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CSCI-Initiation-Technology-AAC Technologies (2018 HK) ：Cutting-edge technologies keep coming-20180117

Cutting-edge technologies keep coming

• Having been a global leader and major supplier of acoustic products to Apple Inc., AAC looks set to enjoy strong revenue growth on technology upgrades and rising penetration of high-end acoustics among Chinese smartphone vendors over the coming 2-3 years.
• In Haptics and RF, AAC’s cutting-edge technologies allow it to further penetrate into the high-end procurement of leading Chinese smartphone vendors. In addition, the company looks well poised to become a game-changer in optics for use in AR and 3D sensing, in our view. 
• Given rich valuation, we initiate coverage on AAC with a Hold rating and DCF-based PT of HKD148, implying 5.5% potential upside.

Global leader in acoustics, with new technologies keeping coming. Acoustics is AAC’s cornerstone business that contributed 51.1% of its revenue in 1H17. Having boosted a cutting-edge in acoustics, AAC is on track to launching a re-designed stereo speaker box (‘Super Linear Speaker’) for Android customers in FY18E, with a 30% higher ASP compared with its existing acoustic products in our estimates. With an ever-increasing consumer appetite for more sophisticated and advanced smartphone features, we expect to see solid shipment growth with rising ASP in AAC’s acoustic business over the coming 2-3 years, driven by 1) rising acoustic content per device; 2) new features such as stereo, waterproofing and audio enhancement; 3) new materials and technologies; and 4) rising demand for voice-enabled IOT devices. 

2-3x higher ASP of new Haptics, increasingly the mainstream. AAC is a major supplier of haptics with LRA motors (gentle sensation and precision response) for Apple Inc.’s iPhone and Apple Watch. With full-screen becoming increasingly popular, we expect to see a proliferation of LRA configuration (as substitution of ERM motors) among Chinese smartphone vendors. Compared with ERM motors, haptics with LRA motors could see ASP 2-3x higher in our estimates.

Advanced RF products fitting well into 4G and 5G smartphones requirements. AAC’s RF business (including structural components and antennas) builds on its strong foundation in precision molding, electromagnetic manufacturing and yield control from its acoustic business. Having been a supplier of mid-ranged RF products, AAC made inroads into the high-end RF products procurement of the major Chinese smartphone vendors (Huawei, OPPO and Meizu etc.) since 2H17. Its new RF products feature 3D glass with metallic middle frames and LDS antennas, which would increasingly become the mainstream for smartphones on 4.5G and upcoming 5G networks in our view. Though a later comer, AAC is well positioned to enjoy strong growth of its RF business.

AAC’s foray into optics and 3D sensing. AAC has entered the optic market since 2009, having established its capacity in (plastic and glass) hybrid lens and pure-glass WLL (“wafer level lens”) through its acquisitions of Kaleido and I. Square as well as investment in Heptagon (later on sold to AMS AG). Yet to reach mass production of hybrid lens, AAC could be a game-changer in next-generation optics for the rapidly emerging applications like AR and 3D sensing, in our view.  

Initiate coverage with HOLD rating. Our DCF generated a valuation of HKD148,  representing FY18E PER/PBR of 22.0x/7.0x respectively. AAC trades at FY18E PER of 20.9x and 18E PBR of 6.7x, which looks fair in view of its cementing industry-leading position and still expanding addressable market driven by new technologies, features and applications as well as upcoming 5G.