Margin outlook remains bleak in FY22F

■ 1Q22 net profit fell 61% yoy and formed 17% of our FY22F forecast, in-line.
■ We think standardised acoustics products will be acoustics segment driver;
camera module development will narrow optics segment margins in FY22F.
■ Retain Reduce with a lower TP of HK$13.54, based on 9x FY23F P/E.

1Q22 results lacklustre amid Omicron outbreak in China

AAC Technologies’ 1Q22 net profit was lacklustre, falling 61% yoy to Rmb205m, due to
sustained margin pressure from ramping up the optics business, as well as low utilisation
and production efficiency amid the Omicron outbreak in China. 1Q22 revenue grew 14%
yoy, supported by stable orders in acoustics and haptics components for Apple. GPM
touched an historical low of 19.5% (-11.6% pts yoy, -1.0% pt qoq) in 1Q22, mainly dragged
down by the optics and acoustics segments due to change in product mix (rising camera
module shipments in optics and increasing output of standardised speaker box for an
Android customer). We maintain our FY22F earnings forecast as we expect sequential qoq
improvements in terms of revenue and GPM as the Omicron impact fades and on higher
production efficiency in the optics and metal casings (precision mechanical) businesses.

Standardised acoustics product for Android to be segment driver

Acoustic revenue rose 6% yoy in 1Q22 to Rmb2.23bn (46% of 1Q22 revenue), driven by
strong demand for iPhones and rising penetration of small cavity speakers among Android
customers. GPM was stable on a qoq basis (-0.1% pt qoq, -10.8% pts yoy) thanks to higher
contributions from iPhones’ acoustics products. We expect acoustic FY22F revenue to
grow 5% led by small cavity speaker penetration growth in Android customers. We think
GPM can be sustained at c.25% in FY22F (24.7% in FY21) due to efficiency improvements
on higher production volume of standardised acoustics products for Android customers
and stable market share in the Apple supply chain.

Optics margin to narrow further as camera module output rises

Improvements were seen in the optics segment in 1Q22: revenue increased by 37% yoy
(+80% qoq) to Rmb924m (19% of 1Q22 revenue), driven by rising plastic handset lens
(+16% qoq, -13% yoy) and handset camera module output (+129% qoq), thanks to wider
customer and product portfolio. AAC Tech’s handset lens also entered the supply chain for
all major handset brands (Xiaomi, Oppo, Vivo and Samsung). However, GPM in optics
remained poor at 3.5% due to low utilisation rate and production yield, as well as weak
product mix. We expect optics revenue to accelerate, doubling yoy to Rmb4.85bn in
FY22F, driven by strong shipment growth in handset lens and handset camera modules.
However, we believe GPM of the optics segment will continue to narrow to 13% due to
change in product mix (higher camera module output).

Retain Reduce; target price lowered to HK$13.54

We retain our Reduce call on AAC Tech due to its poor earnings outlook (-14% EPS in
FY22F) amid a declining GPM trend as it ramps up output of low-margin products. We cut
our TP to HK$13.54, pegged to 9x FY23F P/E (previously 10x), reflecting the weakened
China smartphone market outlook. De-rating catalyst: sustained margin pressure in optics
business. Upside risks: better-than-expected GPM recovery in acoustics/haptics
components.