2Q22's performance is weak, Optical Business 2H22 is still worried
AAC Technologies Holdings Inc. (AAC) released 2Q22 results, overall weak: revenue rose 4.6% year-on-year to 4.52 billion yuan, net profit fell 62.8% year-on-year to 145 million yuan, mainly due to weak 2Q22 gross profit margin, down 6.7% year-on-year to 18.3% (dragged down by fierce competition in the optical market and product structure adjustment), increased exchange losses and continued operating disadvantages. Looking ahead, we believe that: 1) 2H22 AAC's optical business gross profit margin may still be under pressure, mainly due to weak Android customer demand; and 2) AAC vehicle and AR/VR new projects may be medium-and long-term catalysts. We have lowered our 2024 earnings forecast by 35%, 26%, 23% to RMB 7.4, 9.2, and 1.10 billion. However, we find the company's current valuation (20 times the 2022 forecast PE) attractive and reiterate our "buy" rating, and our new target price is HK $16.20 (taking into account the company's leading position in the acoustics industry, giving 23 times the 2022 forecast PE, the industry average is 21 times the 2022 forecast PE).
Optical business: 2H22 gross profit margin may decline further
AAC 2Q22 optical business performance differentiation: 1) revenue increased 14.9% year-on-year to 930 million yuan, thanks to increased shipments of camera modules (117% year-on-year) and plastic lenses (15% month-on-month growth) On the other hand, 2) the gross profit margin further fell to-4.7%, down 26.7 percentage points from the same period last year and 8.2 percentage points from the previous year, mainly due to increased market competition and another one-time impairment of lens inventory (according to management, inventory impairment dragged down lens gross margin by 15 percentage points). Looking ahead to 2H22, competition in the lens market will remain fierce due to weak demand from Android customers. As a result, we expect AAC's optical business gross margin to fall further to-4.0% in 2H22, down 3.6% from the previous month.
Acoustics business: further entering the middle and low end market
AAC's 2Q22 business achieved revenue of 1.91 billion yuan (down 6.4% from a year earlier, while affected by the traditional off-season of overseas customers and weak demand from Android customers), with a gross profit margin of 27.7% (down 0.7% from a year earlier and up 1.1% from a month earlier). The company has launched a series of cost-effective acoustic products, which we believe are expected to help the company expand its mid-and low-end market share. At the same time, we reiterate that we are optimistic that the company's new car acoustics project may become a medium-and long-term catalyst for the company's growth.
Maintain a "buy" rating with a target price of HK $16.20
Taking into account our concerns about AAC optical business and the weak market demand, we have lowered our profit forecast for 2022 Universe 2023 Universe by 35%, 26% and 23% to RMB 7.4, 9.2 and 1.10 billion. We lowered the target price by 26% from HK $21.90 to HK $16.20 (taking into account the company's leading position in the acoustics industry, giving it 23 times the 2022 forecast PE, the industry average is 21 times the 2022 forecast PE). We find AAC's current valuation (20 times the 2022 forecast PE) attractive and maintain a "buy".
Risk tip: smartphone demand is weaker than expected and new product research and development is lower than expected.