AAC Technology: Profit Warning Worse Than Expected; High Costs, Product Launch Delays

We are disappointed that AAC Technology 02018 warned that its net profit for the first half of 2023 would fall by 55%-65% from the year-earlier period (midpoint: CNY 140 million, CNY 0.12 per share), citing a delay in efficiency improvements. Given that about 40% of its business is iPhone-related—demand for which has been relatively resilient versus that for Android smartphones—we had expected AAC’s earnings decline to be closer to Largan’s reported 37.1% decline rather than Sunny Optical’s and Q Technology’s respective midpoint guidance declines of 67.5% and 70.0%. For now, we maintain our fair value estimate for AAC Technology at HKD 23.50 and plan to update our estimates after AAC reports first-half earnings in late August.

Similar to other optics suppliers, we estimate that AAC’s optics segment suffered from a significant discounting of its average selling prices to clear inventory, and since AAC is more exposed to low-end phones, AAC may have suffered more than peers such as Largan and Sunny. In addition, the delay in the adoption of solid-state buttons from this year’s iPhone launch should have further pressured earnings.

We assume that research and development expenses related to automotive products also weighed on profitability. We are concerned that the company’s heavy R&D spending on automotive speakers may not be commercialized as quickly as the market expects, similar to AAC’s other products, such as solid-state buttons and wafer-level glass lenses.