AAC’s Results Show Inflection in Smartphones but Other Ventures' Outlook Reduced

We cut our fair value estimate for AAC Technologies to HKD 19 from HKD 29 mainly due to the weaker Chinese yuan and reduced long-term opportunities in nonsmartphone ventures such as electric vehicles and metaverse. However, we remain confident in the company's ability to turn around its acoustics and haptics profitability as smartphone demand gradually recovers in 2023. AAC outperforms in smartphone optics by undercutting established competitors like Sunny Optical for volume. We see AAC as a play in smartphone recovery as we think its cash cows—acoustics and haptics—can quickly bounce in profitability as newcomers are scarce, unlike optics. Over the long-term, we envision AAC would become a diversified smartphone components supplier and only see sparing successes in automotive and metaverse. While undervalued, we believe the share price of AAC and smartphone component makers would only converge to our fair value estimates in 2023 as upcoming data clears the fog around smartphone recovery.