsion Holdings performed well, with both revenue and net profit showing a growth trend. However, in the third quarter, the situation took a sharp turn for the worse, and the net profit attributable to the parent company fell sharply. According to the financial report data, the operating income in the quarter was 16.693 billion yuan, a year-on-year decrease of 7.22%; the net profit attributable to the parent company was only 1.051 billion yuan, a year-on-year decrease of 41.02%; The net profit after deduction fell to 820 million yuan, a year-on-year decrease of 52.72%.

In this regard, the company explained in the financial report that mainly due to the comprehensive impact of market competition and supply chain costs, the revenue and gross profit margin in the third quarter of 2024 decreased year-on-year, and the gross profit decreased year-on-year.

Source: Transsion Holdings' third quarter report in 2024

It is understood that the smartphone market in emerging markets such as Africa, South Asia, Southeast Asia, the Middle East and Latin America has huge potential, and the replacement of feature phones for smartphones is still an important driving factor, attracting many mobile phone manufacturers to enter, resulting in the market share of Transsion Holdings in these regions being squeezed.

Relevant data show that in the second quarter of 2024, the company's market share in Africa has fallen from 57% at the peak to 51%, while brands such as Xiaomi, realme, and OPPO have grown rapidly in the African market during the same period, with annual growth rates of 45%, 137%, and 39% respectively. It can be seen that competing products are constantly competing for the market share of Transsion Holdings.

At the same time, in the global smartphone market, Transsion fell out of the top five in the third quarter of 2024, overtaken by OPPO and vivo. The decline in global market share may also adversely affect its future market expansion and profitability.

In terms of supply chain costs, changes in the global economic situation and the impact of market supply and demand have led to an increase in the price of raw materials such as mobile phone parts. For example, the price of parts such as storage was at a low level last year, and this year's price level is much higher, increasing the cost of mobile phone manufacturers. In order to cope with market competition, it is difficult for the company to fully pass on the cost to the product price, thus compressing the profit margin. In the first three quarters of 2024, the company's gross sales margin decreased to 21.59% from 24.45% in 2023, and the net sales profit margin also decreased to about 7.6%.

In this regard, some investors asked at the earnings briefing whether the company's gross profit margin is expected to improve in the fourth quarter. The company's executives replied, "The company's gross profit margin in the third quarter of this year decreased year-on-year, but increased from the second quarter." The company's gross profit margin is comprehensively affected by factors such as competition pattern, cost changes, and the company's price strategy. ”

The R&D expense rate has declined, and there are patent disputes

In the fiercely competitive mobile phone market, R&D is undoubtedly the key for manufacturers to build competitiveness and move towards sustainable development.

In the first three quarters of 2024, the company's R&D investment totaled 1.824 billion yuan, a year-on-year increase of 7.87%. However, the company's R&D expense ratio is declining. In the first three quarters of 2024, the company's R&D expense ratio was 3.56%, a year-on-year decrease of 0.37 percentage points.

Compared with other mobile phone manufacturers, Transsion Holdings' R&D expense ratio is obviously at a disadvantage. Taking 2023 as an example, Transsion's R&D expense ratio will be 3.62%, while Xiaomi's will be about 7%, and Huawei's will be as high as 23.4%. In addition, OPPO's annual R&D expense rate has been stable in the range of 6%~8% for a long time.

In the competition for the number of patents, Transsion Holdings also lags significantly behind its peers. By the end of 2023, Huawei held more than 140,000 valid authorized patents, of which more than 90% were invention patents. OPPO has applied for more than 98,000 patents worldwide, Vivo has applied for more than 50,700 patents worldwide, and Xiaomi has more than 37,000 patents. On the other hand, Transsion Holdings has only 3,882 patents, of which only 995 are invention patents.

As of the end of June this year, Transsion Holdings had 3,656 R&D personnel, down 3.2% from the same period last year. Moreover, the number of R&D personnel in the company has also decreased from 23.09% to 19.89%.

Source: Transsion Holdings' 2024 semi-annual report

For the above R&D-related issues, the Blue Whale News reporter called the secretary of the board of directors of Transsion Holdings as an investor. The other party responded that in recent years, the company's R&D expense rate has basically remained between 3% ~ 4%, which is relatively stable, and it is expected to maintain this proportion in the past two years. It also said that there is a difference between the positioning of Transsion and other mobile phone manufacturers, other manufacturers focus on mature markets and serve high-priced people with advanced technology, while Transsion is positioned in emerging markets and has relatively low demand for R&D scale.

"However, the follow-up company also has plans to increase the R&D expense ratio, according to our R&D leader, at least to 5%. Because from the perspective of the company's long-term development, Transsion is gradually going out of Africa and increasing the price of its products. For example, our current large folding mobile phone also achieves 1100 US dollars, and we also have to grab these high-end people market, especially high-end people. The above-mentioned company person added.

It is worth noting that since July this year, Qualcomm has successively sued Transsion and related subsidiaries in relevant courts in India, Germany and other places for patent infringement, in addition to the Dutch company Philips sued Transsion in India, and Nokia is also putting pressure on Transsion to pay patent fees for its products.

Regarding the above issues, at the results meeting, the senior management also made an official response, saying that they respect the intellectual property rights of third parties, and are willing to follow the principles of fairness, reasonableness and non-discrimination, and reach an intellectual property license agreement with the patentee through friendly negotiation. TRANSSION is negotiating patents with patent owners to promote the determination of reasonable licensing fees under the framework of fairness, reasonableness and non-discrimination while respecting the intellectual property rights of others, so as to achieve a win-win situation for the entire industry chain, including patentees and licensees, and better meet the needs of consumers in emerging markets.

However, the current dispute is still inconclusive, and it remains to be seen whether it will have a greater negative impact on the company's operation and performance in the future.