AAC reported another disappointing 2Q with NP decline of 48% YoY (-62% YoY in 1Q), 38%/41% below our/consensus estimates, mainly due to GPM significant decline to 25% (vs 31% for our est.) on intense competition across all segments. Given share loss in haptics/acoustics, limited spec upgrade and iPhone shipment downside, we trimmed FY19-21E EPS by 15-25%, and cut our TP to HK$29.6 (20% downside) based on 12.5x FY20E P/E. Maintain Sell.
- 2Q miss on worse-than-expected GPM. Despite stabilized revenue in 2Q (+1% YoY), AAC’s 2Q net profit slumped 48% YoY thanks to GPM reaching historical low at 25.0% (vs 35.2%/30.1% in 2Q18/1Q19). By segment, acoustics (48% of sales) and haptics/casings (39%) declined 6.2%/2.5% YoY, while optics (7%) maintained strong growth with 74% YoY and MEMs (4%) grew 37% YoY. Mmgt. expected optics to become strategic key growth driver, and acoustics upgrade will drive margin recovery in 2H19E.
- Optics is the only bright spot but too small to move the needle. AAC optics grew 74% YoY in 2Q, and mgmt. guided plastic lens shipment will double to 60kk/60-70kk per month in 4Q19E/1Q20E (vs 30kk/m in 2Q19). As for WLG lens, mgmt. believed it will be widely adopted in 1) periscope lens, 2) main-cam for 64MP/128MP and 3) under-display camera for better transparency. AAC has recruited 100 employees under training in Denmark now and targeted to commerce WLG mass production in 4Q19E.
- Acoustics SLS upgrade and stepper motor/x-axis haptic in 2H19. Gross margin for both acoustics and haptics/casings reached historical low at 27.1% in 2Q, well below 37.2%/32.9% and 41.1%/32.2% in FY18/1Q19. AAC’s entry-level SLS penetrated into 50% of Android shipments (vs 35% in 1Q), and mgmt. expected to reach 70% in 4Q19E, driving 2H19E GPM recovery. As for haptics/casings, AAC expected stepper/x-axis motors to penetrate into more Android models, and automation/integration will boost GPM ahead.
- Our EPS are 26%-34% below consensus; Trimmed TP to HK$29.6. We believe AAC is still in transition period beyond acoustics/haptics slowdown. We cut our EPS by 15-25% to reflect 2Q miss and lower overall GPM despite stronger optics. We revised down our TP to HK$29.6 based on 12.5x FY20E P/E, in-line with 1-sd below 5-yr average P/E. Maintain Sell. Upside risks include stronger lens demand, better iPhone sales and less margin pressure.
