AAC’s 2Q20 net profit declined 21% YoY to RMB268, 11%/34% below our/ consensus estimate, while revenue (+12% YoY) is 6%/5% above our/market expectations. GPM remained weak at 23.3% (vs 25% in 2Q19), in-line with our estimate but well below 30.3% for consensus, mainly due to lower optics margin of 13.8% (vs 30% guidance). While we expect plastic lens shipment will remain on track to achieve 60kk/100kk per month by 3Q/4Q20E (vs 34kk/m avg. in 2Q), we are cautious on optics margin guidance (production GPM at 35%/40% in 3Q/4Q, vs 26% in 2Q), given slower spec upgrade, Huawei weakness (AAC’s No. 2 lens client) and intense competition. Given high-end demand weakness, mgmt. also toned down WLG lens production target to 20mn (from 30mn) in 2020. Our FY20/21E EPS is 20%/22% below consensus. Maintain Hold given fair valuation at 26x FY21E P/E and optics industry headwinds in 2H20E.
- 2Q20 miss on weaker optics margin. AAC’s 2Q20 net profit of RMB268 (-21% YoY) is 11%/34% below our/consensus estimates, while revenue delivered better growth of 12% YoY, driven by iPhone strength and Android restocking post-COVID-19. 2Q GPM came in at 23.2% below 30.3% for consensus, due to weaker optics margin in our view. By segment, acoustic/ MEMS/ ED&PM grew 8%/14%/11% YoY, while optics revenue (9% of sales) grew 43% YoY, largely in-line. We think major disappointment came from weaker optics margin at 13.8%, below guidance of 30% and our street-low estimate of 15%.
- Optics: margin headwinds in 2H20E despite higher “production GPM”. AAC disclosed plastic lens shipment/ASP for the first time, and 2Q lens shipment reached 102kk with avg. 34kk per month (vs 60kk/m output in 2Q). Mmgt. explained the difference between “production output/GPM” and “sales shipment/GPM” was due to inventory level of 1-1.5 month. Although mgmt. guided higher “production GPM” of 35%/40%+ in 3Q/4Q20E (vs 26% in 2Q20), we remain conservative on AAC’s optics GPM in 2H20E given weak spec upgrade, Huawei uncertainties (AAC’s No. 2 lens client) and industry headwinds with intense competition from Sunny/ Largan/ O-Film. We model 22%/25% for AAC’s optics GPM in 3Q/4Q20E (vs 13.8% in 2Q).
- Our FY20/21E EPS are 20%/22% below consensus; Maintain HOLD. We raised FY20-22E EPS by 2-8% for higher iPhone shipment forecast. Our FY20-22E EPS remains 13-22 % below consensus given our more bearish GPM estimates. Our new SOTP-based TP is HK$47.3, implying 22x FY21E P/E. Upside risks include better optics margin and stronger iPhone shipment.
