20181108-招商证券_香港_-瑞声科技-02018.HK-Growing_uncertainties,_downgrade_to_NEUTRAL_6页_1mb

AAC Technologies (2018 HK) Summary

Core Content

AAC Technologies (2018 HK) is a key player in the smartphone component industry, primarily involved in acoustic, haptic & mechanical (H&M), and optics businesses. The company's performance in the third quarter of 2018 (3Q18) was below expectations due to a combination of weaker-than-anticipated smartphone upgrade cycles and pricing pressures.

Main Points

3Q18 Financial Performance

• Revenue: RMB4.9bn, a 9% YoY decline, and 13% below the consensus estimate of RMB5.6bn.
• Gross Margin (GM): Rose 190bps QoQ to 37.1%, but still fell short of the Street's 39%.
• Key Business Segments:
  • Acoustics: Revenue fell 1% YoY to RMB2.5bn, contributing 51% of total revenue.
  • H&M: Revenue dropped 21% YoY to RMB1.9bn, contributing 39% of total revenue.
  • Optics: Revenue doubled YoY to RMB174mn, showing resilience in shipment growth.
• Factors Affecting Performance:
  • Pricing pressure from legacy products.
  • Lower shipment volumes due to weak smartphone upgrade cycles.
  • FX trend was favorable, but the overall impact was limited.

Outlook and Rating Changes

• Downgrade: AAC was downgraded to NEUTRAL from BUY.
• Reasons for Downgrade:
  • Slowing smartphone growth, with global shipments declining by 6% YoY in 3Q18.
  • Apple's guidance indicated a 5% QoQ decline in iPhone shipments to 73mn units in 4Q18.
  • Intensifying competition, particularly in the acoustic segment with Luxshare (002475 CH).
• Revenue and Net Profit Forecasts:
  • Revenue and net profit are expected to decline by 5% and 18% in 2018E, respectively.
  • Return to growth with a CAGR of 16% and 22% for 2018–20E.
• Target Price (TP): Revised from HK$110 to HK$60, based on a 12x 2019E P/E ratio.
• Share Price Performance: Fell 62% YTD, significantly underperforming the Hang Seng Index (HSI) which dropped 14%.

Alternative Investment Recommendation

• In the handset component sector, the report prefers Sunny Optical (2382 HK), citing the strong trend of triple-camera adoption in 2019.

Key Financial Information

Financial Highlights

Balance Sheet

• Total Assets: Increased from RMB24,257 mn in 2016 to RMB41,447 mn in 2020E.
• Current Assets: RMB13,658 mn in 2018E, up from RMB12,829 mn in 2016.
• Non-current Assets: RMB19,118 mn in 2018E, reflecting continued investment in PP&E and intangible assets.
• Total Liabilities: RMB14,739 mn in 2020E, with a Debt to Equity ratio of 23.6%.
• Net Debt to Equity: -1.2% in 2020E, indicating a strong balance sheet.

Cashflow Statement

• Operating Cashflow: Increased from RMB4,812 mn in 2016 to RMB8,260 mn in 2020E.
• Investing Cashflow: Negative in most years, with capital expenditures peaking at RMB4,500 mn in 2018E.
• Financing Cashflow: Negative in 2018E and 2019E, with dividends paid reaching RMB2,567 mn in 2018E.

Profitability

• Gross Margin: Declined from 41.5% in 2016 to 37.4% in 2018E.
• Net Profit Margin: Dropped from 26.0% in 2016 to 21.7% in 2018E.
• ROE: Declined from 31.6% in 2016 to 23.6% in 2018E, reflecting lower profitability.

Investment Ratings

• Industry Rating: OVERWEIGHT, indicating the sector is expected to outperform the market.
• Company Rating: NEUTRAL, reflecting increased uncertainties and challenges for AAC.

Key Figures and Charts

• Figure 1: AAC revenue trend shows a decline in 2018E.
• Figure 2: Net profit trend also shows a decline in 2018E.
• Figure 3: Global smartphone shipment trend indicates a slowdown.
• Figure 4: Apple smartphone shipment trend shows a 5% QoQ decline in 4Q18.
• Figure 5: AAC forward P/E is projected to decline.
• Figure 6: AAC share price and forward P/E band show a significant drop.

Analyst and Regulatory Information

• The report was prepared by Kevin CHEN and Clint SU from China Merchants Securities (HK) Co., Ltd.
• The report includes important disclosures, stating that the information is for informational purposes only and not investment advice.
• Regulatory Restrictions: The report is restricted to certain investors, including Relevant Persons in the UK and other jurisdictions.

Conclusion

AAC Technologies is facing growing uncertainties and increased competition, leading to a downgrade to NEUTRAL. While the company has a strong balance sheet and is targeting a 40% GM for key businesses, the outlook for 2018E is conservative due to weaker smartphone demand and pricing pressures. Investors are advised to consider alternative opportunities in the handset component sector, such as Sunny Optical (2382 HK), and to independently evaluate investment options.