AAC Technologies Earnings: Skeptical on Acquisition and Smartphone Slump Is Prolonged; Fairly Valued

We cut our fair value estimate for AAC Technologies to HKD 17.00 per share from HKD 23.50 after the company’s underwhelming first-half results due to the prolonged slump in smartphones and our doubts about the benefits from its proposed acquisition of automotive sound system company Acoustics Solutions International, which trades as Premium Sound Solutions. We view its shares as fairly valued following our update. Though we increased our 2024-27 operating income by 3% on average from our estimate made in March. The low profitability, capital-intensive new business segments, and further investments to integrate haptics and microphones in vehicles led us to increase our capital expenditure by 46% on average. We lower our midcycle returns on new investment capital and EBI growth assumptions to 10% and 8%, respectively, to reflect the slower growth outlook for the smartphone business and the competitive nature of the automotive infotainment business. We are also skeptical about AAC’s ability to meaningfully improve its profitability outlook as the company still looks keen to grow low-value businesses aggressively.