Entering 2025, we see multiple drivers for AAC including iPhone’s vapor cooling (VC) and MEMS microphone upgrade, Android spec upgrade, ease in optics price war and design wins of EV acoustic/camera. We believe AAC remains a key supply chain name to own when investing in AI smartphone, Android premiumisation, Chinese EV and AR/AI glass with its strong technology and client base, especially when we see the smartphone OEMs and ecosystem are unstoppably penetrating into other hardware. Reiterate BUY with new TP HK$47.6 (previously HK$42.0) based on unchanged 24x 2025E EPS.
　　Key Factors for Rating
　　Apple: though Apple Intelligence has not yet proven itself, we expect AI hardware upgrade trend to remain secular, which should call for more component upgrades such as MEMS microphone and VC. As a key acoustic and precision part Apple vendor, we believe AAC will benefit meaningfully in 2025.
　　Android: as high-end domestic Android sales remain strong throughout 2024, we hear more bullish 2025 spec upgrade and volume projection for high-end from major Chinese smartphone OEMs including Xiaomi. Together with AI, foldable esp. tri-fold and hybrid lens camera, Android component upgrade momentum will likely extend into 2025, uplifting the whole supply chain from low-end price competition. AAC’s top three customers include Huawei and Xiaomi, which we believe to be long-term market share winners.
　　AR/AI glass: with the success of Meta Rayban glass, we can now name more than a dozen of key domestic OEMs including smartphone players working on a comparable product targeting 2025/26 launch. AAC is the go-to acoustic supplier according to our check. Although 2025 contribution should be small, we are positive on AAC’s position as we believe AR/AI glass will turn out to be another market dominated by smartphone OEMs, such as TWS, wh
　　Automotive: EV is another perfect example of the “invasion” of smartphone ecosystem into other hardware, with the remarkable success of Huawei and Xiaomi EV in the domestic market who have deep understanding of consumer hardware. With the PSS acquisition and close partnership with Huawei and Xiaomi, we are now more confident that AAC acoustic solution will become a reference design for new EV models. Meanwhile, AAC is making progress to volume produce lens for Tesla per our check.
　　2025 outlook: with the positive progresses above and the unchanged 4Q24 optics breakeven guidance, we believe AAC business should remain uptrend in 2025. We lift 2024/25/26E EPS of AAC by 1%/14%/19% to factor in the smartphone spec upgrade acceleration and AAC’s share gain in its major customers. Our forecasts have not factored in the potential 2025 central government subsidy on consumer electronics.
　　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 keep 24x 2025E EPS unchanged to value AAC as the business is on a solid track of recovery and growth. Maintain BUY.