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Rally far from over for Hong Kong’s newest blue chip AAC Technologies

Component supplier for the iPhone sees shares rise another 3.32pc on Thursday, after Apple’s latest launch

PUBLISHED : Thursday, 08 September, 2016, 4:33pm
UPDATED : Thursday, 08 September, 2016, 10:25pm

AAC Technologies Holdings, the new Hang Seng Index constituent that officially replaced instant noodle and beverage maker Tingyi (Cayman Islands) Holding Corp on Monday, is likely to see its share price rally further, thanks to its booming non-acoustics equipment sales and the launch of Apple’s iPhone 7, according to analysts.

Best known as a component provider for iPhone, which accounts for half its revenue, the Shenzhen-based firm also develops and supplies miniature acoustic and non-acoustic components to Samsung Electronics, LG Electronics and major Chinese smartphone brands including Huawei Technologies, Xiaomi, Lenovo Group, ZTE, Oppo, Coolpad and Meizu.

Daiwa Securities has raised its target price on the stock from HK$94.5 to HK$102, given its growing revenue from integrated radio frequency (RF) mechanical solutions, which will be a major growth driver in 2016 to 2017.

The revenue contribution of RF mechanical is now expected to rise to 18-21 per cent of AAC’s total revenue in 2016 to 2017, from 9-10 per cent in 2015.

“In addition to LeTV, our research suggests AAC has won orders from Xiaomi, Lenovo, and Oppo, and is likely to tap into major Korean and China brands in the first half of 2017,” Daiwa analysts Kylie Huang and Anthony Liao wrote in a research report.

AAC’s shares have surged 79 per cent so far this year, rising another 3.32 per cent on Thursday to HK$90.2, thanks to the debut of new iPhone.

Its interim profit for the first six months surged 9 per cent year on year to 1.36 billion yuan, with interim revenue up 18 per cent to a record high at 5.56 billion yuan, according to its most-recent set of results filed with the Hong Kong exchange.

Rapid revenue growth from customers buying RF’s mechanical and speaker boxes, according to the filing, offset weak Apple-related revenue during the period.

The company’s acoustic business made up 61 per cent of its total revenue while non-acoustics accounted for 33 per cent. Both segments maintained a 42-43 per cent gross profit margin.

The company has raised its capital expenditure budget for this year to 3.9 billion yuan from 3 billion yuan, split 20 per cent on acoustics, 20 per cent on infrastructure and 60 per cent on its non-acoustics activities, mostly on expanding its business with RF, according to a separate Credit Lyonnais Securities Asia (CLSA)research note.

Daiwa expects AAC’s annual revenue this year to reach 15.03 billion yuan, up 28 per cent year on year, with net profit rising 24 per cent to 3.86 billion yuan. Revenue in 2018 is expected to reach 21.1 billion yuan with net profit rising to 5.78 billion yuan.

Morgan Stanley gives AAC an “Overweight” rating, with a target price of HK$95.

The launch of the iPhone7 is seen as another key growth engine for AAC in the pricing and sales volume of its acoustic and haptic equipment.

With the new iPhones waterproof and having stereo sound, AAC will benefit from the increase in its average selling price
Kylie Huang, Daiwa analyst

Haptics refers to the technology used on mobile phones and smartwatches that enable a user to feel a tactile sensation when interacting with an application.

Video game controllers have used this technology for years, but its adoption for so-called smart wearable devices could make haptics part of many everyday applications.

“Apple contributes roughly 40 to 50 per cent to AAC’s total revenue,” said Kylie Huang.

“With the new iPhones waterproof and having stereo sound, AAC will benefit from the increase in its average selling price,” Huang said.

Huang said AAC should also enjoy a 10 per cent average selling price increase with the use of haptics in the new iPhones.

“A modest upgrade in the next generation iPhone is likely, meanwhile Chinese original equipment manufacturers will see ongoing upgrades to speaker boxes, which will also support better pricing,” Morgan Stanley analyst wrote in its research report.

Analysts also warned, however, the new launch carries risk too, given AAC’s business concentration on the iPhone.

“Any product failure for Apple would affect any chance of recurring procurement for the current and next generation of Apple products,” the CLSA analysts said.

The company also faces pressure from rising labour cost increases in China, and is relocating part of its production from China to Vietnam, they said.

Huang from Daiwa added that potential sales increases from its Chinese and South Korean clients could help offset any weak revenue from the iPhone, thanks to AAC’s wide exposure in the industry.

“The biggest risk should be any overall downward sales of smartphones globally, which is unlikely in near term,” Huang said.

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