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Please read carefully the important disclosures at the end of this report

Equity Research

November 13, 2017

AAC Technologies Holdings

Raise TP to HK$228, BUY for further clarity in optics business

Investment Focus

Maintain BUY

Action

To factor in the faster than expected growth of the optics and 3D glass businesses, we raise our FY18/19 earnings forecasts by 9%/17%. We recommend investors BUY AAC, as it is a key beneficiary of the rising adoption of 3D sensing in smartphones. Our new target price of HK$228 is based on SOTP valuation, implying 32x FY18e.

Reasoning

Further clarity in AAC’s optics strategy: based on recent industry developments, such as AMS/Sunny cooperation, we become more confident that 3D sensing will be the major differentiation factor for Chinese smartphones in 2018. During its analyst briefing, AAC disclosed its lens shipments exceeded 10mn/month in 3Q17; and it expects its plastic lens capacity to reach 30mn/month by 1H18 and hybrid lens capacity to reach 5–10mn/month by end-2018. By leveraging its innovative WLG (wafer-level glass) technology and fast- growing lens capacity, we expect AAC’s lens business will grow 637%/75% in 2018/19, and contribute 10% of group sales in 2019.

Limited downsides in acoustic and haptics: We expect AAC’s acoustics/haptics & RF mechanics businesses to grow 30%/33% YoY in 2017, driven by: 1) rising adoption of advanced accoustics platforms and haptics in Android smartphones as well as rising 3D glass shipments. We see limited market share risks in both business in 2018 because of the slower-than-expected growth of its competitors, such as Luxshare.

Earnings forecast and valuation

After the revision, we expect AAC to achieve 31%/40% earnings growth in 2017/18e, and for its optics business to contribute 10% of group sales in 2019. We derive a new TP of HK$228 based on our SoTP valuation (+52% from prior TP of HK$150), implying 32x FY18 EPS (HK$107.4 for acoustics, HK$71.1 for haptics & RF mechanics, HK$47.4 for optics, and HK$2.1 for MEMS).

Risks

Intensified competition in acoustics and haptics. Slower than expected adoption of 3D sensing cameras in Android smartphones.

Ticker 02018.HK

CICC investment rating BUY

Last close HK$169.40

CICC target HK$228.00

52wk price range HK$177.90~64.24

Market cap (bn) HK$207

Daily value (mn) HK$715.97

Shares outstanding (mn) 1,222

Free float (%) 100

Daily volume (mn sh) 4.84

Business sector Electronic Components

(Rmb mn) 2015A 2016A 2017E 2018E

Revenue 11,739 15,507 20,645 28,504

(+/-) 32.2% 32.1% 33.1% 38.1%

Net profit 3,107 4,026 5,279 7,415

(+/-) 34.1% 29.6% 31.1% 40.4%

EPS 2.54 3.29 4.32 6.07

BPS 9.29 11.63 14.63 18.97

DPS 0.77 1.07 1.32 1.73

CPS 3.08 3.94 3.52 6.45

P/E 55.8 46.0 33.6 23.2

P/B 15.3 13.0 9.9 7.4

EV/EBITDA 41.4 32.4 23.7 16.2

Dividend yield 0.5% 0.7% 0.9% 1.2%

ROAA 20.9% 19.8% 19.5% 22.1%

ROAE 30.2% 31.5% 32.9% 36.1%

Source: Wind, Bloomberg, company data, CICC Research

Leping HUANG Jiaying ZONG

Analyst Associate [email protected]

SAC Reg. No.: S0080117030005

SFC CE Ref: AUZ066

[email protected]

SAC Reg. No.: S0080516080003

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CICC Research: November 13, 2017


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Financial summary Financial statement (Rmb mn) 2015A 2016A 2017E 2018E

Income statement

Revenue 11,739 15,507 20,645 28,504

COGS -6,867 -9,064 -12,235 -16,902

Selling expenses 803 763 934 1,232

Administrative expenses 0 0 0 0

Other ops income (expense) 0 0 0 0

Operating profit 3,387 4,663 6,081 8,473

Finance costs 0 0 0 0

Other income (expense) 71 37 93 144

Profit before income tax 3,435 4,633 6,080 8,538

Income tax -325 -609 -799 -1,122

Minority interest 0 0 0 0

Net profit 3,107 4,026 5,279 7,415

EBITDA 4,182 5,724 7,582 10,644

Recurrent net income 3,107 4,026 5,279 7,415

Balance sheet

Cash and bank balances 2,224 3,864 3,724 3,982

Trade and bill receivables 4,239 5,568 7,524 10,551

Inventories 1,718 2,623 3,172 4,829

Other current assets 0 774 774 774

Total current assets 8,181 12,829 15,194 20,136

Fixed assets and CIP 7,065 9,479 12,698 15,284

Intangible assets and others 1,175 1,950 1,935 1,918

Total non-current assets 8,239 11,428 14,633 17,202

Total assets 16,420 24,257 29,827 37,338

Short-term borrowings 1,159 3,304 5,000 4,000

Trade and bill payables 2,246 4,377 4,587 7,795

Other current liabilities 921 1,445 1,445 1,445

Total current liabilities 4,326 9,125 11,032 13,240

Long-term borrowings 649 789 789 789

Total non-current liabilities 740 917 917 917

Total liabilities 5,066 10,042 11,949 14,157

Share capital 1,228 1,228 1,222 1,222

Retained profit 10,079 12,961 16,630 21,933

Equity 11,354 14,215 17,878 23,181

Total liabilities & equity 16,420 24,257 29,827 37,338

Cash flow statement

Pretax profit 3,435 4,633 6,080 8,538

Depreciation & amortization 708 958 1,313 1,949

Change in working capital -286 -286 -2,295 -1,476

Others -96 -493 -800 -1,124

Cash flow from operations 3,760 4,812 4,298 7,888

Capital expenditure 2,434 4,040 -4,518 -4,518

Others -4,903 -8,157 0 0

Cash flow from investing -2,469 -4,117 -4,518 -4,518

Equity financing 0 0 0 0

Bank borrowings 300 2,201 1,696 -1,000

Others -1,021 -1,404 -1,616 -2,112

Cash flow from financing -721 797 80 -3,112

Foreign exchange gain (loss) 51 149 0 0

Net changes in cash 621 1,641 -140 258

Financial ratios 2015A 2016A 2017E 2018E

Growth ability

Revenue 32.2% 32.1% 33.1% 38.1%

Operating profit 30.3% 37.7% 30.4% 39.3%

EBITDA 33.6% 36.9% 32.5% 40.4%

Net profit 34.1% 29.6% 31.1% 40.4%

Profitability

Gross margin 41.5% 41.5% 40.7% 40.7%

Operating margin 28.8% 30.1% 29.5% 29.7%

EBITDA margin 35.6% 36.9% 36.7% 37.3%

Net margin 26.5% 26.0% 25.6% 26.0%

Liquidity

Current ratio 1.89 1.41 1.38 1.52

Quick ratio 1.49 1.12 1.09 1.16

Cash ratio 0.51 0.42 0.34 0.30

Liabilities / assets 30.9% 41.4% 40.1% 37.9%

Net debt / equity net cash 1.6% 11.5% 3.5%

Return

RoA 20.9% 19.8% 19.5% 22.1%

RoE 30.2% 31.5% 32.9% 36.1%

Per-share data

EPS (Rmb) 2.54 3.29 4.32 6.07

BPS (Rmb) 9.29 11.63 14.63 18.97

DPS (Rmb) 0.77 1.07 1.32 1.73

Cash flow per share (Rmb) 3.08 3.94 3.52 6.45

Valuation

P/E 55.8 46.0 33.6 23.2

P/B 15.3 13.0 9.9 7.4

EV/EBITDA 41.4 32.4 23.7 16.2

Dividend yield 0.5% 0.7% 0.9% 1.2%

Source: Company data, CICC Research

Company description Founded in 1993, AAC has grown into a world-leading supplier of micro component solutions for the communications, IT, and consumer electronics markets. The company designs, manufactures and distributes acoustic and non-acoustic products, including radio frequency (RF), integrated, optical, Li-ion polymer battery, and haptic solutions. AAC owns 11 R&D centers and has >500 senior research staff and engineers. It also has set up four production facilities in China, all of which use cutting-edge automatic production equipment. Backed by these R&D centers and production facilities, AAC is capable of delivering one-stop solutions for customers, including Samsung.



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Contents

Raise TP to HK$228 for optics ................................................................................................................................................ 4

Valuation: raise TP to HK$228 ................................................................................................................................................... 5

Company analysis .................................................................................................................................................................. 7

Optics: further clarity on both plastics and hybrid lens sales ................................................................................................... 7

Acoustics: weak 3Q due to iPhone X delay; android upgrade to drive growth in 2018 ............................................................ 8

Haptics and RF Mechanics: 41% YoY growth in 2018 ............................................................................................................... 9

3Q17 results review and analyst call takeaways ................................................................................................................... 11

Key takeaways from analyst briefing ...................................................................................................................................... 12

Figures

Figure 1: Forecast revision .............................................................................................................................................................. 4 Figure 2: Forecast revision by segments......................................................................................................................................... 4 Figure 3: CICC vs. consensus ........................................................................................................................................................... 5 Figure 4: CICC vs. consensus ........................................................................................................................................................... 5 Figure 5: Peer valuation – Global Optics peers ............................................................................................................................... 5 Figure 6: 12 month forward P/E band ............................................................................................................................................ 6 Figure 7: 12 month forward P/B band ............................................................................................................................................ 6 Figure 8: Forecast revision: Optics .................................................................................................................................................. 7 Figure 9: Mainstream solutions for 3D optical sensing .................................................................................................................. 7 Figure 10: Largan’s monthly revenue YoY growth ........................................................................................................................ 8 Figure 11: Sunny Optical’s monthly handset lens shipment YoY growth ........................................................................................ 8 Figure 12: AAC vs. Sunny vs. Largan -- where will be AAC’s optics business in 2019 ................................................................... 8 Figure 13: Forecast revision: Acoustics ........................................................................................................................................... 9 Figure 14: Acoustic peer comparison: AAC vs. Goertek ................................................................................................................. 9 Figure 15: Forecast revisions: Haptics and RF Mechanics .............................................................................................................. 9 Figure 16: 3Q17 results summary: actual vs. CICC vs. consensus ................................................................................................ 11 Figure 17: 3Q17 results summary by segment ............................................................................................................................. 12



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Raise TP to HK$228 for optics

We raise our FY18/2019 earnings forecasts by 9%/17% respectively, mainly to factor in the faster than expected development of AAC’s optics business.

After the revision, we expect AAC to achieve 31%/40% earnings growth in 2017/18, respectively, and the optics business to contribute 10% of group sales in 2019. We also slightly cut our 2017 AAC forecast 6% mainly due to delays in iPhone X shipments in 4Q17.

Figure 1: Forecast revisions

Source: Company data, CICC Estimate

Figure 2: Forecast revisions, by segment

Source: Company data, Bloomberg, CICC Research

After revision, we are 13%/21% above Bloomberg consensus’ 2018/19 EPS, reflecting our bullish view on the optics business.

(Rmb mn) 1Q17 2Q17 3Q17 4Q17 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E

A A A (CICC) A (CICC) (CICC) (CICC) (OLD) (OLD) (OLD) Diff Diff Diff

Revenue 4,215 4,429 5,324 6,677 15,507 20,645 28,504 35,781 21,679 26,207 30,971 -5% 9% 16%

% chg YoY 66% 47% 27% 20% 32% 33% 38% 26% 40% 21% 18%

COGS 2,461 2,642 3,124 -4,008 9,064 12,235 16,902 21,176

Gross Profit 1,754 1,787 2,199 2,669 6,443 8,409 11,602 14,605

OPEX 524 580 685 738 1,929 2,527 3,403 4,200

Operating Income 1,263 1,266 1,550 1,861 4,663 6,081 8,473 10,748

% chg YoY 86% 50% 21% 22% 38% 30% 39% 27%

Finance expenses 32 36 44 -17 67 95 78 62

Other gains/ expenses -6 -15 -7 261 -96 -96 -13 107

Pretax income 1,226 1,215 1,499 2,139 4,633 6,080 8,538 10,917

% chg YoY 85% 43% 19% 41% 35% 31% 40% 28%

Tax 164 150 133 351 609 799 1,122 1,434

Minority expenses 0 0 0 -2 -1 -2 -2 -3

Net Profit 1,062 1,065 1,366 1,787 4,026 5,279 7,415 9,480 5,630 6,792 8,080 -6% 9% 17%

% chg YoY 72% 45% 24% 32% 30% 31% 40% 28% 40% 21% 19%

EPS(RMB) 0.86 0.87 1.11 1.46 3.29 4.32 6.07 7.76 4.61 5.56 6.61 -6% 9% 17%

% chg YoY 72% 45% 24% 32% 30% 31% 40% 28%

Ratio Analysis

GPM 41.6% 40.4% 41.3% 40.0% 41.5% 40.7% 40.7% 40.8%

OPM 30.0% 28.6% 29.1% 27.9% 30.1% 29.5% 29.7% 30.0%

NPM 25.2% 24.1% 25.7% 26.8% 26.0% 25.6% 26.0% 26.5%

(Rmb mn) 1Q17 2Q17 3Q17 4Q17 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E


Total revenue 4,215 4,429 5,324 6,677 15,507 20,645 28,504 35,781 21,679 26,207 30,971 -5% 9% 16%

Dynamic Component 1,897 2,292 2,516 3,610 7,956 10,314 13,144 15,753 10,007 12,530 14,989 3% 5% 5%

Haptics and RF Mechanics 2,192 1,949 2,424 2,677 6,940 9,242 12,212 15,296 10,899 12,274 13,020 -15% -1% 17%

MEMS Microphone 105 170 283 244 535 803 1,044 1,044 535 535 535 50% 95% 95%

Optics and Others 21 18 100 146 75 285 2,103 3,687 237 867 2,427 20% 143% 52%

Y-Y growth

Dynamic Component 13% 33% 17% 6% 29% 30% 27% 20% 26% 25% 20%

Haptics and RF Mechanics 231% 68% 28% 47% 156% 33% 32% 25% 57% 13% 6%

MEMS Microphone -41% 42% 121% -18% 54% 50% 30% 0% 0% 0% 0%

Optics and Others -17% 6% 149% 271% 278% 637% 75% 314% 266% 180%

Gross Profit 1,754 1,787 2,199 2,669 6,443 8,409 11,602 14,605 8,826 10,592 12,505

% of sales 41.6% 40.4% 41.3% 40.0% 41.5% 40.7% 40.7% 40.8% 40.7% 40.4% 40.4%



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Figure 3: CICC vs. consensus


Valuation: raise TP to HK$228

We derive our new TP of HK$228 based on SoTP valuation (+52% from prior TP of HK$150), implying 32x FY18 P/E including:

► HK$107.4 from dynamic components (47% of TP), derived from 26x FY18e P/E; in line with the median of acoustic competitors Goertek and Luxshare.

► HK$71.1 from haptics and RF mechanics (34% of TP); derived from 20x FY18e P/E, in line with its casing competitor Everwin.

► HK$2.1 from MEMS (1% of TP), derived from 26x FY18e P/E; in line with acoustics segment.

► HK$47.4 from optics (21% of TP), derived from 30x FY20e P/E, to reflect its growth potential and share gain.

Figure 4: CICC vs. consensus


(Rmb mn) 2016A 2017E 2018E 2019E

CICC CON diff CICC CON diff CICC CON diff

Revenue 15,507 20,645 20,648 0% 28,504 25,070 14% 35,781 29,279 22%

Gross Profit 6,443 8,409 8,569 -2% 11,602 10,479 11% 14,605 12,248 19%

Operating Profit 4,663 6,081 6,109 0% 8,473 7,546 12% 10,748 8,844 22%

Net Profit 4,026 5,279 5,346 -1% 7,415 6,584 13% 9,480 7,813 21%

EPS (RMB) 3.29 4.32 4.34 -1% 6.07 5.38 13% 7.76 6.39 21%

Per Share Market cap Net debt EV Sales Net profit NPM P/E

(HK$) (US$ mn) (HK$ mn) (US$ mn) (Rmb mn) (Rmb mn) % (x)

Dynamic components (FY18e) 107 16,911 16,911 13,144 4,404 34% 26

Haptics and RF mechanics (FY18e) 71 11,203 11,203 12,212 3,647 30% 20

Mems (FY18e) 2 327 327 1,044 84 8% 26

Optics (FY20e) 47 7,460 8,225 6,069 1,821 30% 30

Total 228 35,901 7,429 32



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Figure 5: Peer valuation – Global Optics peers

Note: Companies highlighted use CICC estimates. Source: Bloomberg, CICC Research

Figure 6: 12 month forward P/E band Figure 7: 12 month forward P/B band

Source: Bloomberg, CICC Research Source: Bloomberg, CICC Research

Ticker Company M/Cap ROE(%) Dividend

Currency 10-Nov USD mn 17E 18E 17E 18E 2017E 2018E Yield 2017E 2018E 1D 5D 1M 3M YTD

2018.HK AAC* HKD 169.40 26,542 33.6 23.2 9.9 7.4 32.9 36.1 0.9% 31% 40% - 10 25 59 145

2382.HK Sunny* HKD 140.6 19,776 50.3 33.6 18.2 12.6 43.1 47.2 0.1% 105% 63% - 14 16 46 316

002241.SZ Goertek* RMB 22.1 10,795 32.0 24.8 5.6 4.6 19.0 20.4 0.5% 36% 29% - 6 9 13 67

002475.SZ Luxshare* RMB 25.8 12,336 43.0 30.3 6.3 5.3 15.7 19.1 0.3% 50% 42% - 3 26 26 87

002456.SZ O-film RMB 24.4 9,999 45.4 30.0 6.8 5.6 15.1 19.0 0.3% 103% 51% - 7 15 31 78

300136.SZ Sunway RMB 55.3 8,194 55.5 37.4 18.6 12.6 34.9 34.7 0.1% 84% 49% - 7 29 49 94

0285.HK BYDE HKD 23.0 6,630 17.3 14.0 3.1 2.6 20.0 20.0 0.0% 106% 24% - 9 -9 25 278

6088.HK FIT Hon Teng* HKD 4.8 4,136 20.5 15.4 2.2 2.0 13.2 13.5 0.0% 25% 29% - -4 -12 7 54

300115.SZ Everwin* RMB 30.1 4,133 27.9 20.5 5.6 4.6 19.5 24.7 1.0% 23% 54% - 0 -6 -7 16

1478.HK Q-Tech HKD 18.3 2,571 34.7 25.4 8.5 6.6 26.3 28.3 0.0% 158% 37% - 6 14 45 360

000049.SZ Desay* RMB 55.5 1,719 34.0 27.8 7.8 6.2 27.0 26.7 0.3% 31% 23% - 1 7 6 33

Electronic component Average 35.8 25.7 8.4 6.4

Electronic component Median 34.0 25.4 6.8 5.6

3008.TW Largan NTD 5,740.0 25,512 26.3 18.9 8.1 6.2 33.7 36.3 1.1% 29% 39% - -2 2 3 51

AMS.SIX AMS AG EUR 95.6 8,067 67.9 26.3 7.5 6.2 8.8 23.6 0.5% 0% 158% - 0 31 41 231

2382.HK Sunny* HKD 140.6 19,776 50.3 33.6 18.2 12.6 43.1 47.2 0.1% 105% 63% - 14 16 46 316

1478.HK Q-Tech HKD 18.3 2,571 34.7 25.4 8.5 6.6 26.3 28.3 0.0% 158% 37% - 6 14 45 360

002456.SZ O-film RMB 24.4 9,999 45.4 30.0 6.8 5.6 15.1 19.0 0.3% 103% 51% - 7 15 31 78

Optics value chain Average 44.9 26.8 9.8 7.4

Optics value chain Median 45.4 26.3 8.1 6.2

P/BP/E EPS GrowthPrice



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Company analysis

Optics: further clarity on both plastic and hybrid lens sales

AAC’s optics business grew 149% YoY due to the company’s successfully turning its 10mn monthly capacity into shipments.

During its analyst briefing, AAC stated its plastic lens shipments exceeded 10mn unit/month in 3Q17 and it plans to expand its plastic lens capacity to 30mn units/month by 1H18 (up from 20mn units/month at end-2017). Regarding hybrid lenses, AAC stated it targets 5–10mn sets/month capacity by end-2018 and expects to turn all of its capacity into shipments. AAC stated its WLG/hybrid lens solutions are already receiving widespread positive feedback from customers.

We raise our forecast on AAC’s optics business to reflect the stronger growth of both plastic and hybrid lenses. We expect it to grow 271% YoY in 4Q17 and 637% in 2018 driven by the ramp of both plastic and hybrid lens sales.

Figure 8: Forecast revision: Optics


In Figure 9, we compare various 3D sensing solutions; we think AAC’s WLG (wafer-level-glass) is an important alternative to AMS’s WLO (wafer-level optics). Both solutions are important parts of speckle structure light that is currently used in Apple’s iPhone X. We expect AAC’s hybrid lens solution will be adopted by some Chinese smartphone OEMs in 2018, followed by Apple in 2019.

Figure 9: Mainstream solutions for 3D optical sensing

Source: Company data, CICC Research

1Q17 2Q17 3Q17 4Q17 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E


Capacity

Capacity - Plastics lens 10 10 10 20 - 20 30 40

Capacity - hybrid lens - - - 2 - - 10 15

Total shipment volume - 12 36 72 - 120 276 462

Optics and Others 21 18 100 146 75 285 2,103 3,687 237 867 2,427 20% 143% 52%

YoY Growth -17% 6% 149% 271% -51% 278% 637% 75%

% of total sales 1% 0% 2% 2% 0% 1% 7% 10%

Gross Profit - - - - (9) 64 802 1,616 47 303 1,044 35% 164% 55%

% of sales -12.5% 22.4% 38.1% 43.8% 20.0% 35.0% 43.0%

Solution ToF Speckle structured light Coded structured light

Distance Medium Short~medium Long

Accuracy Low Medium High

Transmitter lens requirements

Heat resisitance Y Y

Light diffusibility Y

Lens

Plastc Y

Glass Y Y Y

Major models Project Tango iPhone X Face ID

Algorithm Primesence MantisVision

VCSEL Lumentum, Finisar

Lens Largan AMS, AAC

Module Sunny Optical STMicro Sunny Optical, O-film?



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Figures 10 and 11 illustrate the monthly shipment volumes of Largan and Sunny. We think the slowdown in Largan’s growth is partially due to the rise of AAC. Based on our forecasts on Sunny and the Bloomberg consensus forecast on Largan, AAC’s revenue will reach 59% that of Sunny and 18% that of Largan by 2019.

Figure 10: Largan’s monthly revenue YoY growth

Figure 11: Sunny Optical’s monthly handset lens shipment

YoY growth

Source: Largan, CICC Research Source: Sunny Optical, CICC Research

Figure 12: AAC vs. Sunny vs. Largan -- where will be AAC’s optics business in 2019

Note: Largan’s 2017–19e revenue uses Bloomberg consensus, AAC and Sunny refer to CICC estimates Source: Company data, Bloomberg, CICC Research

Acoustics: weak 3Q due to iPhone X delays; android upgrade to drive growth in 2018

AAC’s acoustic business grew 17% YoY in 3Q17, lower than its 33% in 2Q17; we think this was mainly due to delays in iPhone X shipments for Apple. We also estimate that AAC’s market share in Apple to maintain stable growth of 27%/20% stable in 2018/19 driven by

► Apple’s product upgrade in acoustics in 2018.

► Rising adoption of speaker boxes in mid-range/high-end Android phones. AAC has raised its expectation of this new design’s shipments from 100mn to 150mn pieces and these shipments could turn into good opportunities in 2018.

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Sunny Optical's handset lens monthly shipment YoY growth (RHS)

(mn units)



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Figure 13: Forecast revision: Acoustics


Figure 14 compares the growth trends of AAC and its major competitor, Geortek. We see a similar growth slowdown trend in 3Q17. We expect AAC’s acoustic segment to grow 6% YoY in 4Q17 and 27% in 2018.

Figure 14: Acoustic peer comparison: AAC vs. Goertek


Haptics and RF Mechanics: 41% YoY growth in 2018

AAC’s haptics and RF mechanics business grew 28% YoY well below its +68% in 2Q17. We think this was mainly due to 3Q16’s high base and delays in iPhone X shipments. We expect AAC’s haptics and RF mechanics business to maintain stable growth with 32%/25% YoY growth in 2018/19, driven by: 1) rising shipments of 3D glass; and, 2) wider adoption of haptics in Android smartphones.

Figure 15: Forecast revisions: Haptics and RF Mechanics


1Q17 2Q17 3Q17 4Q17 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E


Assumption

iPhone volume - - - - 215 222 247 250

Dynamic Component 1,897 2,292 2,516 3,610 7,956 10,314 13,144 15,753 10,007 12,530 14,989 3% 5% 5%

YoY Growth 13% 33% 17% 6% 29% 30% 27% 20%

% of sales 45% 52% 47% 54% 51% 50% 46% 44%

Gross Profit 3,619 4,537 5,782 6,772 4,303 5,263 6,145 5% 10% 10%

% of sales 45.5% 44.0% 44.0% 43.0% 43.0% 42.0% 41.0%

AAC Goertek AAC Goertek AAC Goertek AAC Goertek AAC Goertek

Total revenue (Rmb mn) 15,507 19,828 8,703 9,974 4,215 4,526 4,488 5,448 5,324 7,286

YoY 32% 41% 56% 52% 66% 68% 48% 41% 24% 20%

Accoustic revenue (Rmb mn) 7,956 10,939 4,189 5,671 1,897 2,770 2,292 2,901 2,516 4,155

YoY 29% 15% 24% 65% 14% 56% 33% 75% 17% 23%

Accoustic (excl. earpords) 7,956 6,782 4,189 3,686

earpods 4,157 1,985

GM 41.6% 22.4% 41.0% 22.1% 41.6% 22.3% 40.4% 22.0% 41.3% 19.5%

GM of accoustic 45.5% 24.1% 40.6% 25.2%

Net profit (Rmb mn) 4,026 1,652 2,127 719 1,062 299 1,065 420 1,366 666

YoY 26% 32% 57% 52% 72% 52% 45% 52% 24% 19%

2Q17 3Q171H172016 1Q17

1Q17 2Q17 3Q17 4Q17 2016 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E


Haptics and RF Mechanics 2,192 1,949 2,424 2,677 6,940 9,242 12,212 15,296 10,899 12,274 13,020 -15% -1% 17%

YoY Growth 231% 68% 28% 47% 56% 33% 32% 25%

% of total sales 52% 44% 46% 40% 45% 45% 43% 43%

Gross Profit - - - - 2,786 3,738 4,927 6,125 4,469 5,032 5,208 -16% -2% 18%

% of sales 0.0% 0.0% 0.0% 0.0% 40.1% 40.4% 40.3% 40.0% 41.0% 41.0% 40.0%



10

3D glass

During the analyst briefing, AAC management stated that in 2017 they were beginning to use an alternative of putting glass on the front and back cover. We see drivers from:

► Shipments: by end-November, AAC will have already completed the shipment of 1mn pieces per month.

► Capacity expansion plan: by 1Q18 or around April-May, it will increase capacity by another 1–1.5mn, giving a total capacity of 2–2.5mn per month. At this size of increase and volume, AAC should be able to meet customers demand for 3D cover glass.

► ASP: US$15-20/unit is reasonable at the current stage.

Haptics

AAC is still confident that major customers in the Android system will see wider adoption for haptics because of its successful features and interesting applications.

► ASP: the ASP for the less complicated design that Android markets will firstly adopt, may not be as high as the ASP for its major US client.

► Shipments: a range of 30–50mn pieces in 2018

► In the long-term, AAC believes that 50% of the models in the mid-range/high-end of the Android camp will use their haptics products.



11

3Q17 results review and analyst call takeaways

AAC released its 3Q17 results, including 27% YoY revenue growth, and 24% YoY net profit growth; 3Q17 was 3% below consensus due to the slower-than-expected ramp-up of Apple’s new models.

The major positives are:

► Optics and others grew 149% YoY in 3Q17, reflecting that well-recognized optical solutions have started shipping to top domestic customers.

► 3Q17’s GM increased to 41.3% from 2Q17’s 40.4%.

► OPEX ratio decreased to 12.9% in 3Q17, deceases of 0.1ppt YoY and 0.2ppt QoQ.

The major negatives are:

► 3Q17 RF Mechanical & Haptics grew 29%, contributing >45% of 3Q17’s total sales, slower than 2Q’s +68%.

► R&D increased (1–3Q17: 8.2% of revenue) as that for new acoustic and optics delivered innovative designs.

Figure 16: 3Q17 results summary: actual vs. CICC vs. consensus


(Rmb mn) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 3Q17E 3Q17E

A A A A A A A CICC diff Con diff

Revenue 2,545 3,019 4,207 5,737 4,215 4,429 5,324 5,665 -6% 5,436 -2%

% chg yoy 10% 26% 32% 49% 66% 47% 27% 35% 29%

COGS 1,513 1,761 2,448 3,342 2,461 2,642 3,124 -3,351 3,206

Gross Profit 1,031 1,258 1,759 2,394 1,754 1,787 2,199 2,314 2,230

OPEX 383 433 546 567 524 580 685 696 -652

Operating Income 679 844 1,284 1,856 1,263 1,266 1,550 1,554 0% 1,578 -2%

% chg yoy 3% 22% 39% 67% 86% 50% 21% 21% 23%

Finance Expense 9 10 19 28 32 36 44 19

Other gains/expense -5 17 0 26 -6 -15 -7 20

Pretax income 664 851 1,265 1,854 1,226 1,215 1,499 1,555 -4% 1,605 -7%

% chg yoy 0% 20% 34% 65% 85% 43% 19% 23% 27%

Tax 45 115 166 283 164 150 133 107

Minority expenses 0 -1 -1 -0 0 0 0 -1

Net Profit 619 736 1,100 1,571 1,062 1,065 1,366 1,447 -6% 1,403 -3%

% chg yoy 2% 15% 29% 55% 72% 45% 24% 32% 28%

EPS(RMB) 0.50 0.60 0.90 1.28 0.86 0.87 1.11 1.18

% chg yoy 2% 15% 29% 55% 72% 45% 24% 32%

Ratio Analysis

GPM 40.5% 41.7% 41.8% 41.7% 41.6% 40.4% 41.3% 40.9% 0.5% 41.0% 0.3%

OPM 26.7% 28.0% 30.5% 32.3% 30.0% 28.6% 29.1% 27.4% 1.7% 29.0% 0.1%

NPM 24.3% 24.4% 26.2% 27.4% 25.2% 24.1% 25.7% 25.6% 0.1% 25.8% -0.2%



12

Figure 17: 3Q17 results summary by segment


Key takeaways from analyst briefing

Corporate-level guidance

► 2018 revenue guidance of YoY growth no less than 25% (vs. 2017 annual revenue growth guidance of +20% YoY.

► Keep 2017 capex unchanged at Rmb3.0bn.

► Capex breakdown: non-acoustic 40% (mostly into optics), acoustics 35% and infrastructure 25%.

► GPM trend: to move higher in 2018

Optics

Long-term objectives

► Optics could be AAC’s largest business over the long term (7–8 years)

► AAC targets to offer an alternative solution to customers in the high-end lens market (>5P13M)

Hybrid lens – Wafer level glass (WLG)

► Capacity and shipments: 5–10mn sets/month by end-2018 and expect to turn all capacity into shipments.

► Most of 2018’s shipment will be 5P with some 6P shipments in 2H18; the 6P shipments will be applied to cameras rather than 3D sensing.

► ASP: >US$2/unit (1 glass + 4–5 pieces of plastic).

► Major applications: large aperture (rear camera); 3D sensing, AR/VR and automobile.

(Rmb mn) 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

A A A

Total revenue 2,545 3,019 4,207 5,737 4,215 4,429 5,324

Dynamic Component 1,680 1,721 2,145 2,410 1,897 2,292 2,516

Haptics and RF Mechanics 662 1,161 1,893 3,225 2,192 1,949 2,424

MEMS Microphone 178 120 128 109 105 170 283

Optics and Others 25 17 40 (7) 21 18 100

Y-Y growth

Dynamic Component 40% -22% 66% 47% 13% 33% 17%

Haptics and RF Mechanics -24% 79% 49% 90% 231% 68% 28%

MEMS Microphone -14% -65% -44% -48% -41% 42% 121%

Optics and Others 10% -102% -90% -102% -17% 6% 149%

Gross Profit 1,031 1,258 1,759 2,394 1,754 1,787 2,199

% of sales 40.5% 41.7% 41.8% 41.7% 41.6% 40.4% 41.3%



13

Technical details of hybrid lenses

► Having 10 pieces of equipment available for mass production at present.

► Leading technology from Kaleido acquisition in 2010 including tooling.

► Solid alliances with European molding equipment players to guarantee its cutting edge in both plastic and glass lens fields.

► Establish Singapore WLG tooling capacity, managed by European team.

► Product line layout based on 6-7P while current products are mainly 5P.

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