3Q22 performance is bright; maintain "buy" rating, target price of HK $21.00 AAC announced 3Q22 results: revenue increased 26.5% to 5.37 billion yuan, mainly due to Apple Inc sales season and the company's electromagnetic transmission business and Dongyang precision strong growth; net profit also increased 27.5% to 230 million yuan (9.7% higher than Bloomberg consensus forecast). Looking ahead, considering the weak market demand and fierce competition, the optical business may still be under pressure. However, we believe that: 1) AAC is in a favorable position in terms of product technology, delivery capabilities and customer relationships. it may benefit from the increase in acoustic orders from potential key customers; 2) the new product "Acoustics + Motor" is expected to help it gain more share in the electromagnetic drive market. As a result, we raised our annual homing net profit forecast for 22-23-24 by 16%, 6%, 13% to RMB 860 million / 980 million / 1.25 billion, to reflect the improvement in the company's electromagnetic transmission and acoustics business prospects. In view of the attractiveness of the company's valuation (22.4x22E PE), reiterate the "buy" rating with a new target price of HK $21.0 (based on 26.6x22E PE, reference to the comparable company average of 22.2x 22e PE, taking into account the company's leading position in acoustics).
Acoustics business: expected to benefit from market share growth
Driven by Apple Inc's peak sales season, 3Q22's acoustics business revenue rose 5.6 per cent year-on-year to 2.32 billion yuan. AAC maintains close cooperation with Apple Inc and supports customers in emerging areas by improving product competitiveness and ensuring stable delivery. Given AAC's product and technology reserves, delivery capabilities and customer relationships, we believe it is expected to benefit from potential market share growth.
Optical business: expected to remain under pressure
AAC 3Q22 optical business revenue increased by 45.1%, down 39.0% from the previous month, and gross profit margin continued to decline (down 29.0% from the same period last year and 9.3% from the previous month), mainly due to: 1) sluggish market demand from Android customers; 2) low capacity utilization; 3) ASP continued to decline under fierce market competition. Considering that the above negative factors will continue in the future, we expect the company's optical business to remain under pressure in 2023, with a gross profit margin of 1.3% (Huatai Research predicts).
Electromagnetic transmission and precision structure business: it is expected to gain more market share with Combo products to benefit from the synergy of Apple Inc's peak season and Dongyang Precision, AAC electromagnetic transmission and precision structure business recorded strong growth in 3Q22 (revenue increased by 47.3% compared with the same period last year). With the release of "Acoustics + Motor" Combo products, we expect the company to gain more share in the electromagnetic drive market.
Maintain a "buy" rating with a target price of HK $21.0
We raised our annual homing net profit forecast for 22-23-24 by 16%, 6%, 13%, to reflect the improvement in the acoustic and electromagnetic transmission business prospects, and raised the target price by 30% to HK $21.0, based on 26.6x 22EPE (vs comparable company average 22.2x 22EPE, taking into account AAC's leading position in the acoustics market to give a premium). The company's current valuation (22.4x 22e PE) is attractive and reiterates its "buy" rating.
Risk tip: smartphone demand is weaker than expected and new product research and development is lower than expected.