AAC 2H23 results beat driven by resilient GPM of 19.2%, up 1.5ppts YoY. Though overall smartphone market remains slow and competitive, AAC’s business benefits from 1) favourable product mix shift towards more higher-end Androids, including Huawei and Xiaomi , 2) more innovative products like vapor chambers and metal hinges and 3) AI smartphone which will require high dB microphones. In automotive, we are positive on AAC’s order momentum in key OEMs both domestic and overseas. Maintain BUY as we expect 2024 to be a strong recovery year for AAC along with the consolidation of PSS which will contribute over RMB3.2bn sale and RMB200m net income under our estimate. We raise our TP from HK$20.00 to HK$27.4 based on 20x 2024E EPS.
Key Factors for Rating
2H23 results review: 1) Revenue was flat YoY to RMB11.2bn mainly dragged by weak Android acoustic demand, below BOCIe 4% and consensus 2%; 2) GPM improved 1.5ppts YoY to 19.2%, slightly beat BOCIe and consensus, mainly thanks to optics margins recovery; 3) NI increased 25% YoY to RMB590m, beating BOCIe and consensus by 34% and 21% thanks to the narrowing loss from optics.
Acoustics: Revenue was down 11% YoY to RMB4.2bn due to weak global smartphone demand especially Android. However, GPM improved 5.2ppts HoH to 30.7%, thanks to favourable mix shift to more high-end SLS and Huawei. Mgmt. sees the trend of acoustics specification upgrade towards 2024 and 2025 driven by the release of AI smartphones where speaker and microphone will be the key interaction points. We also believe the PSS acquisition could enrich AAC’s product line and bring positive profit contribution regarding automotive acoustic business. PSS has been consolidated since mid-Feb and we forecast RMB3.3bn revenues and RMB232m net income from PSS in 2024.
Optics: Revenue was up 36% YoY to RMB1.9bn in 2H23 with a narrowing negative GPM of -9.2%, better than we expected. Mgmt., guides optics business to break even in 2H24 thanks to higher utilisation, yield rate, 6P/7P/WLG/hybrid lens penetration and healthier inventory. 6P shipment mix reached 14% in 2023.
EMD&PM: Revenue was up 6% YoY to RMB4.6bn in 2H23, driven by growing demand for smartphone metal casing, metal hinges for foldable phone and vapor chamber (VC) cooling. We expect Huawei Mate/P series smartphone to remain key drivers for precision mechanics in 2024.
Key Risks for Rating
1) Slower-than-expected smartphone upgrade; 2) slower-than-expected optics recovery; 3) macro impact on tech demand; and 4) lawsuit with industry peers.
Valuation
We increase 2024/25 EPS by 17%/12% to factor in the consolidation of PSS and optics margin recovery. We now use 20x 2024E EPS (was 17x) to value AAC, in line with its three-year average multiple as the business is on a solid track of recovery and growth. Maintain BUY.