AAC announced to introduce 18 new strategic investors (led by Sequoia Capital China and State Development & Investment Corp.) to its optics subsidiary, AAC Optics, with a Rmb 1.66bn capital increase for 9.28% enlarged equity. AAC also targeted separate listing of AAC Optics within next 3 years, which is part of redemption rights for these investors. While we are positive on more investment in AAC’s lens/CCM capacity, we remain cautious on its optics ASP and profitability in 2H20E, given ongoing de-spec trend, Huawei ban (AAC’s No. 2 lens client), lower WLG visibility and intense competition in mid/low-end optics. Our FY21-22E EPS are 16%/7% below consensus. Maintain Hold with new TP HK$47.5 given fair valuation at 21x FY21E P/E and optics headwinds in 2H20E.
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Introduction of 18 new strategic investors. Following introduction of four first-round strategic investors (incl. OPPO, Xiaomi) on 22 July, AAC announced to introduce 18 new investors into AAC Optics with Rmb 1.66bn on 9 Oct. The deal implies valuation of RMB 17.9bn for AAC Optics (vs Rmb12bn in 22 Jul), and AAC’s 82% stake represented 31% of AAC’s mkt. cap as of 9 Oct 2020.
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Optics: ASP/margin headwinds due to Huawei ban and de-spec trend. Although mgmt. guided “30% reported GPM” for optics in 3Q20E, we remain conservative with GPM of 22%/25% in 3Q/4Q20E (vs 13.8% in 2Q), given ongoing de-spec trend, Huawei ban (AAC’s No. 2 lens client) and intense competition in mid/low-end lens from Sunny/Largan/O-Film. In addition, although we expect 1-2 WLG projects in 4Q20E, we see lack of visibility for strong demand of hybrid lens in near term, and we recommend to stay on the sidelines before AAC delivers any significant progress.
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Better iPhone volume but acoustics/haptics/casing still under pressure. While we think AAC will benefit from iPhone 12 cycle with stabilizing share allocation, we believe its iPhone business (acoustic/haptics, 33% of FY20E sales) will face ASP pressure on lack of upgrade, and its casing biz (Huawei mainly, 16% of sales) will see shipment decline given Huawei ban in 2H20E.
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Our FY21/22E EPS are 16%/7% below consensus; Maintain HOLD. We trimmed FY20-22E EPS by 2%/2%/2% for lower optics/casing shipment due to Huawei ban impact. Our FY21-22E EPS remains 16%/7% below consensus given our more bearish GPM estimates. Our SOTP-based TP is largely unchanged at HK$47.5, implying 22.4x FY21E P/E. Upside risks include better optics margin and stronger iPhone shipment.
