Edited Transcript of 2018.HK earnings conference call or presentation 25-Mar-20 7:50am GMT

For the optics that we would very much like to highlight here, it’s been doing well financially, whether on full year basis or only on fourth quarter. FY ’19 revenue is up 97% (sic) [94%] year-on-year to over CNY 1 billion. Fourth quarter top line was up 100% year-on-year or up 9% from the third quarter. Both ASP and yield have been improved further in fourth quarter as compared with the previous quarters. So we are happy to report a much better gross margin for the fourth quarter 2019.

For the plastic lens, we have already started the shipment of 6P lenses in fourth quarter. We expect to send the 7P samples in second quarter of this year and ship by third quarter this year. We are targeting at 100 million monthly shipments by July this year.

For WLG, we remain confident of it, given its competitive advantages over the conventional plastic lens in the market. Our progress is as scheduled, and we are looking for shipment to happen in 2020 and with up to 30 million shipments for this year.

For camera module, we are working hard on the preparation and expect to start mass production by May this year. Hopefully, with camera module’s production capacity, we can further strengthen our capability in the vertical integration in optics and to provide more complicated solutions and more value proposition in this segment.

For acoustics, full year revenue is down 5.8%. But if we focus on just the fourth quarter revenue, it’s flattish from the previous quarter or up 19% year-on-year. The margin for fourth quarter is 31.3%. The revenue trend is largely driven by the volume, which has been up both year-on-year and quarter-on-quarter. ASP is still on a declining year-on-year trend. In fourth quarter, although that magnitude has narrowed from the rest of the year.

We’re happy to report that SLS penetration has reached our 65% target by the end of 2019. And we are looking for further increasing such penetration rate to 80% by end of 2020. Also, we will continue to expand upgrade road map of SLS by launching more advanced versions in the future. We also look for more dual-speaker products to enter in the high to mid-end smartphone models. And further motivated by some — motivated by better user experience and also the DxOMark assessment and ranking in the smartphone acoustic performance in October last year.

For this combined segment, full year revenue was down 4.7%. But if we focus on just the fourth quarter revenue, it’s up 16% quarter-on-quarter, but still lower — 6% lower than last year. Margin-wise, it stabilized in third quarter and is at 30.5% in the third — fourth quarter 2019. Gross margin for whether the combined segments or each of the EM and PM both expanded in fourth quarter as compared to third quarter. Product mix continued to shift a little bit more to precision mechanics, given the higher growth rate there.

For the haptics, we have seen good growth with top line and modest expansion of margin. We see the interest in adopting our electromagnetic technology by the Android smartphones, such as virtual edge

buttons. And we are looking for a wider range of market opportunities beyond smartphones, such as automobile, games controller, PC, et cetera.

For stepper motor module business, we continue to see volume growth momentum in fourth quarter as well. We continue to have more technological upgrades to make the modules smaller in size and weight and with other features such as simultaneous popping up, rotating and scanning functions. Stepper motor module business still has ample potential, whether it’s in the smartphones or non-smartphone applications.

For precision mechanics, we managed to deliver more complicated designs in fourth quarter, which brought both the ASP and margins higher. We are positive on precision mechanics in FY ’20, and we are looking for wider product range such as hinges, liquid metal, LCP, et cetera, to drive our growth.

For the MEMS, full year revenue is nicely up by 14% year-on-year, and margins also further expanded as we have further increased the adoption of in-house MEMS designs and manufacturing of digital ASIC chips. We have become the first MEMS producer in China to break the technological barrier to produce the MEMS with signal-to-noise ratio of over 70dB all within China. We plan to expand the scope of application of high-end MEMS beyond smartphones and to the smart watches. We will also explore more sales and distribution channels to expand our market share. We are positive on doubling our production capacity this year and to reach 3 billion per year within next 5 years.

On sustainability and ESG, we have start-up communication of our ESG efforts to investor community since August last year. In the upcoming sustainability report, there is going to be our segment one and to be published in May, you will see our expense, growth and disclosure, such as GHG emissions, energy consumption and our work related to climatic changes, et cetera. We are also working on further enhancing the involvement of our Board on ESG on a regular basis.

And of course, at this very unusual moment with epidemic all over the world, staff safety is our top priority. We set up a special task force team under leadership of CEO and get our — all our senior management involved, not only to ensure the work resumption was done on track and in line with various regulations and guidance, but also by putting the staff’s health and safety at the very top priority.

This concludes our quick presentation on the fourth quarter results. There are more supplementary information at the appendix section of the slides for your reference. In the meanwhile, we’ll now go to the Q&A session, where Benjamin and Richard are both here to answer your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have the first question that comes from the line of Susanna Chui from DBS.

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Man Nga Chui, DBS Vickers Research – Analyst [2]

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I have maybe 2 questions. First one is, congratulations to the great guidance on the optics. We now have the hybrid lens target of 30 million in Q2, and I would like to know if there is any target on the 6P and also the 7P lens as well. And could we update the ASP and also the margin as well of the optics? And I will have a second question.

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [3]

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Great. Thank you, Susanna. It’s Richard here. Regarding optics outlook, and we have prepared to not only continuously improve on our production yield, but also to reflect our capabilities and gaining confidence with our customers on more complex optics lens structure including 7P. I think earlier on, Joyce mentioned that we are taking our 7P design and prototypes to our customers very soon. We believe we are confident to gain 7P projects and actually making shipments for these 7P projects around third quarter time.

Clearly, the ASP overall for optics plastic lens will depend upon product mix. We have shown in the year 2019 gradually improving on the ASP. But also, as a precaution, the market is saturated on the lower end. I think it will not do any — suppliers any good to stick with kind of low-end lens design. What is important is that while we will improve our production yield and increase the preference on 6P and/or even 7P product mix, we will gradually be able to also, at the same time, increase our production shipments to our customers.

As you know, the optic lens business is very much dependent on the performance of that plastic lens business. It’s very much dependent upon internal production yields and also the production capacity. We believe, certainly, as we have said all along, the margin — the gross margins on optics lens business, there’s no reason why we shouldn’t be setting a target of about 40% or even higher as we deliver more complex lens designs to our customers. So the plan has not changed. We do not see any obstacles in terms of technical or production or even the market for us to deliver that. So that is clear, something for us to deliver in this year.

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Man Nga Chui, DBS Vickers Research – Analyst [4]

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Okay, Richard. And my second question is about other business line. We saw that acoustic, the sale is very good in fourth quarter. But we would like to know that the total outlook for the acoustic side and also the haptics side and also the RF and mechanics and being the coronavirus situations, could they have some effect on yield outlook and also the margin outlook in Q2 for this segment?

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [5]

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Yes. So I think — yes, Ben?

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Zhengmin Pan, AAC Technologies Holdings Inc. – Co-Founder, CEO & Executive Director [6]

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(foreign language)

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Man Nga Chui, DBS Vickers Research – Analyst [7]

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Could I have a quick follow-up then? Could we still expect 40% gross profit margins and the scale reach 100 million and also ASP 4.2 or 4.5 sale in July? Could we still expect that level of margin?

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Zhengmin Pan, AAC Technologies Holdings Inc. – Co-Founder, CEO & Executive Director [8]

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(foreign language)

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [9]

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Susanna, can I just quickly talk in English about what Ben has been telling everybody? Just a short concise summary. Because you asked about the business segments in situations where we are facing now. Our CEO has talked about for Q1 that we are seeing, we are in already mid-March, by — in the beginning of March, we already have achieved 80% resumption of our operation. And we have almost reached 100% as of now of resuming our normalized production. But what is quite certain is that as of today, we have seen the markets reacting. But for the second quarter, the market is still full of what we call demand from the TRP Android market and also some of automotive existing. And hence, in terms of that impact on AAC business, we believe from Q2, in terms of the normalized demand, pretty much business as usual.

But what is unclear is the current situation spreading over to Europe and Americas and United States, et cetera. So it is only correct and more prudent to describe Q3 situation as not so clear. But what we like to talk about is what we can certainly manage the situation well in terms of our product business segment. For example, starting with optics, we have already mentioned that we are moving — migrating to 6P and 7P. I think the previous question, you asked about ASP. I think at the moment, most likely where we reached to capacity of monthly 100 million, we are in the range of CNY 4.2 to CNY 4.5. As we migrate by around end of Q3 and more so in Q4 time, we expect the brand ASP to reach almost [renminbi $5] because this is — this comes from the fact that we have already established AAC competitiveness, not only in terms of pricing, but in terms of production capability. And what is more important to achieve that 100 million monthly capacity that we already have the CapEx machinery in place, we do not foresee for any further additional CapEx outing to reach that stage. So that is a certainty that we can deliver no matter what happens in Q3 or Q4.

And also talking about the RF mechanical business, I think we mentioned that we have already well-established our position. We’re one of the major player in China, one of the major Android customer — player in China market, and we definitely have won their orders. And in those projects, we are definitely earning major allocations for that business as well. So in terms of that business, it’s about how we could improve utilization and also improve in our production yield in our mechanical business. That is another certainty that we can deliver amidst the uncertain climate in Q3.

In acoustics, I think in the result announcement, we’ve mentioned about we are continuing with our developing and promoting 0.65 and 0.75 plus/minus millimeter classic version and, whereby, our target is to deliver something like 30 million for the whole year at an average price of USD 2. We believe for that, that would capture a meaningful stronghold in the top-end segment. In the mid-segment, we are — our management plan is to fully utilize existing production lines because we believe that will give us a very strong foundation for years to come, especially we have seen very strong acoustic specs, for example, the dual — strong dual speakers that we are seeing in the top-end devices launched this year recently.

And lastly, but not the least, in MEMS microphone, we’ve already mentioned that we are in a very strong unique position, whereby we have proprietary design and we are using a China-based fab. In the first quarter, we already are achieving delivery of 80 million, 8-0 million units, whereby we believe there is strong business opportunity and good profitability when we get in Q3 to deliver 100 million units in the third quarter, especially keeping the situation that there is a very constrained demand — supply situation for the second quarter.

So what we are doing at this moment is that we are paying very strong attention to deliver what we can be certain about in terms of business progress in optics, RF, mechanical and acoustic and MEMS. But at the same time, we recognize that, as always, we need to put in solid plans to keep cost down and improve utilization of production lines. So we believe as the situation evolves, there may be opportunities that while we’re keeping a very nimble, flexible kind of respond to the customers’ demand or market demand, it’s very important that we watch very carefully our way in Capex.

Sorry, Susanna, can you repeat your second question?

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Man Nga Chui, DBS Vickers Research – Analyst [10]

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You guide that when the scale reach 100 million and the ASP reach about $4, the margin will be 40%. So we would like to know if this guidance is the average, for example, in July. Because in July, the scale already reach 100 million and ASP will be about $4.

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [11]

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I think, as we say, we already have the machinery in place. There’s no need for further, for example, depreciation or amortization costs relating to incremental delivery of doubling our shipment capacity. And from the current margin trend, I believe the target of about 40% is achievable. And if you look at industry, I believe that is a very realistic target for competent capable suppliers to set.

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Operator [12]

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(Operator Instructions) The next question comes from the line of Wei Xi from Greenwoods Asset Management.

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Wei Xi;Greenwoods Asset Management;Analyst, [13]

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(foreign language)

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [14]

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Thank you. Thank you.

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Operator [15]

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The next question comes from the line of [Hu-ye Jin Wang] from CITIC Securities.

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Unidentified Analyst, [16]

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(foreign language)

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Zhengmin Pan, AAC Technologies Holdings Inc. – Co-Founder, CEO & Executive Director [17]

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(foreign language)

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Unidentified Analyst, [18]

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(foreign language)

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Zhengmin Pan, AAC Technologies Holdings Inc. – Co-Founder, CEO & Executive Director [19]

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(foreign language)

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Unidentified Analyst, [20]

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(foreign language)

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [21]

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So I think we need to put into translation for the English-speaking dial-in people all the way through — be very short and concise. I think CEO wants to reiterate that the defined projects on hand involving WLG 48 mega, 1G 5P, 64 mega, 1G 6P and for even 108 mega, 1G 6P or 1G 7P device, and of which 4G 6P are capable of delivering wide angle. Clearly, we have already built up experience of inventory or production of WLG plant up to 1 million, and this experience have been turned — or have been fully captured in what we call our last data simulation and more importantly, in our main data frame. Those will be capable of delivering or recording repeated capability in achieving our production use. So in the long run, we believe our capability, which now comes from the 6P plastic lens, already target 100 million per month. We will get similar capability where we have to do WLG.

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Unidentified Analyst, [22]

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(foreign language)

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Zhengmin Pan, AAC Technologies Holdings Inc. – Co-Founder, CEO & Executive Director [23]

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(foreign language)

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [24]

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So quickly, I think, to answer your question about why we are so confident about successfully shipping 100 million per month, I think this is back to the fundamental question of production yield and production efficiency. We have stated that in — by the month of April, we’d like to increase our production capacity to something like 60 million, 6-0 million per month, whereby we believe our cost consumption may — as may have insisted and — as may insisted our optic production is that we are in control of the design and also manufacturing of the, what we call, the virtual accessory in the CapEx in the production tooling, i.e. the only output in the — the only input in our optic lens, plastic lens, optic production is the raw material.

Thereby, I think when we look at the Q2, Q3, Q4 situation as a new supplier, I think the market, this is a normal process for new supplier to classify and prove their technology capability. And once that is a proven effect, meeting the customer demand in the price line that we have described will ascertain our pricing competitiveness and, hence, our confidence of reaching 100 million per month and also our gross margin target of 40%. And that has always been in the business model in terms of our positioning in the technology component industry.

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Operator [25]

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The next question goes to Kyna Wong from Crédit Suisse.

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Kyna Wong, Crédit Suisse AG, Research Division – Associate [26]

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(foreign language)

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [27]

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Let me just answer the questions on CapEx planning and the execution of CapEx planning. As we have always followed, our CapEx is to deal with additional capacity of new product platforms, whether they are acoustic or optics. When we talked about CNY 3 billion CapEx in the year 2019, we are talking about, we have invested in the new SLS platform and also, to some extent, the new projects that acoustic have entered into. And that should — would not be a later percentage of 2019 CapEx. What we have said that in building up our 100 million per month capacity from a couple of years ago, I think our CapEx in 2019 addressed some of the plastic lens capacity and also addresses some of the preparation to build up the already 1 million inventory of WLG. And hence, our CapEx is fairly tied to the development programs of our product segments, mainly in 2019, majority again is still related to optics.

Just to kind of split the remaining balance, I think, as we have said, precision mechanics, CNC machines, we do not — we have not spent a lot in 2019 as we have already built up sufficient capacity. So the CapEx requirement for 2020, I think as we speak, we are constantly reviewing. And during this call, I think Ben has mentioned that in both the plastic lens and some of the kind of WLG capacity we already mentioned, we have already invested. The equipment are already ready. So the CapEx this year will reflect, again, the new project requirement and some of the kind of new business, for example, in doubling capacity of MEMS microphones.

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Zhengmin Pan, AAC Technologies Holdings Inc. – Co-Founder, CEO & Executive Director [28]

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(foreign language)

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [29]

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Ben has confirmed that the capabilities that we built up for plastic lens based on data simulations, not only end up in kind of final production projects, but actually factor our capability in deciding and coming up with production tooling, and that is an important factor for enhancing the production yield.

And what I’d like to clarify about the CNY 3 billion CapEx incurred in 2019, I think Ben has reminded me to tell everybody to confirm that out of that CNY 3 billion, around — something slightly less than 30%, around CNY 850 million is committed to what we call infrastructure consumption projects. Those are not production equipment. So the production equipment CapEx is the remaining CNY 2.2 billion. In fact, the optics took up 50% — around 50% of the remaining CNY 2.2 billion Capex, i.e., that is the major CapEx spend we have in 2019. So the electromagnetic drive and the precision mechanics, those add up to less than 12%. So the majority of the CapEx reflects the business progress.

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Operator [30]

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Next question comes from the line of Leping Huang from CICC.

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Leping Huang, China International Capital Corporation Limited, Research Division – Analyst [31]

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(foreign language)

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Zhengmin Pan, AAC Technologies Holdings Inc. – Co-Founder, CEO & Executive Director [32]

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(foreign language)

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [33]

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So in the uncertainty windows in Q3, Q4, we believe we are flexible and nimble enough to monitor CapEx required to face demand resumption. Once is — the focus is clearly on [leveling] and utilization of existing invested production in CapEx. We believe in enhancing other technical gaps between us and our competitors. We’ll make sure we capture the growth opportunity that may present itself in Q3 and Q4. For example, the plan for quarterly delivery or shipment of over 100 million MEMS microphones.

But more importantly, the assets or what we can see in the certain business opportunities, we already described the optics and the other businesses as well. So it is very important that as we see this importance of timeliness to review CapEx and also enhancing utilization, but at the same time placing very strong emphasis on widening the gap is what we are going to focus on.

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Zhengmin Pan, AAC Technologies Holdings Inc. – Co-Founder, CEO & Executive Director [34]

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(foreign language)

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Joe Kuen Mok, AAC Technologies Holdings Inc. – Executive Director [35]

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Yes. We’ve been managing our business on an international perspective as we have reported our progress in building up Vietnam already now. But in Europe, where we have, at currently, our 2/3 of our normal operations are in place, are actually reporting to work. What is important is that both in terms of technology enhancement work and also the interaction with customers on obtaining qualification are still in progress, i.e., those are continuing work that we have benefited from a high localization. We employ a lot of localized, experienced technicians and operators to help us to achieve that. So in a way, we are ready. We have prepared for the resumption in case the business come back, demand come back in Q3, Q4.

And we talked about camera module as well. The plan has already been laid, and we can be confident that we will reach a capacity of about 4 million to 5 million per month based on fixed production lines by around May time or before June. And clearly, and the plan of increasing that by another full production line are still in place. So we are pleased to say that our internationalization or take advantage of globalization capabilities in each of the different overseas locations have paid off. It means helping us to resume normalized interaction on both technology and also in terms of international customers. But at the same time, we are clearly well placed to take advantage over a strong potential that Q3, Q4 business will bounce back strongly.

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Operator [36]

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Thank you. We have reached the end of question-and-answer session. I would now like to turn the floor back over to the host today for closing comments. Joyce, please continue.

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Joyce Kwock, AAC Technologies Holdings Inc. – Head of IR [37]

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Okay. Thank you for your time for our FY ’19 annual results presentation and also the precious time and elaboration from our top management here. Any further questions, report our IR team, [Ko Yang]; myself, Joyce Kwock; and [Sheldon Jo] will be available here for your questions after this call as well. Thank you.

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Operator [38]

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Thank you for your participation, and this concludes today’s conference. You may go ahead and disconnect.