AAC issued a profit warning for 1Q20, stating that its 1Q20 net profit will decline 85-90% YoY to Rmb 43mn-63mn, significantly below our/consensus estimates of Rmb 339mn/413mn, mainly due to 1) production suspension on CONV-19 outbreak, 2) seasonal pricing pressure, 3) weak smartphone demand, 4) higher expenses for work resumption arrangements. Despite normal production recovery since mid-March, AAC expects end demand will remain uncertain for rest of 2020, which echoes our cautious view on product launch delay, demand weakness and margin erosion ahead. We also expect no upgrade in haptics/acoustics for 2H20E iPhones. Our FY20/21E EPS are 32%/22% below consensus. Maintain Sell and lowered TP to HK$ 29.0 based on 18x FY20E P/E.
- 1Q20 worse than feared on margin pressure and share loss. In addition to less working days on CONV-19 impact, we believe AAC’s 1Q20 miss was a results of 1) GPM erosion in acoustics/haptics, 2) share loss to Luxshare, and 3) casing ASP/margin pressure. In contrast to Luxshare’s pre-announced 1Q with 55-60% YoY NP growth, AAC issued a profit warning with 85-90% YoY NP decline, which implies downside to market’s positive view on AAC’s stablising haptics/acoustics market share and positive optics progress.
- Optics remains too small to move the needle. We think optics is the only bright spot for AAC, as mgmt. maintained bullish guidance to achieve 100kk/m plastic lens shipment by Jul 2020 (vs 45kk/m in 4Q19) and 6P/7P shipment will start in 3Q20E. While we are encouraged by AAC’s optics positive progress, we think shipment/ASP guidance seems too aggressive given Sunny/Q-tech’s conservative view and order uncertainty in 2H20E.
- Our FY20/21E EPS are 32%/22% below consensus. We trimmed our FY20-22E EPS by 4-19% to reflect higher margin pressure and continued demand weakness into 2H20E. We estimate net profit to grow -18%/-7%/+1% YoY in 2Q/3Q/4Q20E, driven by 1) more intense competition in acoustics/haptics, 2) slower optics ASP/shipment ramp, and 3) lack of major acoustics/haptics upgrade in 2H20 iPhone.
- Maintain Sell and reduced TP to HK$29.0 (31% downside). We expect more earnings downside following 1Q20E miss and uncertainty of new iPhone launch timeline. Our new TP of HK$29.0 is based on same target multiple of 18x FY20E P/E. Upside risks include stronger lens, better iPhone and less margin pressure.
