AAC Technologies Holdings Inc. (2018) Earnings Call Transcript & Summary

Hello, investors, good afternoon. Welcome to the AAC Technologies 2022 Full Year Results Announcement Conference. I'm Wang Huang, host today and Director of AAC Tech IR team. First of all, on behalf of the company, I would like to thank you for your attention to AAC. Next please allow me to introduce the management. They are Mr. Kelvin Pan, Executive Vice President of AAC Tech; Ms. Dan Guo, Chief Financial Officer of AAC Tech; Mr. Jack Duan, COO of AAC Optics; Mr. Tingjia Shi, Vice President of Strategy of AAC. Thanks management's attention. Today's meeting includes 2 parts, starting with my presentation of AAC 2022 review and Q4 financial performance. This will be followed by an open management QA session about the company's strategic developments. You are welcome to communicate with the management and ask questions [Operator Instructions] We also have simultaneous interpreting channel today [Operator Instructions] Next let's take a look at 2022 full year and Q4 results. In the Q4, the Group achieved a revenue of RMB 5.84 billion, up 21.4% year-on-year. Increase in revenue was mainly attributable to the strong demand of overseas customers and increase in combined revenue contribution from Electromagnetic Drives and Precision Mechanics business. GP margin was 16.6%, down 3.9 percentage points year-on-year because of the product mix change and a more fierce competition in optics market. Net profit of Q4 is RMB 237 million, up 12% year-on-year. The group achieved revenue of RMB 20.63 billion, up 16.7% year-on-year. The increase was mainly due to the increase in revenue contribution from Electromagnetic Drives and the Precision Mechanics business. Gross profit margin of 18.3%, down 6.4 percentage points year-on-year because of the increase in low GP margin business and more fierce competition in optics market. Net profit was RMB 820 million, down 37.6% year-on-year. In 2022, the group continued to -- its prudent financial management on CapEx and R&D. During this reporting period, the group's operating cash inflow was RMB 2.52 billion. Main capital expenditure was RMB 1.85 billion. As of 31st of December 2022, net gearing ratio was 6.2%. Cash and cash equivalents was RMB 7.16 billion. We believe that some financial position is essential to the sustainability of the group's growth and ensures group's ability to continue to innovate and develop in the future. Acoustics. In the Q4, the group's Acoustics business revenue was RMB 2.39 billion, 41% of the total revenue, up 5.6% Y-o-Y. Gross profit margin was 31.2%, up 4.4 percentage points Y-on-Y and driven by the overseas customers' revenue contribution. The group's Acoustics business revenue was RMB 8.85 billion, up 3.1% year-on-year. GP margin was 28.1%, which was mainly due to the Android market demand decline and Android Acoustics products drop. In 2022, the group continued to work closely with overseas customers and supported their expansion into emerging business fields by constantly enhancing products competitiveness and the market share increased steadily. Currently, the group has built up an integrated solution for mobile audio devices, including high-performance linear speakers, multi-speaker arrays and also the proprietary algorithm, which will be actively promoted to the market. The group will continue to keep abreast its customers' needs, launch new products and technologies and increase its revenue. Optics. In Q4, the group's optics business revenue was RMB 798 million, 14% of the total revenue, up 55.6% Y-on-Y, weakened market demand affected the shipment volume and the utilization of plastic lens and the camera modules, resulting in a decline in the overall gross profit margin of the optics business. The group's optics business revenue was RMB 3.22 billion, up 34.7% year-on-year, mainly due to the increased market share of the camera modules. Plastic lens product mix has been continuously improving, and the proportion of 6P and the above increased. Camera module business grew steadily and annual shipment volume delivered was [ 114 million ] year-on-year increase of 121.5%. OIS products have started small-scale mass production, the group will continue to enhance its vertical integration capability by integrating plastic lenses, camera modules and VCM business. The next focus is on the electromagnetic drives, EMD and Precision Mechanics business segment. In Q4, given the shipment increase of drives and the PM products as well as the synergy and the new business driven by the Toyo Precision, revenue was RMB 2.29 billion, up 27.5% year-on-year and up 11.5% Q-on-Q. Our GP margin was 22.2%, up 2.5 percentage points Y-on-Y and 0.7 percentage points Q-on-Q. For the full year 2022 revenue for these combined segments amounted to RMB 7.28 billion, up 29% and the remaining steady. And the shipment volume of x-axis haptics motor for Android customers was up 41.9% year-on-year. Market share is further improved. And with respect to Precision Mechanics business, leveraging use of manufacturing experience and in-depth cooperation with customers, the group has continued to expand its high-value business and optics and product mix. And also, the group will continue to improve its product mix and increase the utilization rates and the GP margin. And the Toyo -- the synergies between Toyo Precisions and existing metal casing business have been fully substantialized by the smooth expansion into the notebook and other markets, and we will increase the revenue of Toyo Precision and also the total revenue. Last but not least, we'd like to pay more attention to the sensor and the semiconductor business. And the revenue was about -- this is about -- this is [indiscernible] of a point. And the GP margin is 13.9%. And this is all -- this is mainly due to the product mix. And in 2022, the sensor and semiconductor business, revenue was [ RMB 1.246 billion ] and [ 24% ] year-on-year, and the GP margin is 11.6% and year-on-year decline is 3.5 percentage points. And in Q4 of 2022, the manufacturer -- the factory of Malaysia started its production and the group continued to promote the proprietary MEMS microphone by improving the structural optimization and the group increased the reliability of the products. And we also formed the partnership with the Soundskrit and expanded the business to the consumer electronics and smart automotives and promoted high-performance MEMS microphone products. And we think with the AI and the smart home appliances and automotive improvements, and we think this will improve the MEMS business in the future. And in 2022 the group insisted on both internal and external improvement and introduced this digital management and can show the CapEx and increased inventory turnover. And in 2022, group, at the same time, solidified the smartphone market. And at the same time, seized the opportunity and continued to explore the emerging markets, and they will also provide the precise and haptics experience and they will provide different systems like the haptics and also the new capital expenditures and the better experience to our customers, and we will also continue to -- our lean management. And based on the customers' demand, and we will provide the customers with diversified products and in the EV and in the traditional automotives continue to -- its exploration and the mass delivery has already commenced. And in the automotive optics in 2022, the relevant products have already passed the certification of the top clients and the government has already covered this in cabin cameras and also the ARHUD optics components and LiDAR components have already received the acceptance and the recognition of the top clients. So those are the introduction of the 2022 full year results and the Q4 and we will come to a QA session [Operator Instructions]

And the first question is from CICC, [indiscernible]

Good afternoon management. My name is [indiscernible] from CICC. I have 2 questions. The first question is related to the demand at the beginning of this year, and we saw a rebound at the beginning of this year and in Chinese New Year. But recently, the demand of the smartphone was fluctuated. So my question is about your view on the annual demand of our smartphone. And do you have any year-on-year change and Q-on-Q change?

So from the full year statistics, the shipment volume of the smartphone was maintained a steady. And so we think this change is very limited for the first half and the second half of the year, and we think there will be some improvement after the Chinese New Year. So the shipments will be similar to the second half of last year. And in the second half of this year, we -- in the second half of this year, there will be new models launched and the shipment will be further improved in Q3 and Q4. So for the full year, the percentage is about 44% versus 55% and the smartphone shipment will be maintained a similar. And in March, there were new models of Android launched. And we also think this kind of launch will drive the demand of our customers. and compared with the model launched in the second half of the year, we believe there will be more new models and the consumption driver will be stronger than the first half of the year.

Okay. Understood. Very clear. My second question is about the CapEx. Last year, the CapEx was [ shrunk ]. So I'd like to know the CapEx -- the breakdown of the CapEx by segment. Because you know there are overseas production expansion. And also, we have commenced on our production in the Malaysia factory. So what kind of a percentage of the CapEx will be allocated to the overseas market?

Okay. I will answer the question first and welcome other management to supplements. And we are facing up an uncertain macro environment. So we conducted a prudent management. And also it's a kind of management. So the CapEx last year is about RMB 3.5 billion, and it was declined to about RMB 1.8 billion, is almost half of the last year and less than 30% was in optics. And for lens, it's less than 1/4. We also allocate those CapEx to motor and Precision Mechanics. The Precision accounted for about 15%. And last year, the number was lower. If you see the CapEx of 2023, so with the lower base of 2022, our CapEx will be targeted in some projects, and we will make adjustments of 10% to 15% control, which is 10% to 15% down. Of course, this is in line with the overseas strategy and other strategies. We want to reserve our resources, and we will allocate and distribute the CapEx according to the new business and the traditional business and the different products, yes. And for the traditional products, we continue to control and optimize our CapEx. For the new products, for example, the key functions and new products, we accelerate the CapEx plan. Of course, the CapEx plan is compliant with the customers' demand. So this is also in line with the launch of the new models and the customers' strategies. And in the future, our focus will be on the new products and the new functions.

Next question.

Good afternoon management. My first question is about the smartphones. I have a follow-up question on the market. Acoustics, optics and the PM, do you have any outlook on the revenues. And what about the revenue target on the non-smartphone market?

Okay. I will talk about the Android market first. The shipment volume on our smartphone last year was not increased. There were a product change -- product mix change and those kind of a change and its influence will be reduced in the first half and the second half of 2023. So in Optics and Acoustics and the PM, there will be new products and the projects in the second half of the year. And this will help us to build a sound development of Android business. So in the first half, in the beginning of the second half of the year, and we have been influenced by the fierce competition of the market. Of course, the shipment volume. With introduction of the new products in the mid- and high-end products, we think the load in the revenue and the shipments and the revenue will also be increased with the shipment volume. Toyo Precision, this business is smooth and we expand our business to the notebook market and other new projects. We are also developing the metal casing products of notebooks. And in the middle of this year and the production will go into -- will be ramped up and the mass production will be commenced. With this kind of pace, we believe that the revenue will be an increase this year and next year and the year after next year. We think the revenue will be more promising in terms of the notebook and laptops.

Okay. Understood. In terms of automotive, was the revenue of 2022 in this regard. And this year, and how many new projects, how many products you will be finalized? And do you have any guidance on this regard?

Thank you for your question. Automotives, Acoustics. And we think the revenue will be over RMB 100 million, and it's quite sizable. And our focus is on the end user's experience, the integrated experience and also this experience in the packet. For example, these micro speaker, we made some innovation on those micro speakers, and we will also increase the in-cabin experience of the customers and we also build the commercial partnership with a luxury brand. We also forged our partnership with the NEVs. And third, we will leverage our algorithm, to improve more functions and the customer experience. So those are our focus is. And the AAC hasn't entered in the automotive for a long time, and we have already received tremendous orders, and we hope to triple this development this year.

The next question is from [indiscernible].

My name is [ Jack Lo from Goji Electronics ] And I thank management for your answers. So my question is about the 3- to 5-year mid- and long-term strategy. And some people ask about the automotive, acoustics. And what's your mid- and long-term target on this regard?

For the overall strategies of the company for the next 3 to 5 years and we have 1 foundations and also 2 drivers. And the first foundation is based on this electro -- consumer electronics and the 2 drivers, and there are 2 dimensions. And the first is the emerging markets and the -- it's also includes the automotive, of course, in terms of the automotive, it's not only limited to acoustics and optics, and AI and also PM and other segments, we'll touch upon this segment. So this is the first dimension for our growth driver. And the second, we want to accelerate our business to a higher value chain decisioning. And this will drive us to integrate the overall value chain, and we will leverage the algorithm and other strengths to achieve this goal. So this is the target of next 3 to 5 years of AAC Tech.

In terms of the acoustics in the automotive segments, and this revenue was about RMB 200 million because -- the automotive. And we hold that in this automotive field and the revenue won't be below in our traditional consumer electronics. So those are the clear target of the acoustics.

Thank you, Jack's answers and management answers. And next question is from [indiscernible], Credit Suisse.

I have a question about optics. And in Q4, the GP margin was lower and the inventory was lower as well. So I'd like to ask, was the percentage drop are driven by the inventory declines and the camera decline has reached to its bottom or it still has the potential to drop?

So okay, in terms of the inventory, I'd like to answer this part. In Q4 and also in Q3 and the management deleveraged inventory to increase our -- improve our cash flow and the fierce competition in the market. So in the second half of last year, we actively deleveraged our inventory. So this is the inventory of nowadays. And it decreased from the 7 to -- 6 to 7 months to 4 to 5 months. And in the first half of the year, the GP margin will be improved prominently and we will make the product mix change and product mix structure. So the ASP will be going up sharply. And this will have the positive impact on the GP margin. And we think this kind of increase and price increase is about 2 digits.

Okay. The second question is about the order increase in Android markets. In the recent months, the optics, the volume is similar to the last year's and is better than Q4 and we relocate our production because you know our production is over then and the demand before. So after the Chinese New Year, we see this trend. But of course, we maintained our prudent optimistic attitude and because we're not sure whether this kind of a trend will be continued.

I have a question from Felix on the chat box. So he'd like to ask about the unit price of the notebook and whether the potential for its increase in the future.

The unit price is about USD 50, five-zero US dollar and the first factory is in Yangzhou and the daily production capacity is about 10,000. So for a month, it's about 260,000 and with the new products and the products introduction, we hope that the production will be ramped up. This metal products for notebooks, we think this market is very sound.

The 2 questions from the chat box. First question is about the cash flow improvement. Second question, ASP trends for each segment.

In terms of the cash flow, we have already discussed it. And we actively managed the cash flow and you also adopted lean management. The free cash flow, together with the inventory turnover as well as the CapEx are well under control. And the CapEx, as I mentioned before, was declined by almost 15% Y-o-Y, year-on-year. And the inventory is decreased by over 20%. And optics, as mentioned by Jack, we also conducted a lot of optimizations. And next step, we will do more measures on the process. So in terms of the cash flow, for the full year of 2022 and next year is a negative RMB 1.3 billion. And this year was positive RMB 2.5 billion. So this is a big improvement. And in the future, we will strengthen this kind of management and to further increase free cash flow level. And by the end of 2022, and the cash and cash equivalents is about RMB 7.6 billion and net gearing ratio is also very sound and all the financial positions are stable.

In terms of the ASP trend, the ASP trend of this year is similar to ASP trends of 2022. And the first half will be lower than the second half because of the demand. But for the Precision Mechanics, this will be improved because with the new introduction -- because of the new introduction of the notebooks business, and this will increase the ASP in this regard. For the next 1 or 2 years and this kind of a trend will be maintained. With respect to the big customers, and we think their ASP is stable and with new products and projects, and we think there will be more production. So those are the clear trends. On Android market, they're starting from the second half of 2022 to the first half of 2023, the ASP has been a little declined, and this is also because of the competition in the market but with the new products introduced in the second half of 2023, the ASP will be improved at that time. So we think the market of the smartphone is stable. And with the introduction of the new functions and the products and the -- this kind of -- each smartphone and ASP will also maintained stable.

Okay. Thank you for your answer. Next question is from [indiscernible].

I have 2 questions. The first question [indiscernible] relations and as well as the supply chain relocation phenomenon worldwide. As far as I know, our strategy in this regard is very efficient. So for the next 2 to 3 years, what's your plan on your production? What kind of production relocation of your business?

Yes. And we continue to discuss this question with our big overseas customers. And most of the production nowadays is within Chinese market in China. And we will have a better match with the customers' production and products. And this year, we will expand our production capacity to an ASEAN countries. Of course, this is in line with the supply chain strategy of the customers. Some traditional products will be relocated to the overseas production, but some new projects and products -- production will also be relocated to overseas. And for the high-end development and technology demand, and we will still maintain this production landscape, maybe in the next 2 to 3 years, domestic and the overseas production capacity percentage is about 70% versus 30%.

Okay. I'd like to ask a question about AAC optics. I saw the listing process on STAR. So whether its developments will be more independent or will be more combined with AAC Technologies, was its positioning changed in the market?

And in terms of the product strategy, we insisted that different dimensions. The first of all is the cameras and lens and our lens is the #3 -- is a top 3 worldwide and as we will adjust our products this year and to expand and develop our business to the high-end lens. Our technology is mature. So we will pay more attention to the high-end lens development this year. And the second is about WLG. Last year and since the second quarter, the new factory was commenced and we delivered our products after that and the quality will be further improved this year. And with the technology and upgrade, the WLG will have a more promising development next year. And for the non-smartphone market, for example, the automotive and drones and industrial cameras, we also expand our business [indiscernible] and to those business in industrial cameras, and we entered in this new area. In the future, we will expand our business to those emerging markets. Last year, you know that we withdraw the listing. We think with the solid development of those diversified dimensions, we may reconsider the listing procedure. With respect to the overall strategy, we think the smartphone market is relatively stable. So we will carry on more integrated business. And the optics strategy is in line with the group. And we have [indiscernible] motor and modules and our proprietary algorithm and softwares and which will help our customers to improve and upgrade customer's experience. And of course, all these are within the budget of the customers. The interaction with our big customers and business communication, and we will make strategies together with Optics business. So we will empower the Optics business and support the development. The development in automotive. In the future, the lens -- the automotive lens will be further improved. In the next 3 to 5-year plan, we will match our group strategy with the development strategy of optics to achieve better operation.

Next question is from Frank He from HSBC.

I have 2 questions. The first question is about the breakdown of our optics. For example, lens and modules, mostly revenue distribution and the breakdown on the 2 sessions. And we have a rapid growth in the modules. So do you have any revenue guideline?

The modules revenue and lens revenue percentage is 2 versus 1. But this year, our production is the same, and we won't have a very large improvements in this regard. But our focus is to develop into a higher-end products. Okay. And for the motor, and we will introduce the virtual functions, and we also see the trend in the Android market. So I would like to know more information in this regard. We also see some information on the social media. And we think those new functions are the trends of the industry. This will create new attractions to customers. So this is still in line with the new model launch in the market. Many customers are interested in the information, but the official disclosure and announcement will be dependent on the feedback of the customers. Of course, we are doing preparation works, for example, the production capacity and the follow-up of the key customers, we are proactively support our key customers, generally speaking, we think those new functions are very good innovations in smartphone market.

Thank you, Mr. Frank. Thank you, management. Time is ticking. We would like to invite last question. Tina, please go ahead.

Thank you, management to allow me to answer the last question. My question is about the North American customers' development because this is an important driver in company's future developments and there are new projects how do you seize the opportunities there? And do you have any new CapEx plan on the North American market?

I'd like to answer the question. Our partnership with the key customers are smooth. And this year, we think there will be new function introduced to the market and the business. And we will also work closely with them. And this is in line with the general trend of the smartphone market. We also want to upgrade our competitive edge. So with the Precision Mechanics and the core components upgrades, we will also pay more attention and to more business. For example, Precision modules and this will better show our competitive edge. And second, in terms of the supply chain, global supply chain, and we know that there will be new projects in Vietnam and in Android, we produced our products in Vietnam for a period of time, and we have 2 to 3 factories there. And so I think we can work closely with our key customers with those capacity and stable capacity. India, [indiscernible] with the traditional products, and we will optimize our CapEx. But for the new products, the CapEx will be continued on the factories and the new products, platforms and the smartphones volume market, market size still there. For example, it is still 1 billion per year, and so we can increase our units return and this will be introduced in all the Android customers and other customers.

The last question, because we still have several minutes, so we will answer last question. The question is about the 2023 guidance. GP margin and the revenue and the new business strategy.

The shipment volume compared with 2022 will be increased. So we hope in terms of the revenue and the improvement of the production capacity and utilization and as well as the optimization of the operation, and we think GP margin and the revenue will be further improved. Secondly, we insisted the integration strategy and we can explore new products and functions and the smartphone units -- in a single smartphone unit. We also believe new products this year will be more clear, and these new products are targeting the consumer electronics. And in the automotive market, this is a long-term development market. We also use our competitive edge and our traditional strengths to enter the market. And then in the next 2 to 3 years, this will be the faster growth track. So by leveraging the consumer electronics and AR/VR in the laptops and notebooks, and we will increase our unit return. And we will also enter the automotive to increase our revenue and the GP margin. Thank you.

Thank you for your attention. This is the time limit. This is the end of the 2022 annual results announcement. If you have any questions, you are welcome to contact our IR team. Thank you for your attention to AAC Technologies. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]