AAC Tech (2018 HK)
Noted that the name of the blog is SGstocks&shares. but cant really find anything interesting in SG, so thought of writing a fun piece on HK. This is just a summary of the (brokers) research we have read, meant as an introduction and for fun learning.
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AAC Tech (2018 HK) - HK$118
Seems to have bottomed out and may be attractive at current levels - key risks are the maturing smartphone market. A side play on Apple as it derives about half of its profit from Apple, and supplies 50% of acoustic components to Apple
About:
major supplier of miniature electronics components to Apple, Samsung and Chinese mobile phone brands - manufactures acoustic components, such as speakers and receivers, haptics, radio frequency (RF) solutions, and microelectromechanical systems (MEMS) for electronics products, from smartphones and tablets to wearable devices.
Valuation
Currently trading at 18.3x FY18F PE, 14.8x FY19F PE – bounce off its 10year average of 13.0x. – AAC has steadily enjoyed a valuation re-rating since 2010 (PE moving higher)- has reached as high as 22x PE (implied TP: $176, 16.1x EV/FY19 EBITDA)
Our near term TP is $131.2 (16.4x FY19F PE (+1SD of 10 year range), 12x EV/EBITDA
$139.2 (17.4x FY19F PE, 12.7x EV/EBITDA) – 5 year +1SD
AAC is projected to grow at an average of 20% from FY18-FY20. – PEG of about 0.8-0.9x
Concerns priced in? AAC Tech has retraced as much as 42% from its high. Previous pullbacks (except 2008) has been up to 38.7%. The pullback may have been due to the slowdown in smartphones. AAC has also cut its CAPEX budget for 2018 by 15% - up to 50% will be allocated to expanding the optics business, 20% to acoustic products, 5% to haptics, 25% to upgrades and maintenance.
Investment merits
Has about 40% market share and is the world’s largest smartphone acoustic components supplier.
Apple supply chain proxy : Supplies 50% of Apple’s acoustic components since 2010 (Also supply Samsung since 2011) – Apple est to formed about 47% of revenue.
Andriod haptics upgrade to provide catalyst? Currently most smartphones equipped with haptic components are iphones. With the gradual removal of physical home buttons, it could lead to an upgrade haptics from android phones (which we are already seeing in likes of S9 etc) Haptics can enhance user experience on smartphones which highlight edge to edge display and AR features. Haptics & RF modules have grown to become 50% of FY17 AAC’s revenue. Analysts are expecting a 2H recovery driven by Haptics which could also help improve his margins.
One of the leading players in Optics (Smartphone AR). AAC has expanded in the WLO market 5 years ago (which are used in 3D sensor manufacturing) – has the potential to grow significantly and penetrate into Apple’s 3D sensing suppliers. Currently low competition, due to high barriers of entry
Concerns priced in? AAC Tech has retraced as much as 42% from its high. Previous pullbacks (except 2008) has been up to 38.7%. The pullback may have been due to the slowdown in smartphones. AAC has also cut its CAPEX budget for 2018 by 15% - up to 50% will be allocated to expanding the optics business, 20% to acoustic products, 5% to haptics, 25% to upgrades and maintenance.
Risks: Customer concentration (Apple forms nearly half of revenue) Collectively, Apple, Samsung, Huawei, Oppo and Xiaomi formed about 90% of revenue. Smartphone market slowdown/slow refresh cycle, Trade war
