Margins still not recovering
? AAC Tech warned that its 4Q21F net profit likely dropped c.75% yoy to c.Rmb130m due to poor performance from its optics business.
? FY22F operational outlook remains weak due to lack of acoustics and haptics upgrades in iPhone 14, in our view.
? Downgrade from Hold to Reduce. Our TP slides to HK$26.41, now based on 12x 2023F P/E, -2 s.d. from its 3-year average.
FY21-23F EPS cut to reflect lower GPM in optics and acoustics
AAC Tech on 19 Jan issued a profit warning – it expects 4Q21F net profit decline of 71- 79% yoy to Rmb160m-190m, leading to FY21F net profit decline of 12-16% to Rmb1.27bn1.33bn, c.20%/25% below our/Bloomberg consensus forecasts. We cut FY21-23F EPS by 20-26% to reflect lower assumptions for optics, acoustic and haptics GPM, and lower volume and ASP for handset lens amid keener competition in the low- to mid-range market (13MP and below). The profit warning turned us more negative on its short-term revenue growth and earnings due to poor performance in its optics business and still-weak margins for its acoustics and haptics components as the lack of major specification upgrades in both iO/S and Android camp is causing sustained margin pressure on its core segments.
Performance of optics segment worsened in 4Q21F
AAC Tech claimed increased competition, coupled with decreased product ASPs, caused huge margin pressure on its optics business. We believe it cut the prices of its low-to mid end products (5MP/8MP/13MP) in 4Q21F to gain customers in the Android camp, resulting in significant margin decline. Meanwhile, we believe 4Q21F shipment of its wafer level glass (WLG) hybrid lens was also disappointing, as output remained very small.
FY22F outlook weak due to lack of spec upgrades
We expect FY22F operations to still be weak due to 1) lack of major acoustics and haptics spec upgrades in iPhone 14 (to launch in Sep 22), 2) fierce competition in low- to midrange handset lens and handset camera modules, and 3) slow penetration of its standardised speaker box among Android customers. Still, we project c.20% FY22F EPS growth, supported by higher volume from acoustics components for iPhones. We remain conservative on its Android customer shipment growth.
Downgrade from Hold to Reduce
We downgrade AAC Tech from Hold to Reduce as we expect slow recovery in acoustics GPM in FY22-23F due to lack of major spec upgrades, and still-weak GPM for its rapidly expanding optics business due to poor product mix and low capacity utilisation. Our TP slides to HK$26.41, now based on 12x 2023F EPS (from 16x 2022F), 2 s.d. below its 3- year average, to reflect the unfavourable competitive landscape in optics business and its uncertain short-term earnings outlook. We will revisit AAC Tech when its GPM stabilises and its optics segment resumes strong growth. De-rating catalysts: margin pressure on legacy acoustics and haptics components for iPhones, and wider WLG hybrid lens losses.