We upgrade AAC to BUY with SOTP-based TP of HK$37.8 (19.6x FY25E P/E), as we believe spec upgrade in acoustics/optics/haptics and upcoming AI smartphone cycle will boost earnings growth into FY25/26E. AAC’s 1H24 revenue/net profit growth of 22%/257% YoY is ahead of market expectations, thanks to stronger margin recovery (+7.4 ppts YoY/+2.3 ppts HoH), better product mix in acoustics/optics/PM and consolidation of PSS. For FY24E, mgmt. reiterated 15% YoY sales growth (excl. PSS) with GPM HoH expansion, driven by: 1) Optics: better HSL/HCM ASP/shipment and improving GPM into 4Q24E, 2) Acoustic: SLS/Combo product penetration, 3) Haptics/casing/hinges: high- end model launches and market share gains in 2H24E, and 4) Acoustics/heat dissipation upgrades for AI smartphones. Overall, we lifted our FY24-26E EPS by 23-31% to reflect strong 1H24, better margin recovery and AI spec upgrade into 2025/26. Near-term catalysts including iPhone 16 launch, Android spec upgrade and GPM recovery.
　　1H24 beat on stronger GPM recovery across all segments. By segment, acoustics/ED&PM/optics delivered 4%/1%/25% YoY sales growth in 1H24. In particular, we are encouraged by optics GPM improvement to 4.7% (plastic lens/HCM GPM 16.7%/5.7%), well ahead of -17%/-9.2% GPM in 1H23/2H23, and GPM for acoustics/haptics/PM returned to heavy level of 30%/30%/18%. Mgmt. is positive on further GPM expansion for both plastic lens and HCM in 2H24E, and target breakeven for optics business in 4Q24E. Acoustic/haptics/ PM segments benefited from smartphone demand recovery in 1H24, while MEMS declined due to shipment delay for one key smartphone customer.
　　FY24E/2025 outlook: more spec upgrades and GPM upside for iPhone 16 and Android AI smartphones. For FY24E, mgmt. guided 15% YoY sales growth (exclu. PSS) with better margin into 2H24E, and sales growth momentum will sustain into 2025/26, mainly driven by 1) share gains in optics HLS/HCM/WLG with GPM expansion. 2) spec upgrade (acoustics/haptics/ heat//optics) for upcoming Apple/Android AI smartphones. 3) sales synergy with PSS auto acoustics. Overall, we expect AAC’s earnings to grow 125%/24% YoY in FY24/25E
　　Our FY24-26E EPS are 12-16% above consensus; Upgrade to BUY. We lifted our FY24-26E EPS by 23-31% to reflect strong 1H24, better margin profile and AI spec upgrade into 2025/26. Our new SOTP-based TP of HK$37.8 implies 19.6x FY25E P/E. The stock now trades at 20.2x/16.3x FY24/25E P/E which is attractive in our view. Upcoming catalysts include iPhone 16 launch, Android AI spec upgrade and GPM recovery.