AAC reported another NP decline of 28% YoY (vs -48%/-62% YoY in 2Q/1Q), 8% below consensus and 9% higher than our estimates. 3Q GPM came in at 29.6% (-7.5ppt YoY), below consensus of 31.5%. Given stablising revenue (acoustic/ haptics offset by optics) and narrowing earnings decline in 4Q19E/FY20E, we raise TP to HK$45.0 based on new multiple of 18x FY20E P/E (15% below 5-yr avg.). Since most positives from Apple recovery are reflected and we are cautious on optics guidance, we recommend to take profit on recent rally and maintain Sell.
- 3Q19 miss on lower GPM. Despite stabilized revenue of +2.9% YoY in 3Q, AAC’s 3Q net profit slumped 29% YoY due to lower GPM of 29.6% (vs 37.1% in 2Q19). By segment, acoustics (46% of sales) declined 8.6% YoY, while haptics/casings (41%) and optics (6%) grew 7% YoY and 81% YoY. Mmgt. expected optics (both plastic and WLG) to become strategic key growth driver, and acoustics SLS upgrade will boost margin recovery in 4Q19E.
- Optics remains on fast track but guidance looks too aggressive. Optics growth accelerated to 81% YoY in 3Q19 (vs 74% in 2Q) with improving yield/ utilization. Mgmt. guided 60kk/m plastic lens shipment with 40% GPM in 4Q19E, and targeted 100kk/m shipment with 50% GPM in 1Q20E. AAC also plans to achieve ASP of Rmb4.5/5.0 in 1Q/4Q20E (vs. <Rmb3.5 in 3Q19). As for WLG lens, mgmt. targets to fully launch in 2020 with 10+ projects on hand now. However, we believe guidance looks too bullish on margin/ASP and visibility for WLG demand remains low at this early stage.
- Acoustics/haptics: stablising revenue with margin pressure. We expect acoustics and haptics/casings to recover with 1% and 2% YoY in FY20E, following decline for past two years. AAC’s SLS penetrated into 60% of Android shipments in 3Q (vs 50%/35% in 2Q/1Q), on track to reach 65% by 4Q19E (revised down from 70%). That said, we expect GPM pressure into FY20E given limited upgrade and competition with Luxshare/Goertek.
- Our EPS are 9-17% below consensus; Maintain Sell. We lifted our FY19-21E EPS by 2-11% to reflect higher revenue/margin assumptions. Given narrowing NP decline in 4Q19E/FY20E, we assign new multiple of 18x (15% below 5-yr avg.) to derive new TP of HK$45.0. With 13% downside and most positives already priced in, we recommend to take profit and maintain Sell. Upside risks include stronger lens, better iPhone and less margin pressure.
