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Investment Thesis: Optics and MEMS as the major growth drivers

Key Arguments

Strong optics performance expectation driven by 1) optimisation of product mix by increased revenue share from high-end products, 2) increasing market share, and 3) vertical expansion of products CCM and Vehicle module. AAC Technology (AAC)’s optics revenue maintains a robust growth at a FY20-23F CAGR of 79.9%, accounting for 24.5%/33.6% of revenue in FY22/23.

Seizing the opportunities with the development of IoT market and the spec upgrade trend in true wireless stereo earphones and notebook. Micro-electro-mechanical systems (MEMS) segment to be the second fastest-growing business with ample room for growth and is expected to grow at a CAGR of 17.9% in FY20-23F.

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Potential spin-off and separate listing of AAC Optics help realisation of the value of its optical business by reversion to peers’ level.

Valuation:

Our TP of HK$39.8, based on 17x FY22 PE, is in line with the five-year average.

Where we differ:

Our revenue forecast in the optics product segment is higher than the market for 0.5% and 21.9% in FY22/23 owing to the increasing market share from lens and camera module segment through its strategic relation with smartphone players.

Key Risks to Our View:

1) Sluggish growth in global smartphone shipment persisting due to economic downturn and 2) further loss of market share in the handset dynamic component due to rigorous competitions among peers.