AAC reported 1Q20 net profit decline of 88% YoY, largely in-line with profit warning earlier (down 85-90% YoY), and revenue decline of 5% YoY is better than our/market expectations. While China smartphone market is recovering in 2Q20E, we think overseas demand weakness, inferior product mix and margin pressure across all segments will continue to drag AAC’s earnings in next few quarters. We trimmed FY20-22E EPS by 4-15% to reflect lower blended GPM, and our new FY20-22E EPS are 28%/31%/21% below consensus. Maintain Sell with new TP of HK$ 36.0 based on roll-over 18x FY21E P/E.
- 1Q20 in-line but GPM worse than expected. AAC 1Q20 net profit decline of 88% YoY came in at midpoint of earlier guidance, while revenue drop of 5% YoY is better than our/market estimates, due to higher casing/optics revenue. By segment, we estimate acoustic/haptics (65% of sales) were down 24%/9% YoY, offset by lower-margin casings/optics growth of 44%/62% YoY. 1Q20 GPM continued to worsen and reached historical low at 23.1%, which is below 24.3%/25.2% for our/market estimates.
- Optics: Good progress but guidance remains too aggressive. We think optics is the only bright spot for AAC, but recent progress is slower than previous guidance in late-March. Mgmt. postponed various targets: 1) plastic lens shipment: 60kk/100kk per month by 2Q20/3Q20 (from Apr/July prev.), 2) 7P lens: mass production in 4Q20 (from 3Q20 prev.), 3) camera module: mass production in 2H20E (from May prev.). Other guidance included 30%/40%/40%+ GPM by 2Q/June/2H20E (vs ~10% in 1Q20), and 30mn WLG shipment in FY20E. Overall, we believe optics guidance remains too aggressive, given Xiaomi/Huawei pressure in 2Q20E (AAC’s major optics clients) and lack of WLG visibility on flagship model weakness.
- Our FY20/21E EPS are 28%/31% below consensus. We trimmed our FY20-22E EPS by 4-15% to reflect inferior product mix, higher margin pressure and shipment weakness into 2H20E. We estimate net profit will continue to decline 23%/9%/2% YoY in 2Q/3Q/4Q20E, mainly driven by lack of acoustics/haptics upgrade in 2H20 iPhones, slower optics shipment/ margin ramp, and higher mix of lower-margin casing segments.
- Maintain Sell with new TP of HK$36.0. We expect more earnings downward revisions following 1Q20 results, iPhone launch delay and slower global smartphone recovery. Our new TP of HK$36.0 is based on roll-over target multiple of 18x FY21E P/E (from 18x FY20 P/E). Upside risks include stronger lens, better iPhone and less margin pressure.
