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

Good afternoon. Welcome to the AAC Technologies 2023 Full Year Results Announcement Conference, and my name is [ Wang Jing Xi ]. And first of all, I'd like to extend my sincere thanks for your attention in AAC. Next, please allow me to introduce the management. They are Mr. Benjamin Pan, Executive Director and Chief Executive Officer of AAC Technologies; and Mr. Kelvin Pan, Executive Vice President of AAC Tech; and Ms. Dan Guo, Chief Financial Officer of AAC Tech; and Mr. Jack Duan, COO of AAC Optics; Mr. Shi Tingjia, Vice President of Strategy of AAC Technologies. [indiscernible] thanks management's attendance. Today's meeting includes 2 parts, starting with my presentation on AAC 2023 full year financial performance. And this will be followed by an open management Q&A session. [Operator Instructions]. We also have simultaneous interpreting channel today. [Operator Instructions] Next, let's take a look at the results. In the second half of 2023, the group achieved revenue of RMB 11.2 billion, flat year-on-year and up 21.5% half year-on-half year, with the gross profit margin of 19.2%, up 1.4 percentage points year-on-year, and a 5.1 percentage points H-on-H, and this is marking the beginning of an inflection point. Improvements in GP margin was mainly due to the recovery in demand for mid- to high-end models. Net profit was RMB 590 million, an increase of 25.2%. For the full year of 2023, the group's revenue amounted to CNY 20.42 billion, a slight decrease of 1% year-on-year. The revenue for Precision Mechanics and Optics business increased significantly. GP margin was 19.9% -- 16.9%. Net profit was RMB 740 million, down 9.9% year-on-year. In 2023, the group adhered to its prudent financial management on CapEx and operating expenses. Operating cash flow amounted to RMB 4.63 billion, and the CapEx amount to RMB 1.38 billion, down 25.4%. And the free cash flow amounted to CNY 3.81 billion, the highest level since the group's listing. And the -- also the net gearing ratio was 5.1%. Inventory turnover days decreased from 109 days to 80 days, and this lays a good foundation for the group's future growth and innovation. Next, I would like to share with you the performance by business segments. Acoustics. And in the second half of 2023, the group's Acoustics business revenue was CNY 4.18 billion, down 11.5% year-on-year, but up 25.7% H-on-H. The GP margin was 30.7%, and this is benefiting from the significant change of the scale and specification upgrading of mainstream customers. The acoustic business achieved revenue of the full year of CNY 7.5 billion, a year-on-year decrease of 15.4% and the GP margin of 28.4%, a slight decrease of -- an increase of 0.3 percentage. And in 2023, the group actively cooperated with the customers' technology goal innovation layout, and the council then deepen the close cooperation with the customers. And also the annual SLS master speaker shipment volume in 2023 exceeded 10 million pieces. Optics. In the second half of last year, the group's optical business achieved a revenue of RMB 1.86 billion, an increase of 36% year-on-year and 4.8% H-on-H, benefiting from the continuous improvement in product mix and slowdown in the competition in the industry. And the GP margin was [ -9.2% ] and up 20.5 percentage points, an improvement of 7.5% points and points on H-on-H. And we also recorded this revenue of the Optics of RMB 3.63 billion, an increase of 12.7%. And the annual shipments of plastic lenses, including self-supplied lenses will be about -- was about 660 million, up 20% year-on-year and the 360 million pieces of 5P and above were shipped through other years. And [ WLG ] production yield has significantly improved, and this has led to a steady increase in production capacity and the group had shipped nearly 8 million hybrid lenses in total. And this efficiency of a mobile phone [indiscernible] glass lenses has laid a solid foundation for more customers to choose. The next focus is on the EMD and the PM consolidated segment. In the second half of 2023, thanks to more high-end flagship smartphone and folding device using the group's motors and metal casing. And this is about -- this year, the revenue of the [ Consulting ] segment increased by 13.3% year-on-year to CNY 8.25 billion and mainly due to the increase in the proportion of revenue from Precision Mechanics. The group's overall shipments, volume of access, haptics, motor grew by 13.3% year-on-year, thanks to the group's strength in [ start-up ] speed, vibration frequencies and conversion efficiencies. The revenue increased by more than 30% in PM year-on-year and its shipment volume of an ASP also achieved double-digit growth. Last but not least, let's focus on the sensors and semiconductors. In the second half of 2023, it benefited from the marginal recovery of smartphone market, and also our continuous improvement in the penetration rate and enjoys [ cost churns ]. The revenue was about CNY 531 million and down 31.7%, and this year-on-year, and a 75% half year-on-half year. The gross profit margin was 15.7%, and the revenue of sensor and semiconductor business was CNY 1.03 billion, down 18.4% Y-on-Y, mainly due to the weak demand for customer electronics. And we have our production basis for MEMS in Nanning, Shenzhen and Malaysia, aiming to create perfect layout of domestic and foreign collaborations, and also the cumulative shipments for 3 consecutive years is close to CNY 3 billion, and AI technology enables high-performance microphones and its growth momentum. And I'd like to talk about development of the group's business. Its related products are widely used in Xiaomi and the [ 4T ] and also with its high-end SLS master speakers was largely improved. And also, we have this shipment volume increased in the access and haptics motors. And the hinges is about 14%, and we also uphold in the smartphone market experience and in these different models. We -- like in the Xiaomi folding [indiscernible] Glory digital series and Samsung Galaxys and our company continue to bring customers a better acoustics optics and the voice experience, and there are also Acoustics Solution International B.V. announcement, we have already completed its acquisition, and this is also represented the PSS has become the indirect subsidiary of the group with 80% equity and its financial performance has been integrated into the overall performance of the group in the middle and late February. The addition of PSS will not only greatly enrich the group's product portfolio, but also rapidly improve the group's global service capability. And PSS, it's a company with over 50 years. So we -- its revenue in 2022 is about EUR 460 million. And the group will provide innovative, high-quality audio and acoustic systems solutions. At the same time, we will also effectively expand our business mobility in all key businesses. On the client side, PSS supplied to the world's leading OEM car companies. Its customers cover overseas and domestic leading middle and high-end car brands, and it recently released [indiscernible] mega models and all PSS-exclusive solutions. Next, let's introduce the product portfolio of PSS. It's including the loud speaker products, high mid and a low-frequency [indiscernible] speakers. They are not only for automotive customers, but also for some of the world's high-end consumer electronic brands. In other acoustic [ fuse ], including box acoustics and 3D and headrest solutions and a unique innovations of PSS. And we also have the system AVAS, and the third is the tactical system based on sensors. PSS has already mass produced and realized fixed points, and everyone gradually see its amazing models and really experience the perfect combination of acoustics and optics. And the PSS has a perfect global R&D and production layout, and its founding headquarters is located in Belgium and in Mexico and also us.

Thanks for your attention for my introduction. And now we can start the Q&A session. [Operator Instructions] Let's welcome the first question. And the first question is from [indiscernible], [ CICC ].

I have 2 questions. My first question and we have already seen the AI development trend and our big clients is North American, also mentioned their cooperation with AI to improve and expand the business. And Acoustics is a very important window. So whether AI brings about the innovation to our Acoustics business or any change in our structure of Acoustics business.

Thank you for your question. I'd like to answer the question. We are also paying close attention to the AI influence. We think the first influence will be in our microphone products and many enjoy customers talking about this and noise-related function. For example, in the 64 and 65 microphones, demand is strong in the market, and we have our proprietary chips and to produce these kinds of microphones. And we think in the future, the introduction of AI will trigger the upgrade of an Android system and enjoying clients, and starting from the second half of 2024, there will be the upgrade of some specifications mainly Android market. And this momentum will continue in 2024. And of course, some flagship smartphones will be introduced there first. And in 2025, and this size can reach about 500 million, and this will be introduced to more models. And from 64 to [ 17 ] DP products are matured in our company, and this will also pose other an upgrade of the other microphones because there are only 1 or 2 companies that can do those microphones. In terms of speaker, AI will bring a lot of a higher quality performance. So the high-quality and high-quality performance speakers, including the master series will be strengthened. And in 2023, the -- we have already made breakthroughs over 10 million. And in 2024, we will strengthen its penetration in the market. So the potential upgrade brought about by the AI is very great. And in AI, we insist on the innovation. And this innovation must be in line with the demand of our customers. We still need to pursuing the higher level on customer experience upgrade.

My second question is about optics. In the second half of last year, we see these turning point. And you also talked about the competition landscape change. So what's your outlook? And what's your [ product ] strategy of the Optics business this year? We also see the Shenzhen big clients return trigger the change of these optics industry and upgrade. So I'd like to know the outlook and future development of our Optics business.

I will answer your question. Actually, you have 2 questions. And the first one is about the positioning. So -- and also our pricing. And for us, our pricing system is stable and prudent. And last year, we talked about a lot about this prudent pricing strategy, and we don't make any changes this year. And our purpose and the target is to improve our customer experience and the mid- and high-end market share and we want to gain more market share. So we have already observed this pricing strategy results last year. [indiscernible] and here are for some products with less potential in the market share, and we won't be very aggressive on that regard. So our pricing strategy is still steady and prudent. This is for your first question. With regard to your second question, we won't have any comments on the specific brands or products. But our efforts will be on the mid- and high-end market shares. If some clients products are in line with our strategy, and we will have more resources and more attention to this customer. Of course, we will combine our capabilities and to exert our efforts to achieve the good results. But we don't comment on the specific products and the companies. You also mentioned the competition landscape of Optics. And from my point of view, and including some companies in Taiwan and in Mainland, and our views are the same. The vicious competition landscape has already passed in the first half of 2023, this kind of landscape was passed. And from the replacement from [ 6P to 7P ] and the price tends to be more stabilized and we won't see any great potential of the price hike. So if you want to have large price hike, you need to be focused on the [ G plus P ] or more -- or higher end products. And the GP margin by the end of last year was positive. And for the first quarter, the GP margin -- the GP is also a positive, and this is mainly due to the 6Ps shipments volume increase. And we will also see the over -- about 8 million [ G plus P ] and about 3 million is about 1G plus 6P. So this is an improvement. The worst time of the competition in optics has already passed with the upgrade of 6P and the 7P and the [ G plus P ], and we are confident to face this computation, and it will include our shipments as well as the production capacity. And apart from the bigger companies, the smaller companies will feel harder to enter the industry. So this is the base landscape in the smartphone market.

Thank you. Very clear. And I hope that you will achieve a better performance this year. That's all for me.

Thank you.

And the next is from [indiscernible], [indiscernible] Overseas.

First of I'd like to congratulate on your results. I have 2 questions. And the first one is about SLS master-level products have already exceeded 10 million. So my first question is about the unit price.

The master service this year made the breakthrough of 10 million in 2023. And in 2024, this will be introduced to the mid models of our customers. So at present, we think these master series can be doubled. The growth rate is about 100%. The penetration rate is dependent on the middle models' demand on the upgrade of the acoustics performance. And we think this will be speeded up by the AI's developments. And we also have our combo apart from the master series. We have the high performance-to-price ratio products. And this kind of products will be expanded this year. We will increase our investment on this regard. And many customers that will upgrade their acoustics devices to louder and the combo products. And in this year, combo can reach about over 10 million in access haptics, and also the speakers will be combined in a unified device, and to create One Plus One and the value will be an over [ 2 ], and we can provide high performance to price products to our customers. So this will increase our ASP, and it's within 5% to 10%. Some low-end products that will become more competive, and in high end, the SLS. And from 2023, we embarked this kind of transaction, and we will continue these breakthroughs in 2024, and in penetration will be continued in 2024 -- 2025 to 2026. So Acoustics has entered upwarding trend because of the scale and the specification upgrade and we provide a very good products with a competitive price to our customers, and this won't increase customers' cost.

Very clear. In addition, in the results, we are seeing this PM growth is fast. And what's the outlook?

Yes, Precision Mechanics in this year -- in 2023 has recorded a sound growth. And this was related to the market development, of course, with our layout and the plan of our business strategy. And we see some high-end products and titanium products, and we are deepening our cooperation with the big clients in China and also some products returned to the Android market. And this also improved our business performance and by leveraging our production capacity, our GP margin returned to a sound level. And in the future, clients will pursue the high-quality products. And the titanium alloy is effective. But in the future, they will still optimize the overall performance. And [ hinges ] in 2023 was very successful from the first clients, the foldable model from an owner [ Foreign Language ], and we made breakthroughs -- and [ hinges ] in 2023 shipments was 700,000. Actually, it -- this kind of products needs frequent testings and high-level appreciation. So [ hinges ] is breakthrough in the PM segment in AAC in the future, we will continue to promote these products and to obtain more market share. And second is about the VCs. In 2023, the growth of VCs is satisfactory. We also see the outlook of VCs because the AI development, the computing power will cause some heating problems in cell phones. The VCs products, like the stainless steel VCs or the bronze VCs and we'll provide a solution to this heating problem in cellphones from the production use and the technology -- our technology investment and as well as our innovation later solidify the foundation for the VCs development. And in 2024, we foresee double-digit growth in VCs. So in the overall VC segment, we are very optimistic. This is due to the recovery of the market, and we also see our previous plan in VCs.

Next question is Alex Lin from BOCI.

So the first question is about PSS. And in February, they have already and calculated in the balance sheet. So do you have any guidance to their revenue and growth?

In terms of the guidance, yes, and in February, we made announcement, we have completed 18% transaction and we will do the first consolidated -- our balance sheet report this year. We estimated the top line is about RMB 3.5 billion in the next 1 or 2 years, and then this kind of momentum will be steady, and the GP margin is over 20%. So the contribution to our net profits this year is about RMB 200 million.

Very clear. My second question is about PSS. The second batch of the equity. So in the announcement, and this will be decided in the -- in EBITDA and in the financial report of 2025. So I want to know the details. So how do you evaluate the 20% of the equity? Do you have any the strategies and what kind of collaboration models in the PSS?

Yes. So in the -- we used the EBITDA [ modeling ] because this is about the sensitive information and confidential information. So we didn't make detailed disclose. And this is about -- because the financial report is in the March year-end, in 2025, and we have a close communication on the business and also on the collaborations. So the transaction structures can support the 2 size future business development. And we have our shared and a common goal to achieve in the future. Yes, we have completed 80% equity and acquisition, but the AAC's management on PSS has already started, and we have already helped them in business as well as customers. And in terms of their products, loud speakers and the microphone, and we started our collaboration with them. And Chinese customers, specifically, the NEV and OEMs, we [indiscernible] in our collaboration with the PSS has already been started. And we empowered and helped the PSS comprehensively. So you also talk about this valuation adjustments and also this is a kind of exchange terms. And -- but we don't have the specific terms.

And next question is from [indiscernible] International.

First of all, I'd like to congratulate on your breakthroughs in the business and the results. I have 2 questions. And the first question is about cell phones and we see the sensors and as '24 and AI cellphones, and they also set the estimation of the annual sales. So what's your outlook of the cell phone sales in 2024 with the influence of AI?

As mentioned before, we think AI will bring a lot of innovation on cell phones, including the softwares, applications and hardwares. And there also are some of the haptics like the microphones and loud speakers and AI will be used in the optical scenarios, and those scenarios meet those products. And after development and the chips' heating problem, will be this focus in the market. So this will be in line with our strategy of VCs, our VC products can provide solutions. In addition, like Oppo and also other companies like Apple, and they will have their AI plans. But what's the evolution of the AI technology and how they are combined with the cell phone software and hardware and all these kind of changes will be more clear in 2024 and in 2025. So this year, in 2024, we will see some upgrade. And the obvious functional change or a specific change of AI in cell phones will be in 2025. Of course, the iteration of AI is speedy. Therefore, we need to pay close attention to the development of AI. Overall speaking, we are optimistic towards the market. But at the same time, we still hold a prudent attitude towards its development.

My second question is about the competitive landscape. And you talk about the improvement in the competition. So what's your outlook of the GP margin and the revenue? So I'd like to have a breakdown of the traditional regional business and the outlook with PSS.

And the Chairman and CEO also talk about the cell phone or smartphone shipments this year, and we are prudent to is a shipment. At the same time, we also see the second half of last year, our results experienced upward trend, and the external environment is positive within the top line, AAC is 10% to 15%. And the PSS, the net revenue is about CNY 3.5 billion, but consolidation is from March. So AAC plus PSS year-on-year revenue can reach 20% to 30% growth. In terms of GP margin, in the second half, as mentioned by the segments, in Acoustics, on Optics or PM and the motors and the growth at all [indiscernible] years. So we think the GP margin this year will return to about 20%, which is a healthy level. And this kind of a growth is based on our development of the -- all segments and expansion of our business. So all the segments can be recorded very positive development trend.

And the next question is from the chat box. And what's the outlook and of the results and what's the outlook of the investment ranking, we can see the Moody's ranking.

I'd like to answer your question. We have a close communication with Moody's ranking system, and they're concerned about our cash flow and the control of the CapEx our leverage ratio after the acquisition of PSS. The ratio target is relatively high. We still have the space and the total debt and the EBITDA, our ratio is 3.8x. And by the end of 2023, the leverage ratio is about 2.45x. So there's a big gap. And after the completion of -- in February, and we have a cash inflow, very good cash inflow, and we have the efficient control in CapEx of CNY 1.38 billion and 25% down year-on-year. And this year, we will continue to do the CapEx -- [ can ] show, and this will be within 1.4 to 1.5, and the operation cash flow will help us leverage ratio because the acquisition cash capital, most of the capital is from our cell phone capitals. So in the interim, after the consolidation of PSS, the leverage ratio will be about 2.6x to 2.7x. So all the indicators are positive.

Next question, I'd like to invite Huatai Securities. Mr. Hu Yuzhou, please go ahead.

I have 2 questions. The first question is about lenses. GP margin in January was positive, and we can see the positive GP margin for the full year. So what's your outlook in your Optics business and when will it become the positive this year?

According to the demand and our plan, we think, in the second half of the year, and this will breakeven and the [ Indian ] operation and our operation cash flow will improve our production yields. And in the high-end products, we continue to make progress. For example, last year, in Q4, the 6P is accounted for a certain percentage, and it has already improved to 20%, and the 5P plus 6P accounts for 60%. And nowadays, it has amounted to about 70%. So the overall ASP and also the product structure improved, and this improved our GP margin. In addition, the optical modules. And last year, and we see the little loss-making in the GP margin, and it's become profit making this year. And with the improvement of the modules, we also improved our GP margin in this regard. And the volume and the last year is 10 million per month. And this year, we have achieved about 1 -- [ 13 ] million per month. And the CapEx this year was effectively controlled. So in the Q2 -- in H2, we think this will turn positive.

My second question is also about on Optics. What's your inventory level of your lenses? And what's the outlook of the shipment volume inventory of the lenses?

The inventory turnover is about 2 months to 2.5 months, and has been continuously improved. And improvement -- yes, the inventory is over 2.5 months. And last year, last year is over 140 days, to turnover. And nowadays, it is about [ 80 ] days. The Optics inventory level is maintained a good level, it's lower than the average inventory level of the group. So your second question is about the outlook of the shipments, right?

Yes.

So the lenses of volume will be around CNY 600 million to CNY 700 million. But the proportion, the mix, the 5P plus 6P will be over 10%. In terms of modules, last year, every month is 10 million pieces per month. And this year, we think the monthly growth is about 10% to 20%. Actually, we are not pursuing the volume. Our focus is on the structure. And this year, we can produce more high-end modules like the OS modules or the 200 million [ pixels ] modules. And this is more strategic for us.

Next is the question from [indiscernible].

My question is about the Optics, the WLG production yields and has been significantly improved. So what's your plan of the WLG and its shipment volume?

[Operator Instructions] Thank you.

Mr. Pan also mentioned about the WLG hybrid shipment volume and have reached almost 8 million. And if 1G and 6P accounted the biggest percentage, it's about over 90%. And this is the very high-level product. And in smartphone, in Xiaomi, [ Mix ] and the other series, we introduced the WLG lenses. And it's performance has already been testified. And in this year, in terms of WLG with the upgrade of our equipment devices, and our production capacity has been significantly improved. And there is a single module production capacity and has improved by 7x. At the same time, the precision and the production yield have largely been improved. So this laid a very solid foundation for us to be the suppliers to the high-end clients and non [ G+P ] lenses. We also see the positive or the upward trend. And for example, we can use this WLG in the periscope, and this is a very good performance and also used in a different image and image and the -- also, image mirrored because it has a good performance in the dispersion. In addition, in VR and AR in the automotive and application, and here, we can also introduce the products to this field. So with the production capacity and technology improvement, and this application can be expanded, and it has a wide application area. It can also supplement the [indiscernible] lenses. So this is a faster growth market, WLG has its own future high performance and mass production and relatively competitive cost. So this has already been recognized by our customers, and the customers show the big interest on this regard. So we are -- we have confidence in the growth of the WLG.

And next question is from the [ Merchant Securities ].

Also AAC has its own automotive Acoustic business and what's the future plan with collaboration with the PSS?

Thank you for your question. So before PSS, AAC has its plan in the automotive speaker -- automotive products, and like the loud speakers and related products. And in the future, on PSS, that will also be merged and the traditional AAC team will be focused more on the algorithm and software and the loud speakers products and to provide better service to our automotive customers.

I'll make a supplement here. Yes. So in terms of the Acoustics application on the automotive, we want to provide complete solution or turnkey solution to our customers. And we have the traditional -- the PSS has its traditional loud speakers and it's innovative speakers. So it has an AVAS and [indiscernible] related products. And they have a lot of innovations. So we think they have the leading position in the market. So in the automotive acoustics and loud speakers, and this will be led by PSS. But apart from the speakers, the loud speaker and the use of algorithm is also important. So if it has 500 speakers combination and it will have another matching 500 loud speaker and algorithm in the vehicle. So AAC will shed more light on the algorithm and the project development. And in loud speaker's size and its mass production will start in 2024 as well as its delivery. So after the PSS and the overall plan and the strategy will be more completed and deepen collaboration, we're seeing the progress. And we also help the PSS to collaborate with the carmakers and also help their products to be penetrated in Chinese markets.

Our time is constrained. This concludes our Q&A. I would like to ask -- invite our management to make a summary of our conference today. Mr. Pan, please.

And from 2021, and we use [ McKinsey ] to do the transformation. And you also see the big change in management. And in the second half of 2023 and also the outlook by 2024, I'm happy to see the transformation and has already brought about our own capability in each production line. And in 2023, we have the good results on each production line. So this is due to the efforts of Kelvin. And when he is leading the team, I saw after the results, and I'm happy with the results. And after the years of the transformation, I also like to extend my sincere thanks to our investors for your patience and the time, and with your support, we have the opportunity for the structural transformation of our company. And in the future, and after the acquisition of PSS, I'm very confident to our results and growth in the future.

Thank you. Mr. Pan, and thank you for your sharing -- this concludes our AAC Technologies 2023 Full Year Results Announcement, and the [indiscernible] materials will be uploaded to the official website. If you have more questions, please feel free to contact us. Thank you for your attention to AAC Technologies. Thank you.

Thank you, see you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]