We maintain Sell rating with lowered TP of HK$35.8 for our cautious view on iPhone launch delay, aggressive optics guidance and order uncertainty. Although recent 40% share price correction has priced in 1H20 iPhone weakness and COVID-19 supply impact, we believe there is still downside on consensus earnings due to product launch delays and demand weakness. We trimmed FY20/21E EPS by 15%/7% for 4Q19 miss, weaker margin and COVID-19 disruption. Our EPS are 31%/26% are below consensus. We would take a more positive stance if we saw demand recovery, better lens shipment and gross margin improvement.
- 4Q19 miss on GPM and lower ASP. AAC reported 4Q19 net profit decline of 27% YoY, 5%/24% below our/consensus estimates. The miss was mainly due to 1) weaker GPM in acoustics/haptics, and 2) optic’s weaker ASP and lower shipment of 45kk/m in 4Q (vs 60kk/m prev. guidance). By segment, acoustics (42% of sales) reversed declining trend with 19% growth, while haptics/casings (46%) declined 6% YoY and optics (6%) grew 150% YoY.
- Conservative on optics’s aggressive guidance. Optics was the only bright spot in 4Q19 with 150% revenue YoY (vs 81% YoY in 3Q). Mgmt. targets to achieve 100kk/m plastic lens shipment (vs 45kk/m in 4Q19) with ASP Rmb 4.2-4.5 by Jul 2020 (delayed from 1Q20E), and 6P/7P shipment will start in 3Q20E. As for WLG lens, mgmt. plans to start mass production in 2Q20E and annual shipment will reach 30mn in FY20E. While we are impressed by AAC’s optics progress, we think shipment guidance of 100k/m by July looks too aggressive given Sunny’s conservative view on handset lens and order uncertainty in 2H20E.
- Our FY20/21E EPS are 31%/26% below consensus. After 7 consecutive quarters of earnings decline due to share loss and slow spec upgrade, we expect AAC’s gross margin will remain under pressure in FY20E. We expect net profit to grow -0.1%/-2.4%/+6.4% YoY in 2Q/3Q/4Q20E, driven by 1) deteriorated landscape in acoustics/haptics market, 2) slower-than-expected optics ramp given Sunny’s conservative shipment/ASP guidance, and 3) lack of major upgrade except optics (6% of AAC sales).
- Maintain Sell; demand visibility remains weak. While market has priced in 1H20 weakness, we expect earnings downward revision and iPhone launch uncertainty due to COVID-19 will continue to put the stock under pressure. Our new TP of HK$35.8 is based on same target multiple of 18x FY20E P/E. Upside risks include stronger lens, better iPhone and less margin pressure.
