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AAC Technologies Holdings Inc 02018

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AAC’s Q2 Results Underwhelmed As Acoustics Casing Profitability Disappointed; FVE Lowered

Kazunori Ito Senior Equity Analyst

Analyst Note

| Kazunori Ito |

AAC delivered disappointing second quarter results, as profitability of the acoustics, and electromagnetic drives & precision mechanics, or ED/PM, divisions missed our expectations. Overall revenue jumped 12% year on year, as acoustics, ED/PM, and optics sales increased 8%, 11%, and 43%, respectively. Meanwhile, operating income declined 26% year on year, driven by a 1.8% contraction in gross margin and an 18% jump in research and development expense, as AAC continue to invest heavily in optics. On the margin front, acoustics and ED/PM suffered 70 and 450 basis points year-on-year contractions in gross margin, respectively. We think that continued market share gains in Android speakers haven't been enough to mitigate iPhone soft pricing, while ED/PM margin headwind indicates greater-than-anticipated margin pressure within AAC’s fast-growing casing business. We lower our 2020 operating income forecast by 25%, as we lower our gross margin assumption for acoustics and ED/PM. Meanwhile, we cut our five-year sales forecasts by an average of 8%, as we reduce our longer-term metal casing revenue assumption to incorporate lower global smartphone shipment for Huawei, AAC’s largest customer. Hence, we lower our fair value estimate to HKD 46 per share from HKD 48, implying a multiple of 17.5 times 2021 earnings. We consider shares fairly valued, as we are not fully confident as to the pace of optics progress and if it is sufficient to mitigate the challenges within acoustics and metal casing.

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Company Profile

Business Description

AAC Technologies is one of the world’s largest manufacturers of miniature acoustic components, such as speakers and receivers, for smartphones, which account for 48% of its overall revenue. Since its founding in 1993, the company has expanded into the production of other handset components, such as electromagnetic drives (haptics) and precision mechanical (metal casing), which combined make up 43% of the firm’s sales. In 2017, AAC begun shipment of mobile camera lenses, though they make up less than 5% of the company’s top line. The firm is also engaged in the production of MEMS microphones, 3D glass, RF antennas, and headsets. AAC is a major supplier to Apple, which makes up approximately 49% of the firm’s sales.

Contact
38 Gloucester Road, Unit 1605-7, China Evergrande Centre
Hong Kong, Cayman Islands
Sector Technology
Industry Communication Equipment
Most Recent Earnings
Fiscal Year End Dec 31, 2020
Stock Type
Employees 39,385