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AAC Technologies (2018 HK) - Growing uncertainties; Downgrade to NEUTRAL

作者: Kevin CHEN,Clint SU
时间: 2018年11月08日
重要性: 一般报告
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摘要: Report title:AAC Technologies (2018 HK) - Growing uncertainties; Downgrade to NEUTRAL
Analyst:Kevin CHEN,Clint SU
Report type:Company
Date:20181108
[Summary]

■ 3Q18 results missed on weaker shipment and pricing trends from weaker than expected upgrade cycles
■ We expect uncertainties and challenges ahead for AAC due to slowing smartphone growth and increasing competition
■ Downgrade to NEUTRAL; lower TP to HK$60

3Q18 results disappointed on lower shipment/pricing
AAC revenue fell 9% YoY to RMB4.9bn (13% below consensus) in 3Q18, hurt by shipment and ASP decline in Acoustic and Haptic & Mechanical (H&M). Optics revenue doubled YoY to RMB174mn as shipment growth remained on track. Overall GM rose 190bps QoQ to 37% in 3Q18 (below Street’s 39%), due to 1) pricing pressure from legacy products, 2) fewer shipments from weaker than expected upgrade cycles. AAC no longer provides guidance, but it expects its margins to recover on improved utilization, targeting 40% GM for its key businesses longer term.

Expect growing uncertainties ahead
We now hold a more conservative view on AAC’s outlook, given 1) rising smartphone demand uncertainties: Global smartphone shipment decline widened (3%/2%/6% YoY in 1Q/2Q/3Q18, by IDC estimates), and Apple guidance points to a 5% iPhone shipment QoQ decline to 73mn units in 4Q18; 2) increasing competition, e.g. Luxshare (002475 CH) taking share in Acoustic. For Optic, current hybrid lens projects are mostly for imaging, thus subject to intense competition from leading handset camera lens suppliers. We lower our forecast for AAC, now expecting its revenue/NP to decline 5%/18% in 2018E, and return to growth at 2018-20E CAGR of 16%/22% (previously 25%/30%).

Downgrade to NEUTRAL; lower estimates/TP
We downgrade AAC Technologies to NEUTRAL (from BUY) as we expect increasing challenges and uncertainties ahead. AAC shares fell 62% YTD (vs. HSI 14%), now trading at 11x 2019E P/E (below -1 Std. average). We lower our 2018/19 EPS estimates 18%/24%, and our TP to HK$60 (from HK$110) based on 12x 2019E P/E (previously 16x). In the handset component sector, we prefer Sunny Optical (2382 HK) as triple-camera remains a clear trend for smartphone specs upgrade in 2019.

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