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A surprising turn of events in China during Q3 battered Philips (PHG -16%), spurring a sharp reduction in its FY24 comparable sales growth outlook. Last quarter, the medical and personal health device maker was optimistic that business in China, which comprises around 10% of revenue, had stabilized, adding that the region should gradually contribute to positive order growth over the coming quarters. Given this context, investors are stunned by the fact that not only did China fail to add to order growth in the quarter, but that conditions deteriorated, driving today's significant sell-off.

• PHG missed earnings estimates in Q3 by a few pennies, a common occurrence for the company, making this development not overly surprising. In fact, PHG fell short of EPS expectations last quarter and still enjoyed a surging stock price. What helped dwarf this blemish was a solid adjusted EBITA margin bump of 160 bps yr/yr to 11.8%. PHG's steady EBITA margin reflects continuous productivity enhancements and higher royalty income. These actions underpinned PHG's confidence in achieving the high end of its FY24 margin outlook at around 11.5%.
• Unfortunately, margins were insufficient to white out the problems in China, where consumer and hospital demand withered. Personal Health comparable sales contracted by a double-digit percentage yr/yr in the region, weighing significantly on overall comparable sales, which came up flat yr/yr. Orders fell by a similar margin in China, dragging overall orders down by 2% in the quarter.
• Headwinds in China were an extension of those from Q2, including anti-corruption measures and a lack of impact of the National Renewal Program, which affects order and lead times. Echoing last quarter's comments, PHG stated that visibility around the ongoing impact of anti-corruption measures and the timing of the government program remains cloudy. However, unlike its remarks in July, PHG no longer conveyed optimism that China will still gradually contribute to order growth over the coming quarters. Instead, uncertainty was the central theme.
• The obstacles in China offset otherwise solid numbers from PHG's other key markets, each registering positive comparable sales growth. It also eroded PHG's former FY24 comparable sales growth guidance, targeting just +0.5-1.5% versus +3.0-5.0%. However, a slim silver lining was that PHG continues to anticipate +3.0-5.0% growth outside of China.

When removing China from the equation, PHG recorded solid numbers in Q3, including impressive progress regarding ongoing productivity actions. However, the troubles in China cannot be so quickly overlooked. China is a central component of PHG's overall business, with management reiterating the region's importance relative to long-term growth. Without a clear timetable on when stabilization, let alone recovery, will materialize, investors are expressing considerable discomfort today.

Lastly, PHG's China-related issues are an alarming sign ahead of some of its peers' upcoming quarterly reports, particularly GE HealthCare (GEHC) on October 30. GEHC derives around 30% more revenue from China than PHG.