Company Reports

Over the past decade, AAC has benefited from the rise of Apple, which accounts for around half of the firm’s sales, by supplying acoustics and haptics components to the phonemaker and its laptop casing, through the Toyo Precision acquisition. However, AAC has had to endure a slowdown in the adoption of the new speaker and touch feedback technologies by Apple and intensifying competition within Apple’s supply chain. As a result, its return on invested capital declined to negative 1% in 2023 from 35.8% in 2013.

We raised our fair value estimate for AAC Technologies to HKD 23 from HKD 17 due to improved upgrade visibility for its speakers and microphone components and access to Premium Sound Solutions’, or PSS', customer base of leading global automakers. However, we believe the market has fully priced in the improved specification upgrade demand, better optics execution, and synergies from the PSS acquisition.

Over the past decade, AAC has benefited from the rise of Apple, which accounts for around half of the firm’s sales, by supplying acoustics and haptics components to the phonemaker and its laptop casing, through the Toyo Precision acquisition. However, AAC has had to endure a slowdown in the adoption of the new speaker and touch feedback technologies by Apple and intensifying competition within Apple’s supply chain. As a result, its return on invested capital declined to negative 1% in 2023 from 35.8% in 2013.

Over the past decade, AAC has benefited from the rise of Apple, which accounts for around half of the firm’s sales, by supplying acoustics and haptics components to the phonemaker and its laptop casing, through the Toyo Precision acquisition. However, AAC has had to endure a slowdown in the adoption of the new speaker and touch feedback technologies by Apple and intensifying competition within Apple’s supply chain. As a result, we estimate its return on invested capital will decline to negative 3.8% in 2023 from 33.1% in 2013.

We have fine-tuned our forecasts but kept our fair value estimates for both Sunny Optical and AAC Technologies unchanged at HKD 107 and HKD 17, respectively, as we remain cautiously optimistic about a recovery in smartphone demand and camera upgrades in 2024. While we believe in a meaningful recovery in 2024 based on upbeat industry data and excitement over Huawei’s next flagship smartphone launch, we reckon Sunny’s shares are undervalued as Sunny should capture the most of the direct benefits from the camera arms race between Huawei and Apple in the long run, which is not fully priced in. On the other hand, we believe AAC’s shares are overvalued as we are concerned that AAC’s less advanced product mix is not enough to benefit from the recovery of the high-end market and will continue to suffer from increased competition, while the market is too optimistic about the recovery. We think artificial intelligence in digital photography is neutral to smartphone camera makers.

Following Apple’s launch event, we make no change to our forecasts and fair value estimates for Apple's suppliers like TSMC (TWD 850), Sunny Optical (HKD 107), Luxshare Precision (CNY 41.50), Largan (TWD 2,500), and AAC Technologies (HKD 17). We think the launch is slightly negative to the supply chain. This is due to possible renewed fears that Apple is increasing pressure on its suppliers to maintain its profitability, at the latter's expense. No-moat Luxshare and AAC should bear the brunt of such pressure, in our view. Sentiment may worsen further as China says it has noticed “security incidents" concerning Apple's iPhones, reinforcing worries that China may extend its iPhone usage ban to groups beyond civil servants.

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.

Over the past decade, AAC has benefited from the rise of Apple, which accounts for around half of the firm’s sales, by supplying acoustics and haptics components to the phonemaker and its laptop casing, through the Toyo Precision acquisition. However, AAC has had to endure a slowdown in the adoption of the new speaker and touch feedback technologies by Apple and intensifying competition within Apple’s supply chain. As a result, its return on invested capital declined to 1.8% in 2022 from 33.1% in 2013.

We are disappointed that AAC Technology warned that its net profit for the first half of 2023 would fall by 55%-65% from the year-earlier period (midpoint: CNY 140 million, CNY 0.12 per share), citing a delay in efficiency improvements. Given that about 40% of its business is iPhone-related—demand for which has been relatively resilient versus that for Android smartphones—we had expected AAC’s earnings decline to be closer to Largan’s reported 37.1% decline rather than Sunny Optical’s and Q Technology’s respective midpoint guidance declines of 67.5% and 70.0%. For now, we maintain our fair value estimate for AAC Technology at HKD 23.50 and plan to update our estimates after AAC reports first-half earnings in late August.

We maintain our fair value estimate for AAC Technologies’ shares at HKD 23.5 after updating our earnings forecasts following the company’s fourth-quarter results release. We expect the profitability of the optics segment to improve in 2023 as management has realized that the aggressive expansion strategy is not feasible. We view AAC shares to be slightly undervalued as the company’s core competencies, such as acoustics and haptics, continue to generate durable cash flows. Meanwhile, smartphone demand recovering in the latter half of 2023 will spur haptics specification upgrades and alleviate competitive pressure on optics. We believe there is potential for an upside surprise in our forecasts and the stock price coming from sales volumes of automotive acoustics and incremental revenue from cross-selling optics and haptic systems to automakers as current visibility remains low.

Over the past decade, AAC has benefited from the rise of Apple, which accounts for around 45% of the firm’s sales, by supplying acoustics and haptics components to the phone maker. However, AAC has had to endure a slowdown in the adoption of the new speaker and touch feedback technologies by Apple and intensifying competition within Apple’s supply chain. As a result, its return on invested capital declined to 4.6% in 2021 from 31% in 2012.

We raised our fair value estimate of AAC Technologies' shares to HKD 23.5 from HKD 19 as we project haptics to enjoy improved prospects due to new smartphone applications. We expect the company to pare back on its aggressive cash burn toward optics as it becomes evident that the risk-reward tradeoff for the venture is unattractive. We view AAC shares to be slightly undervalued, and the market seems to overlook its value in core competencies such as haptics and focuses excessively on unproven execution in optics. Upside catalysts for AAC include further indications of solid-state buttons on iPhones and midrange smartphone recovery once macro conditions cease to deteriorate.

Over the past decade, AAC has benefited from the rise of Apple, which accounts for around 45% of the firm’s sales, by supplying acoustics and haptics components to the phone maker. However, AAC has had to endure a slowdown in the adoption of the new speaker and touch feedback technologies by Apple and intensifying competition within Apple’s supply chain. As a result, its return on invested capital declined to 4.6% in 2021 from 31% in 2012.

Over the past decade, AAC has benefited from the rise of Apple, which accounts for over 30% of the firm’s sales, by supplying acoustics and haptics component to the latter. However, AAC has had to endure a slowdown in the adoption of new speaker and touch feedback technology by Apple and intensifying competition within Apple’s supply chain. As a result, its return on invested capital declined to 4.5% in 2020 from 38.9% in 2010.

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.

We trimmed our fair value estimate for narrow-moat Sunny Optical to HKD 180 from HKD 190 as it experiences more significant headwinds from having greater exposure to the Android and Chinese market than we had expected in March. Sunny’s recent shipment data underperformed its peers that either have more exposure to the iPhone, which is currently more resilient; or to lower-end handsets. Sunny may possess greater risk in the near term as Chinese middle-class consumers’ appetite for electronic goods vanishes due to the recession concerns. Therefore, we cut our 2022 handset lens sets and handset camera modules shipment estimate for Sunny Optical on fewer cameras per phone and market share loss.

We maintain our fair value estimate for no-moat AAC Technologies at HKD 29 as our long-term margin expansion story driven by the lens upgrades and utilization improvement is intact. Lens profitability is dragged by ongoing price pressure amid a challenging smartphone environment. Mobile phone component players, including AAC, suffered from more significant delays in shipments and upgrades as tepid demand continued. We think AAC can improve camera module utilization by reducing its planned capital expenditure spending on the segment as it has already built out most of its capacity for the next two to three years. As we expect demand for smartphone upgrades to recover and supply constraints to alleviate in 2023, we continue to believe that its shares are undervalued.

Although we slashed our AAC Technologies’ fair value estimate to HKD 29 from HKD 56 as we refreshed our long-term profitability outlook for optics, we still find the stock undervalued. While we believe the market assumes its lenses’ average selling price and gross margins will not recover from 2021, we view that the company can, without great difficulty, recover its profitability through improving utilization rate and better cost efficiency amid intense competition. Based on the current market price, we think the market perceives the company would have zero success in the automotive and metaverse segments and its wafer-level-glass lenses products. However, we think the company can succeed in non-smartphone markets by helping research and development-focused partners with commercialization. Overall, we believe that the market is too pessimistic about AAC’s margin recovery.

Over the past decade, AAC has benefited from the rise of Apple, which accounts for over 30% of the firm’s sales, by supplying acoustics and haptics component to the latter. However, AAC has had to endure a slowdown in the adoption of new speaker and touch feedback technology by Apple and intensifying competition within Apple’s supply chain. As a result, its return on invested capital declined to 4.5% in 2020 from 38.9% in 2010.

We retain our fair value estimate for AAC Technologies of HKD 56 per share despite the company expecting fourth quarter of 2021 net profit plunged 75% year on year to HKD 189 million at the midpoint, and 58% lower than our expectations. Chip shortage was once again the cited reason for the disappointment, but more importantly, lukewarm non-China smartphone shipments pressured prices of AAC’s low- to mid-end plastic lenses. No top line figure was given. We believe AAC’s shares remain attractive as a hybrid lens is a viable next phase of smartphone upgrade as adding lenses or making them bigger become less feasible. As well, automotive cameras are likely to pave growth for the next decade. On top of that, the market is pricing in miniscule likelihood of success in AAC’s non-smartphone endeavors.