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CSCI-Technology-AAC Technologies (2018 HK) ：Another strong year ahead - 20180328

Another strong year ahead

• AAC reported a solid set of FY17 results with revenue and profit in-line with both our and market expectations. The company proposed a final DPS of HKD1.70 (HKD1.17 for FY16).
• In 2017, AAC continued to entrench its industry leadership position with broad-based growth across all segments. The company made further foray into the Android camp, exemplified by speaker modules (‘SLS’) and low-to-medium-end haptics.     
• We have revised up our FY18E/FY19E revenue and FY19E profit estimates by 1.7%/4.9% and 3.3%, respectively, and raised our DCF-based price target to HKD180. Upgrade to Buy. 

A solid set of FY headlines. As well expected, AAC reported a strong set of FY17 headlines. Revenue rose 36.2% YoY, driven by sturdy growth from haptics/RF (+51.2% YoY, 49.7% of total revenue) and acoustics (+22.8%, 49.4% of total revenue). Gross margin expansion of Haptics/RF and MEMS microphones was offset by margin squeeze in dynamic component (speaker module, receivers, etc.). The company proposed a final DPS of HKD1.70 (HKD1.17 for FY16).  

Cutting-edge technologies drive core business growth. AAC has launched its Gen-1.0 of Super Linear Structure (‘SLS’) for the Android camp featuring elevated acoustic performance with 30% ASP increment and 150mn shipment in FY18E, per our estimates. Furthermore, we expect acceleration of linear motor adoption of Android camp to drive a 10-fold growth in shipments from Chinese smartphone vendors. In the meanwhile, MEMS microphone saw a rebound in volume and margin on rising in-house supply of MEMS ASIC. We maintain our rosy outlook on AAC’s core business and entrenched leadership position. 

AAC’s foray into optical field to bear fruit. AAC has already built a monthly capacity of 20mn and 5mn for plastic lens and WLG (‘Wafer Level Glass’) respectively. We expect mass delivery of WLG and full utilisation by end of 1H18/2H18 respectively. With continued expanding capacity and improving margin, AAC is set to change the game by offering hybrid lens in the application of 3D sensing and imaging. We expect its WLG lens to be adopted by Huawei and Xiaomi by 2H18 as in the case with their 3D sensing collimator, while we see it is highly likely that AAC could obtain vivo’s front camera lens and Huawei’s back camera lens orders by 2019. 

Broad-based proliferation bucking a lukewarm industry. We see a promising FY18 underpinned by both wider and deeper penetration into the Android camp’s procurement as well as its sturdy position in the Apple supply chain. Multi-cylinder growth calls for re-rating. We have revised up our FY18E/FY19E revenue and FY19E profit estimates by 1.7%/4.9% and 3.3%, respectively, and raised our DCF-based price target to HKD180. Upgrade to Buy.