AAC Technologies Holdingsimg3.gelonghui.com/pdf201711/pdf20171116212235600.pdfAAC Technologies...
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Equity Research
November 13, 2017
AAC Technologies Holdings
Raise TP to HK$228, BUY for further clarity in optics business
Investment Focus
Maintain BUY
Action
To factor in the faster than expected growth of the optics and 3D glass businesses, we raise our FY18/19 earnings forecasts by 9%/17%. We recommend investors BUY AAC, as it is a key beneficiary of the rising adoption of 3D sensing in smartphones. Our new target price of HK$228 is based on SOTP valuation, implying 32x FY18e.
Reasoning
Further clarity in AAC’s optics strategy: based on recent industry developments, such as AMS/Sunny cooperation, we become more confident that 3D sensing will be the major differentiation factor for Chinese smartphones in 2018. During its analyst briefing, AAC disclosed its lens shipments exceeded 10mn/month in 3Q17; and it expects its plastic lens capacity to reach 30mn/month by 1H18 and hybrid lens capacity to reach 5–10mn/month by end-2018. By leveraging its innovative WLG (wafer-level glass) technology and fast- growing lens capacity, we expect AAC’s lens business will grow 637%/75% in 2018/19, and contribute 10% of group sales in 2019.
Limited downsides in acoustic and haptics: We expect AAC’s acoustics/haptics & RF mechanics businesses to grow 30%/33% YoY in 2017, driven by: 1) rising adoption of advanced accoustics platforms and haptics in Android smartphones as well as rising 3D glass shipments. We see limited market share risks in both business in 2018 because of the slower-than-expected growth of its competitors, such as Luxshare.
Earnings forecast and valuation
After the revision, we expect AAC to achieve 31%/40% earnings growth in 2017/18e, and for its optics business to contribute 10% of group sales in 2019. We derive a new TP of HK$228 based on our SoTP valuation (+52% from prior TP of HK$150), implying 32x FY18 EPS (HK$107.4 for acoustics, HK$71.1 for haptics & RF mechanics, HK$47.4 for optics, and HK$2.1 for MEMS).
Risks
Intensified competition in acoustics and haptics. Slower than expected adoption of 3D sensing cameras in Android smartphones.
Ticker 02018.HK
CICC investment rating BUY
Last close HK$169.40
CICC target HK$228.00
52wk price range HK$177.90~64.24
Market cap (bn) HK$207
Daily value (mn) HK$715.97
Shares outstanding (mn) 1,222
Free float (%) 100
Daily volume (mn sh) 4.84
Business sector Electronic Components
(Rmb mn) 2015A 2016A 2017E 2018E
Revenue 11,739 15,507 20,645 28,504
(+/-) 32.2% 32.1% 33.1% 38.1%
Net profit 3,107 4,026 5,279 7,415
(+/-) 34.1% 29.6% 31.1% 40.4%
EPS 2.54 3.29 4.32 6.07
BPS 9.29 11.63 14.63 18.97
DPS 0.77 1.07 1.32 1.73
CPS 3.08 3.94 3.52 6.45
P/E 55.8 46.0 33.6 23.2
P/B 15.3 13.0 9.9 7.4
EV/EBITDA 41.4 32.4 23.7 16.2
Dividend yield 0.5% 0.7% 0.9% 1.2%
ROAA 20.9% 19.8% 19.5% 22.1%
ROAE 30.2% 31.5% 32.9% 36.1%
Source: Wind, Bloomberg, company data, CICC Research
Leping HUANG Jiaying ZONG
Analyst Associate [email protected]
SAC Reg. No.: S0080117030005
SFC CE Ref: AUZ066
SAC Reg. No.: S0080516080003
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CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
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Financial summary Financial statement (Rmb mn) 2015A 2016A 2017E 2018E
Income statement
Revenue 11,739 15,507 20,645 28,504
COGS -6,867 -9,064 -12,235 -16,902
Selling expenses 803 763 934 1,232
Administrative expenses 0 0 0 0
Other ops income (expense) 0 0 0 0
Operating profit 3,387 4,663 6,081 8,473
Finance costs 0 0 0 0
Other income (expense) 71 37 93 144
Profit before income tax 3,435 4,633 6,080 8,538
Income tax -325 -609 -799 -1,122
Minority interest 0 0 0 0
Net profit 3,107 4,026 5,279 7,415
EBITDA 4,182 5,724 7,582 10,644
Recurrent net income 3,107 4,026 5,279 7,415
Balance sheet
Cash and bank balances 2,224 3,864 3,724 3,982
Trade and bill receivables 4,239 5,568 7,524 10,551
Inventories 1,718 2,623 3,172 4,829
Other current assets 0 774 774 774
Total current assets 8,181 12,829 15,194 20,136
Fixed assets and CIP 7,065 9,479 12,698 15,284
Intangible assets and others 1,175 1,950 1,935 1,918
Total non-current assets 8,239 11,428 14,633 17,202
Total assets 16,420 24,257 29,827 37,338
Short-term borrowings 1,159 3,304 5,000 4,000
Trade and bill payables 2,246 4,377 4,587 7,795
Other current liabilities 921 1,445 1,445 1,445
Total current liabilities 4,326 9,125 11,032 13,240
Long-term borrowings 649 789 789 789
Total non-current liabilities 740 917 917 917
Total liabilities 5,066 10,042 11,949 14,157
Share capital 1,228 1,228 1,222 1,222
Retained profit 10,079 12,961 16,630 21,933
Equity 11,354 14,215 17,878 23,181
Total liabilities & equity 16,420 24,257 29,827 37,338
Cash flow statement
Pretax profit 3,435 4,633 6,080 8,538
Depreciation & amortization 708 958 1,313 1,949
Change in working capital -286 -286 -2,295 -1,476
Others -96 -493 -800 -1,124
Cash flow from operations 3,760 4,812 4,298 7,888
Capital expenditure 2,434 4,040 -4,518 -4,518
Others -4,903 -8,157 0 0
Cash flow from investing -2,469 -4,117 -4,518 -4,518
Equity financing 0 0 0 0
Bank borrowings 300 2,201 1,696 -1,000
Others -1,021 -1,404 -1,616 -2,112
Cash flow from financing -721 797 80 -3,112
Foreign exchange gain (loss) 51 149 0 0
Net changes in cash 621 1,641 -140 258
Financial ratios 2015A 2016A 2017E 2018E
Growth ability
Revenue 32.2% 32.1% 33.1% 38.1%
Operating profit 30.3% 37.7% 30.4% 39.3%
EBITDA 33.6% 36.9% 32.5% 40.4%
Net profit 34.1% 29.6% 31.1% 40.4%
Profitability
Gross margin 41.5% 41.5% 40.7% 40.7%
Operating margin 28.8% 30.1% 29.5% 29.7%
EBITDA margin 35.6% 36.9% 36.7% 37.3%
Net margin 26.5% 26.0% 25.6% 26.0%
Liquidity
Current ratio 1.89 1.41 1.38 1.52
Quick ratio 1.49 1.12 1.09 1.16
Cash ratio 0.51 0.42 0.34 0.30
Liabilities / assets 30.9% 41.4% 40.1% 37.9%
Net debt / equity net cash 1.6% 11.5% 3.5%
Return
RoA 20.9% 19.8% 19.5% 22.1%
RoE 30.2% 31.5% 32.9% 36.1%
Per-share data
EPS (Rmb) 2.54 3.29 4.32 6.07
BPS (Rmb) 9.29 11.63 14.63 18.97
DPS (Rmb) 0.77 1.07 1.32 1.73
Cash flow per share (Rmb) 3.08 3.94 3.52 6.45
Valuation
P/E 55.8 46.0 33.6 23.2
P/B 15.3 13.0 9.9 7.4
EV/EBITDA 41.4 32.4 23.7 16.2
Dividend yield 0.5% 0.7% 0.9% 1.2%
Source: Company data, CICC Research
Company description Founded in 1993, AAC has grown into a world-leading supplier of micro component solutions for the communications, IT, and consumer electronics markets. The company designs, manufactures and distributes acoustic and non-acoustic products, including radio frequency (RF), integrated, optical, Li-ion polymer battery, and haptic solutions. AAC owns 11 R&D centers and has >500 senior research staff and engineers. It also has set up four production facilities in China, all of which use cutting-edge automatic production equipment. Backed by these R&D centers and production facilities, AAC is capable of delivering one-stop solutions for customers, including Samsung.
CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
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Contents
Raise TP to HK$228 for optics ................................................................................................................................................ 4
Valuation: raise TP to HK$228 ................................................................................................................................................... 5
Company analysis .................................................................................................................................................................. 7
Optics: further clarity on both plastics and hybrid lens sales ................................................................................................... 7
Acoustics: weak 3Q due to iPhone X delay; android upgrade to drive growth in 2018 ............................................................ 8
Haptics and RF Mechanics: 41% YoY growth in 2018 ............................................................................................................... 9
3Q17 results review and analyst call takeaways ................................................................................................................... 11
Key takeaways from analyst briefing ...................................................................................................................................... 12
Figures
Figure 1: Forecast revision .............................................................................................................................................................. 4 Figure 2: Forecast revision by segments......................................................................................................................................... 4 Figure 3: CICC vs. consensus ........................................................................................................................................................... 5 Figure 4: CICC vs. consensus ........................................................................................................................................................... 5 Figure 5: Peer valuation – Global Optics peers ............................................................................................................................... 5 Figure 6: 12 month forward P/E band ............................................................................................................................................ 6 Figure 7: 12 month forward P/B band ............................................................................................................................................ 6 Figure 8: Forecast revision: Optics .................................................................................................................................................. 7 Figure 9: Mainstream solutions for 3D optical sensing .................................................................................................................. 7 Figure 10: Largan’s monthly revenue YoY growth ........................................................................................................................ 8 Figure 11: Sunny Optical’s monthly handset lens shipment YoY growth ........................................................................................ 8 Figure 12: AAC vs. Sunny vs. Largan -- where will be AAC’s optics business in 2019 ................................................................... 8 Figure 13: Forecast revision: Acoustics ........................................................................................................................................... 9 Figure 14: Acoustic peer comparison: AAC vs. Goertek ................................................................................................................. 9 Figure 15: Forecast revisions: Haptics and RF Mechanics .............................................................................................................. 9 Figure 16: 3Q17 results summary: actual vs. CICC vs. consensus ................................................................................................ 11 Figure 17: 3Q17 results summary by segment ............................................................................................................................. 12
CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
4
Raise TP to HK$228 for optics
We raise our FY18/2019 earnings forecasts by 9%/17% respectively, mainly to factor in the faster than expected development of AAC’s optics business.
After the revision, we expect AAC to achieve 31%/40% earnings growth in 2017/18, respectively, and the optics business to contribute 10% of group sales in 2019. We also slightly cut our 2017 AAC forecast 6% mainly due to delays in iPhone X shipments in 4Q17.
Figure 1: Forecast revisions
Source: Company data, CICC Estimate
Figure 2: Forecast revisions, by segment
Source: Company data, Bloomberg, CICC Research
After revision, we are 13%/21% above Bloomberg consensus’ 2018/19 EPS, reflecting our bullish view on the optics business.
(Rmb mn) 1Q17 2Q17 3Q17 4Q17 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E
A A A (CICC) A (CICC) (CICC) (CICC) (OLD) (OLD) (OLD) Diff Diff Diff
Revenue 4,215 4,429 5,324 6,677 15,507 20,645 28,504 35,781 21,679 26,207 30,971 -5% 9% 16%
% chg YoY 66% 47% 27% 20% 32% 33% 38% 26% 40% 21% 18%
COGS 2,461 2,642 3,124 -4,008 9,064 12,235 16,902 21,176
Gross Profit 1,754 1,787 2,199 2,669 6,443 8,409 11,602 14,605
OPEX 524 580 685 738 1,929 2,527 3,403 4,200
Operating Income 1,263 1,266 1,550 1,861 4,663 6,081 8,473 10,748
% chg YoY 86% 50% 21% 22% 38% 30% 39% 27%
Finance expenses 32 36 44 -17 67 95 78 62
Other gains/ expenses -6 -15 -7 261 -96 -96 -13 107
Pretax income 1,226 1,215 1,499 2,139 4,633 6,080 8,538 10,917
% chg YoY 85% 43% 19% 41% 35% 31% 40% 28%
Tax 164 150 133 351 609 799 1,122 1,434
Minority expenses 0 0 0 -2 -1 -2 -2 -3
Net Profit 1,062 1,065 1,366 1,787 4,026 5,279 7,415 9,480 5,630 6,792 8,080 -6% 9% 17%
% chg YoY 72% 45% 24% 32% 30% 31% 40% 28% 40% 21% 19%
EPS(RMB) 0.86 0.87 1.11 1.46 3.29 4.32 6.07 7.76 4.61 5.56 6.61 -6% 9% 17%
% chg YoY 72% 45% 24% 32% 30% 31% 40% 28%
Ratio Analysis
GPM 41.6% 40.4% 41.3% 40.0% 41.5% 40.7% 40.7% 40.8%
OPM 30.0% 28.6% 29.1% 27.9% 30.1% 29.5% 29.7% 30.0%
NPM 25.2% 24.1% 25.7% 26.8% 26.0% 25.6% 26.0% 26.5%
(Rmb mn) 1Q17 2Q17 3Q17 4Q17 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E
A A A (CICC) A (CICC) (CICC) (CICC) (OLD) (OLD) (OLD) Diff Diff Diff
Total revenue 4,215 4,429 5,324 6,677 15,507 20,645 28,504 35,781 21,679 26,207 30,971 -5% 9% 16%
Dynamic Component 1,897 2,292 2,516 3,610 7,956 10,314 13,144 15,753 10,007 12,530 14,989 3% 5% 5%
Haptics and RF Mechanics 2,192 1,949 2,424 2,677 6,940 9,242 12,212 15,296 10,899 12,274 13,020 -15% -1% 17%
MEMS Microphone 105 170 283 244 535 803 1,044 1,044 535 535 535 50% 95% 95%
Optics and Others 21 18 100 146 75 285 2,103 3,687 237 867 2,427 20% 143% 52%
Y-Y growth
Dynamic Component 13% 33% 17% 6% 29% 30% 27% 20% 26% 25% 20%
Haptics and RF Mechanics 231% 68% 28% 47% 156% 33% 32% 25% 57% 13% 6%
MEMS Microphone -41% 42% 121% -18% 54% 50% 30% 0% 0% 0% 0%
Optics and Others -17% 6% 149% 271% 278% 637% 75% 314% 266% 180%
Gross Profit 1,754 1,787 2,199 2,669 6,443 8,409 11,602 14,605 8,826 10,592 12,505
% of sales 41.6% 40.4% 41.3% 40.0% 41.5% 40.7% 40.7% 40.8% 40.7% 40.4% 40.4%
CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
5
Figure 3: CICC vs. consensus
Source: Company data, Bloomberg, CICC Research
Valuation: raise TP to HK$228
We derive our new TP of HK$228 based on SoTP valuation (+52% from prior TP of HK$150), implying 32x FY18 P/E including:
► HK$107.4 from dynamic components (47% of TP), derived from 26x FY18e P/E; in line with the median of acoustic competitors Goertek and Luxshare.
► HK$71.1 from haptics and RF mechanics (34% of TP); derived from 20x FY18e P/E, in line with its casing competitor Everwin.
► HK$2.1 from MEMS (1% of TP), derived from 26x FY18e P/E; in line with acoustics segment.
► HK$47.4 from optics (21% of TP), derived from 30x FY20e P/E, to reflect its growth potential and share gain.
Figure 4: CICC vs. consensus
Source: Company data, Bloomberg, CICC Research
(Rmb mn) 2016A 2017E 2018E 2019E
CICC CON diff CICC CON diff CICC CON diff
Revenue 15,507 20,645 20,648 0% 28,504 25,070 14% 35,781 29,279 22%
Gross Profit 6,443 8,409 8,569 -2% 11,602 10,479 11% 14,605 12,248 19%
Operating Profit 4,663 6,081 6,109 0% 8,473 7,546 12% 10,748 8,844 22%
Net Profit 4,026 5,279 5,346 -1% 7,415 6,584 13% 9,480 7,813 21%
EPS (RMB) 3.29 4.32 4.34 -1% 6.07 5.38 13% 7.76 6.39 21%
Per Share Market cap Net debt EV Sales Net profit NPM P/E
(HK$) (US$ mn) (HK$ mn) (US$ mn) (Rmb mn) (Rmb mn) % (x)
Dynamic components (FY18e) 107 16,911 16,911 13,144 4,404 34% 26
Haptics and RF mechanics (FY18e) 71 11,203 11,203 12,212 3,647 30% 20
Mems (FY18e) 2 327 327 1,044 84 8% 26
Optics (FY20e) 47 7,460 8,225 6,069 1,821 30% 30
Total 228 35,901 7,429 32
CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
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Figure 5: Peer valuation – Global Optics peers
Note: Companies highlighted use CICC estimates. Source: Bloomberg, CICC Research
Figure 6: 12 month forward P/E band Figure 7: 12 month forward P/B band
Source: Bloomberg, CICC Research Source: Bloomberg, CICC Research
Ticker Company M/Cap ROE(%) Dividend
Currency 10-Nov USD mn 17E 18E 17E 18E 2017E 2018E Yield 2017E 2018E 1D 5D 1M 3M YTD
2018.HK AAC* HKD 169.40 26,542 33.6 23.2 9.9 7.4 32.9 36.1 0.9% 31% 40% - 10 25 59 145
2382.HK Sunny* HKD 140.6 19,776 50.3 33.6 18.2 12.6 43.1 47.2 0.1% 105% 63% - 14 16 46 316
002241.SZ Goertek* RMB 22.1 10,795 32.0 24.8 5.6 4.6 19.0 20.4 0.5% 36% 29% - 6 9 13 67
002475.SZ Luxshare* RMB 25.8 12,336 43.0 30.3 6.3 5.3 15.7 19.1 0.3% 50% 42% - 3 26 26 87
002456.SZ O-film RMB 24.4 9,999 45.4 30.0 6.8 5.6 15.1 19.0 0.3% 103% 51% - 7 15 31 78
300136.SZ Sunway RMB 55.3 8,194 55.5 37.4 18.6 12.6 34.9 34.7 0.1% 84% 49% - 7 29 49 94
0285.HK BYDE HKD 23.0 6,630 17.3 14.0 3.1 2.6 20.0 20.0 0.0% 106% 24% - 9 -9 25 278
6088.HK FIT Hon Teng* HKD 4.8 4,136 20.5 15.4 2.2 2.0 13.2 13.5 0.0% 25% 29% - -4 -12 7 54
300115.SZ Everwin* RMB 30.1 4,133 27.9 20.5 5.6 4.6 19.5 24.7 1.0% 23% 54% - 0 -6 -7 16
1478.HK Q-Tech HKD 18.3 2,571 34.7 25.4 8.5 6.6 26.3 28.3 0.0% 158% 37% - 6 14 45 360
000049.SZ Desay* RMB 55.5 1,719 34.0 27.8 7.8 6.2 27.0 26.7 0.3% 31% 23% - 1 7 6 33
Electronic component Average 35.8 25.7 8.4 6.4
Electronic component Median 34.0 25.4 6.8 5.6
3008.TW Largan NTD 5,740.0 25,512 26.3 18.9 8.1 6.2 33.7 36.3 1.1% 29% 39% - -2 2 3 51
AMS.SIX AMS AG EUR 95.6 8,067 67.9 26.3 7.5 6.2 8.8 23.6 0.5% 0% 158% - 0 31 41 231
2382.HK Sunny* HKD 140.6 19,776 50.3 33.6 18.2 12.6 43.1 47.2 0.1% 105% 63% - 14 16 46 316
1478.HK Q-Tech HKD 18.3 2,571 34.7 25.4 8.5 6.6 26.3 28.3 0.0% 158% 37% - 6 14 45 360
002456.SZ O-film RMB 24.4 9,999 45.4 30.0 6.8 5.6 15.1 19.0 0.3% 103% 51% - 7 15 31 78
Optics value chain Average 44.9 26.8 9.8 7.4
Optics value chain Median 45.4 26.3 8.1 6.2
P/BP/E EPS GrowthPrice
CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
7
Company analysis
Optics: further clarity on both plastic and hybrid lens sales
AAC’s optics business grew 149% YoY due to the company’s successfully turning its 10mn monthly capacity into shipments.
During its analyst briefing, AAC stated its plastic lens shipments exceeded 10mn unit/month in 3Q17 and it plans to expand its plastic lens capacity to 30mn units/month by 1H18 (up from 20mn units/month at end-2017). Regarding hybrid lenses, AAC stated it targets 5–10mn sets/month capacity by end-2018 and expects to turn all of its capacity into shipments. AAC stated its WLG/hybrid lens solutions are already receiving widespread positive feedback from customers.
We raise our forecast on AAC’s optics business to reflect the stronger growth of both plastic and hybrid lenses. We expect it to grow 271% YoY in 4Q17 and 637% in 2018 driven by the ramp of both plastic and hybrid lens sales.
Figure 8: Forecast revision: Optics
Source: Company data, CICC Estimate
In Figure 9, we compare various 3D sensing solutions; we think AAC’s WLG (wafer-level-glass) is an important alternative to AMS’s WLO (wafer-level optics). Both solutions are important parts of speckle structure light that is currently used in Apple’s iPhone X. We expect AAC’s hybrid lens solution will be adopted by some Chinese smartphone OEMs in 2018, followed by Apple in 2019.
Figure 9: Mainstream solutions for 3D optical sensing
Source: Company data, CICC Research
1Q17 2Q17 3Q17 4Q17 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E
A A A (CICC) A (CICC) (CICC) (CICC) (OLD) (OLD) (OLD) Diff Diff Diff
Capacity
Capacity - Plastics lens 10 10 10 20 - 20 30 40
Capacity - hybrid lens - - - 2 - - 10 15
Total shipment volume - 12 36 72 - 120 276 462
Optics and Others 21 18 100 146 75 285 2,103 3,687 237 867 2,427 20% 143% 52%
YoY Growth -17% 6% 149% 271% -51% 278% 637% 75%
% of total sales 1% 0% 2% 2% 0% 1% 7% 10%
Gross Profit - - - - (9) 64 802 1,616 47 303 1,044 35% 164% 55%
% of sales -12.5% 22.4% 38.1% 43.8% 20.0% 35.0% 43.0%
Solution ToF Speckle structured light Coded structured light
Distance Medium Short~medium Long
Accuracy Low Medium High
Transmitter lens requirements
Heat resisitance Y Y
Light diffusibility Y
Lens
Plastc Y
Glass Y Y Y
Major models Project Tango iPhone X Face ID
Algorithm Primesence MantisVision
VCSEL Lumentum, Finisar
Lens Largan AMS, AAC
Module Sunny Optical STMicro Sunny Optical, O-film?
CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
8
Figures 10 and 11 illustrate the monthly shipment volumes of Largan and Sunny. We think the slowdown in Largan’s growth is partially due to the rise of AAC. Based on our forecasts on Sunny and the Bloomberg consensus forecast on Largan, AAC’s revenue will reach 59% that of Sunny and 18% that of Largan by 2019.
Figure 10: Largan’s monthly revenue YoY growth
Figure 11: Sunny Optical’s monthly handset lens shipment
YoY growth
Source: Largan, CICC Research Source: Sunny Optical, CICC Research
Figure 12: AAC vs. Sunny vs. Largan -- where will be AAC’s optics business in 2019
Note: Largan’s 2017–19e revenue uses Bloomberg consensus, AAC and Sunny refer to CICC estimates Source: Company data, Bloomberg, CICC Research
Acoustics: weak 3Q due to iPhone X delays; android upgrade to drive growth in 2018
AAC’s acoustic business grew 17% YoY in 3Q17, lower than its 33% in 2Q17; we think this was mainly due to delays in iPhone X shipments for Apple. We also estimate that AAC’s market share in Apple to maintain stable growth of 27%/20% stable in 2018/19 driven by
► Apple’s product upgrade in acoustics in 2018.
► Rising adoption of speaker boxes in mid-range/high-end Android phones. AAC has raised its expectation of this new design’s shipments from 100mn to 150mn pieces and these shipments could turn into good opportunities in 2018.
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CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
9
Figure 13: Forecast revision: Acoustics
Source: Company data, CICC Estimate
Figure 14 compares the growth trends of AAC and its major competitor, Geortek. We see a similar growth slowdown trend in 3Q17. We expect AAC’s acoustic segment to grow 6% YoY in 4Q17 and 27% in 2018.
Figure 14: Acoustic peer comparison: AAC vs. Goertek
Source: Company data, CICC Estimate
Haptics and RF Mechanics: 41% YoY growth in 2018
AAC’s haptics and RF mechanics business grew 28% YoY well below its +68% in 2Q17. We think this was mainly due to 3Q16’s high base and delays in iPhone X shipments. We expect AAC’s haptics and RF mechanics business to maintain stable growth with 32%/25% YoY growth in 2018/19, driven by: 1) rising shipments of 3D glass; and, 2) wider adoption of haptics in Android smartphones.
Figure 15: Forecast revisions: Haptics and RF Mechanics
Source: Company data, CICC Estimate
1Q17 2Q17 3Q17 4Q17 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E
A A A (CICC) A (CICC) (CICC) (CICC) (OLD) (OLD) (OLD) Diff Diff Diff
Assumption
iPhone volume - - - - 215 222 247 250
Dynamic Component 1,897 2,292 2,516 3,610 7,956 10,314 13,144 15,753 10,007 12,530 14,989 3% 5% 5%
YoY Growth 13% 33% 17% 6% 29% 30% 27% 20%
% of sales 45% 52% 47% 54% 51% 50% 46% 44%
Gross Profit 3,619 4,537 5,782 6,772 4,303 5,263 6,145 5% 10% 10%
% of sales 45.5% 44.0% 44.0% 43.0% 43.0% 42.0% 41.0%
AAC Goertek AAC Goertek AAC Goertek AAC Goertek AAC Goertek
Total revenue (Rmb mn) 15,507 19,828 8,703 9,974 4,215 4,526 4,488 5,448 5,324 7,286
YoY 32% 41% 56% 52% 66% 68% 48% 41% 24% 20%
Accoustic revenue (Rmb mn) 7,956 10,939 4,189 5,671 1,897 2,770 2,292 2,901 2,516 4,155
YoY 29% 15% 24% 65% 14% 56% 33% 75% 17% 23%
Accoustic (excl. earpords) 7,956 6,782 4,189 3,686
earpods 4,157 1,985
GM 41.6% 22.4% 41.0% 22.1% 41.6% 22.3% 40.4% 22.0% 41.3% 19.5%
GM of accoustic 45.5% 24.1% 40.6% 25.2%
Net profit (Rmb mn) 4,026 1,652 2,127 719 1,062 299 1,065 420 1,366 666
YoY 26% 32% 57% 52% 72% 52% 45% 52% 24% 19%
2Q17 3Q171H172016 1Q17
1Q17 2Q17 3Q17 4Q17 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E
A A A (CICC) A (CICC) (CICC) (CICC) (OLD) (OLD) (OLD) Diff Diff Diff
Haptics and RF Mechanics 2,192 1,949 2,424 2,677 6,940 9,242 12,212 15,296 10,899 12,274 13,020 -15% -1% 17%
YoY Growth 231% 68% 28% 47% 56% 33% 32% 25%
% of total sales 52% 44% 46% 40% 45% 45% 43% 43%
Gross Profit - - - - 2,786 3,738 4,927 6,125 4,469 5,032 5,208 -16% -2% 18%
% of sales 0.0% 0.0% 0.0% 0.0% 40.1% 40.4% 40.3% 40.0% 41.0% 41.0% 40.0%
CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
10
3D glass
During the analyst briefing, AAC management stated that in 2017 they were beginning to use an alternative of putting glass on the front and back cover. We see drivers from:
► Shipments: by end-November, AAC will have already completed the shipment of 1mn pieces per month.
► Capacity expansion plan: by 1Q18 or around April-May, it will increase capacity by another 1–1.5mn, giving a total capacity of 2–2.5mn per month. At this size of increase and volume, AAC should be able to meet customers demand for 3D cover glass.
► ASP: US$15-20/unit is reasonable at the current stage.
Haptics
AAC is still confident that major customers in the Android system will see wider adoption for haptics because of its successful features and interesting applications.
► ASP: the ASP for the less complicated design that Android markets will firstly adopt, may not be as high as the ASP for its major US client.
► Shipments: a range of 30–50mn pieces in 2018
► In the long-term, AAC believes that 50% of the models in the mid-range/high-end of the Android camp will use their haptics products.
CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
11
3Q17 results review and analyst call takeaways
AAC released its 3Q17 results, including 27% YoY revenue growth, and 24% YoY net profit growth; 3Q17 was 3% below consensus due to the slower-than-expected ramp-up of Apple’s new models.
The major positives are:
► Optics and others grew 149% YoY in 3Q17, reflecting that well-recognized optical solutions have started shipping to top domestic customers.
► 3Q17’s GM increased to 41.3% from 2Q17’s 40.4%.
► OPEX ratio decreased to 12.9% in 3Q17, deceases of 0.1ppt YoY and 0.2ppt QoQ.
The major negatives are:
► 3Q17 RF Mechanical & Haptics grew 29%, contributing >45% of 3Q17’s total sales, slower than 2Q’s +68%.
► R&D increased (1–3Q17: 8.2% of revenue) as that for new acoustic and optics delivered innovative designs.
Figure 16: 3Q17 results summary: actual vs. CICC vs. consensus
Source: Company data, Bloomberg, CICC Research
(Rmb mn) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 3Q17E 3Q17E
A A A A A A A CICC diff Con diff
Revenue 2,545 3,019 4,207 5,737 4,215 4,429 5,324 5,665 -6% 5,436 -2%
% chg yoy 10% 26% 32% 49% 66% 47% 27% 35% 29%
COGS 1,513 1,761 2,448 3,342 2,461 2,642 3,124 -3,351 3,206
Gross Profit 1,031 1,258 1,759 2,394 1,754 1,787 2,199 2,314 2,230
OPEX 383 433 546 567 524 580 685 696 -652
Operating Income 679 844 1,284 1,856 1,263 1,266 1,550 1,554 0% 1,578 -2%
% chg yoy 3% 22% 39% 67% 86% 50% 21% 21% 23%
Finance Expense 9 10 19 28 32 36 44 19
Other gains/expense -5 17 0 26 -6 -15 -7 20
Pretax income 664 851 1,265 1,854 1,226 1,215 1,499 1,555 -4% 1,605 -7%
% chg yoy 0% 20% 34% 65% 85% 43% 19% 23% 27%
Tax 45 115 166 283 164 150 133 107
Minority expenses 0 -1 -1 -0 0 0 0 -1
Net Profit 619 736 1,100 1,571 1,062 1,065 1,366 1,447 -6% 1,403 -3%
% chg yoy 2% 15% 29% 55% 72% 45% 24% 32% 28%
EPS(RMB) 0.50 0.60 0.90 1.28 0.86 0.87 1.11 1.18
% chg yoy 2% 15% 29% 55% 72% 45% 24% 32%
Ratio Analysis
GPM 40.5% 41.7% 41.8% 41.7% 41.6% 40.4% 41.3% 40.9% 0.5% 41.0% 0.3%
OPM 26.7% 28.0% 30.5% 32.3% 30.0% 28.6% 29.1% 27.4% 1.7% 29.0% 0.1%
NPM 24.3% 24.4% 26.2% 27.4% 25.2% 24.1% 25.7% 25.6% 0.1% 25.8% -0.2%
CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
12
Figure 17: 3Q17 results summary by segment
Source: Company data, Bloomberg, CICC Research
Key takeaways from analyst briefing
Corporate-level guidance
► 2018 revenue guidance of YoY growth no less than 25% (vs. 2017 annual revenue growth guidance of +20% YoY.
► Keep 2017 capex unchanged at Rmb3.0bn.
► Capex breakdown: non-acoustic 40% (mostly into optics), acoustics 35% and infrastructure 25%.
► GPM trend: to move higher in 2018
Optics
Long-term objectives
► Optics could be AAC’s largest business over the long term (7–8 years)
► AAC targets to offer an alternative solution to customers in the high-end lens market (>5P13M)
Hybrid lens – Wafer level glass (WLG)
► Capacity and shipments: 5–10mn sets/month by end-2018 and expect to turn all capacity into shipments.
► Most of 2018’s shipment will be 5P with some 6P shipments in 2H18; the 6P shipments will be applied to cameras rather than 3D sensing.
► ASP: >US$2/unit (1 glass + 4–5 pieces of plastic).
► Major applications: large aperture (rear camera); 3D sensing, AR/VR and automobile.
(Rmb mn) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
A A A
Total revenue 2,545 3,019 4,207 5,737 4,215 4,429 5,324
Dynamic Component 1,680 1,721 2,145 2,410 1,897 2,292 2,516
Haptics and RF Mechanics 662 1,161 1,893 3,225 2,192 1,949 2,424
MEMS Microphone 178 120 128 109 105 170 283
Optics and Others 25 17 40 (7) 21 18 100
Y-Y growth
Dynamic Component 40% -22% 66% 47% 13% 33% 17%
Haptics and RF Mechanics -24% 79% 49% 90% 231% 68% 28%
MEMS Microphone -14% -65% -44% -48% -41% 42% 121%
Optics and Others 10% -102% -90% -102% -17% 6% 149%
Gross Profit 1,031 1,258 1,759 2,394 1,754 1,787 2,199
% of sales 40.5% 41.7% 41.8% 41.7% 41.6% 40.4% 41.3%
CICC Research: November 13, 2017
Please read carefully the important disclosures at the end of this report
13
Technical details of hybrid lenses
► Having 10 pieces of equipment available for mass production at present.
► Leading technology from Kaleido acquisition in 2010 including tooling.
► Solid alliances with European molding equipment players to guarantee its cutting edge in both plastic and glass lens fields.
► Establish Singapore WLG tooling capacity, managed by European team.
► Product line layout based on 6-7P while current products are mainly 5P.
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