AAC Technologies Holdings Inc
HKEX:2018
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AAC Technologies Holdings Inc
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Welcome to our 2018 Q3 Result Conference Call. I am Eddie Kung, Head of Investor Relations of AAC. And joining us today, we have our CEO, Mr Benjamin Pan; and our Managing Director, Mr. Richard Mok. Before we start, we would like to remind you some information you may hear during our discussion today may contain forward-looking statements. Actual results or trends could turn out differently.
Now I would like to go through the results before opening up the questions.
For the first 9 months 2018, the weaker global smartphone market continued to cause a negative impact on the company. Revenue for 9 months 2018 dropped 4.8% year-on-year to RMB 13.3 billion in line with the contracting market shipments. However, driven by Android customers' adoption of innovative solutions, the sales contribution increased by 3.6% year-on-year for 9 months 2018. Gross profit margin decreased 4.2 percent points, mainly caused by appreciation of RMB for 9 months 2018, which contribute to 1.5 percent points and a weaker upgrade cycle create unfavorable product mix and reduction in shipment volume.
The company always emphasize on financial discipline in managing a strong balance sheet. The solid financial position enable the company to maintain investment for future growth. For 9 months 2018, the company generated strong cash inflow from operations of approximately RMB 5 billion. After deduction of capital expenditure and dividend paid, cash on hand was more than RMB 3 billion as at 30 September 2018.
Let's look at individual standard performance, Acoustics. For 9 months 2018, sales of the Acoustics segment was increased 2% year-on-year to RMB 9.8 billion (sic) [ RMB 6.8 billion ] despite of fluctuation markets. The launch of Super Linear Structure, SLS, for Android customer along with the continued upgrade of acoustic components drove the dollar content growth. However, mainly due to the price pressure from the legacy products, gross profit margins on a year-on-year basis for 9 months 2018 decreased by 3.7 percent points to 37.9%
Accelerating the upgrading process of new technology platforms and existing SLS version will soon evolve to an upgraded version for Android flagships in delivering better sound quality. At the same time, a modified version of existing SLS will be launched for penetration into mid-tier smartphones. The company believe both revenue and gross profit margin of this segment can be further enhanced through the wider adoption of the SLS platforms.
For the Haptics and Precision Components/Precision Mechanical segment. Sales performance was adversely affected by the current trough in the cyclical specific upgrade in first 9 months 2018. Limited change in functionality and redesign caused a decrease in average selling price and lower shipment volume. Revenue of this combined segment decreased by 18.3% year-on-year to RMB 5.3 billion, and gross profit margin dropped 4.0 percent points to year -- to 39.1% for the 9 months 2018 year-on-year.
Nevertheless, we believe that the demand for haptics and precision components such as audio display actuators as well as the new stepping motor modules and also our [indiscernible] 3D-shaped glass casings will drive business growth of this segment.
In terms of Optics, business revenue of -- for 9 months 2018 has increase strongly as expected, this -- by at more than 4x year-on-year to RMB 414 million.
Shipment volume of optic business has been expanding as planned by successfully penetrating into all of our major PRC customers. Monthly production capacity is on track to increase to 40 million by end of 2018 for meeting the increasing demand. On the other hand, the design upgrade roadmap of hybrid lens has been recognized by customers. Production capacity is ready for mass production. Together with the continued improvement in production yields and margins in line with the expanding scale, the company is set to deliver high growth in optic segment.
MEMS components segment. Revenue increase of 5.5% year-on-year in the first 9 months of 2018. Gross profit margin has improved largely by 6.2 percent points and 8.2 percent points year-on-year to 26.5% and 35.7% for the 9 months and Q3 2018, respectively. The strategy of increasing utilization of in-house MEMS and ASIC dies is beginning to pay off.
Now, we shall open the floor for question. Thank you.
[Operator Instructions] Our first question comes from the line of Cherry Ma from CLSA.
My first question is related to 3Q acoustic segment. Can you give us some color on the reasons behind the 3Q acoustic sales and gross margin decline on a year-on-year basis? If it was impacted by either production scale, a new rate or slower Android upgrade or either pricing pressure due to competition?
Thank you for your question, Cherry. It's Richard here. I think the third quarter, we have expected to ramp up, and as you know, [indiscernible] is the new product launch quarter. I think there's nothing unusual about -- or anything exceptionally that AAC could not deliver. I think we are striving to continue to make the improvements on efficiency, not only on existing platforms, but new platforms, such as SLS in the Android phone. I think the quarterly margins on, not only acoustic segment, but each segment, it's really dependent upon the precise product mix for that quarter. So I think what we are seeing in the third quarter is not indicative of any deteriorating kind of direction in our acoustic products.
Just a follow up. If there's no deterioration in product mix and if there's no unusual problem in product ramp up, what was the key reason for the margin to decline on a year-on-year basis, given usually, on a bigger scale, AAC is able to achieve for 40% or more margin?
What we have tried to point out, and also in the announcement, that, generally, I think in the third quarter, the overall kind of market is slightly depressed. We see for the market smaller volume of total handset, but for AAC, we do see some reduced shipment. And that has, to some extent, affected a small extent of our margins. But also, I think, as we also said in the announcement, there was some platform, what we term as legacy products, whereby, there will be, obviously, pricing pressure, et cetera. So it's a mixture of little things that caused the small short term dip in the margin.
And my second question is related to outlook. In the press release, your company mentioned you're cautious but positive for 2019. Is it possible to give us some color in terms of self-growth, margin trend and CapEx for next year?
Of course, I think the current economics environment and the various kind of uncertainty of the current trade dispute, I don't think we have a certain kind of defining view of what's going to happen next. So we remain cautious. But we are also positive to the extent that, I think in acoustic, in haptics, in optics, in our mechanical structures and also, if I go back to haptic, our haptic components, our preparations are fully and ready for better business in all the 4 segments that led us to a positive outlook, we believe. Having said that, we no longer gave guidance for any results nor quarterly financial performances, we can -- we are confident that in all these segments that I've mentioned, that the opportunity from our existing customers are great, and we are ready to reap the potential kind of margins that we are targeted and the volume growth that we are seeking.
Our next question comes from the line of [ Chenyun ] from Morgan Stanley.
I think I just only have 1 question. You just mentioned that there is [ uncertainty ] outlook in terms of the trade dispute. So would -- is there any plan to move the plan out of China? And if there is, where is the potential consideration of the direction? And also, whether that would have impact to next year's outlook since -- if there's moving plans, there might be some issues, I mean, initially. They might take some time to impact the yield.
Yes, thank you for your question. I think, as you know, we have been operating, for example, outside China, in Vietnam and we have a small factory in the Philippines as well. But by no means they are the exact kind of capacity build to replace what we already have in China, namely in Changzhou, Shuyang and Shenzhen. But what we have done is to obviously plan for the worst. And we don't -- I think, to be honest, we can't say the current plan is that we can 100% mitigate the worst effect of a worsening trade situation to move all our production outside from China. But nevertheless, I think what is prudent and sensible for us to have is to have different contingency plans to what we can minimize the impact and to control and to quickly recover the situation. So what we are saying here is we don't expect -- first of all, we don't expect the worsening impact because of a worsening dispute. But nevertheless, contingency plans are made. We believe it in our best kind of assets to control the maximum impact have on our fund -- on our short term financial performances. But nevertheless, I think in any trade kind of dispute situation, I think it's our advantage to kind of show off our proprietary kind of comparative advantage in leading the technology manufacturing. So we would not change our directions in terms of that. But in terms of immediately shifting out of China, we are making internal plans to control the maximum impact on it, but it's not 100% kind of replacement consideration.
[Foreign Language]
Ben reminded me to add the fact that what we have been arranging for investing into, for example, recently, we made announcement of our continuous investment in Singapore. To some -- to a major extent, it's not related to the current U.S. And China trade dispute. What we have already been preparing, not this year but in the past, is to recognize the rising labor cost in China. But at the same time, our production process and our focus on raising -- or increasing automation and raising productivity per worker is a goal that we are gradually achieving as already as we have published the lessening of workers number in the first 6 months and continue to do so.
[Foreign Language]
In Vietnam and as of today, we have very good, successful record of producing our speaker box, especially in considering our semi-automation arrangements, which fit -- which is very appropriate for many, what we call multi-products production lines. The flexibility involved give us a very good cost advantage. And similarly, in the Philippines, such -- repeat of such production mode is likely to happen very quickly. The objective here is to satisfy the many multi-products requirements from different customers, but also put into very good use of the existing semi-automation production facilities, which will also be modified for some new products in the Haptics segment. So in all, these arrangements in Vietnam and the Philippines not only provide the quality targets we need, not only control or help us to maintain competitive costing but also help us to create good returns on [indiscernible] already invested.
[Foreign Language]
In Singapore, not only we have been positioning for high-end research and development but -- not only in the MEMS segment as we have already disclosed but also in the 3 other segments such as Acoustic, Haptic and Optics. We have existing plans, operational plans to expand our operations in Singapore. Some of those will be related to what we are already doing in Europe, such as in our Denmark subsidiary. The point of the objective there is to create a very clear divide from China. We believe that will help us to protect or what we call stopping such access to such technology and capability from our competitor. So this is a multi kind of strategy which will consolidate and propagate AAC's leading capability.
Our next question comes from the line of Alice Chen from UBS.
So my first question is about the acoustics component segment. As you've mentioned in your press release, speaker modules actually grew about 20% year-on-year in third quarter? Can you give us a rough idea if it's mainly driven by shipments [ order for AAC ]? And also for these excess penetration, I mean, do you have a rough idea of what kind of penetration in 2018? And what will be your expectations with [ 2019 ]? Are we seeing that increasing assumption in the [indiscernible] module? That's my first question.
Thank you for your question. You can hear us murmuring in the background. Just checking on the numbers. I think on a year-on-year, the third quarter, I think the growth, to a large extent, comes from increase in the blended ASP in the acoustic segment, proving the adding value to our acoustic design, mainly from our existing platform. And may I continue to add that this trend of increasing ASP, I think as we've mentioned before, we have a very strong, very clear path, not only to operate what the current entry version. And on top of that, parallel, we will have an enhanced version. So both parallel tracks are to promote, not only push the current specs onto the next better performance, but also enable the current generation -- entry generation to penetrate into what we call the mid segment as well. So those strategy are working. The blended ASP for the third quarter, on a year-on-year basis, has risen.
Okay. So do you have the estimate of the penetration rate of this [ competitor ]?
SLS, I think we are already successfully penetrated in the Android phones already, so we will continue to take advantage of that and widen the gap between ourselves and our competitors on the acoustic front.
Our next question comes from the line of Chen Wei from Goldman Sachs.
Okay. So Richard, I want to follow up on the margin questions as there's a lot of interest here. So last quarter, you've talked about gross margin targets for acoustic to hit 40%. So I want to know how are you doing getting back into this range in terms of what do we need to see. Is it better pricing? Or you've talk about in the third quarter there's some issues with legacy products, but that should go away in the fourth quarter. So does that mean margin improves? And also in the first half of '18, you reduced headcount by 27% from automation, as you mentioned in the financial reports, how do we see this kind of playing into improving margins? This my first question.
Thank you. I think margins is, as you know, a very important measurement that the company look at when we looked at our capability to differentiate what our competitor, or in terms of the value we are creating for our customers. So when we look at acoustic, we've been stressing on the fact that not only we are promoting a new design platform for our Android customers. But at the same time, we are improving on the multi kind of products requirements from our various customers, as we mentioned, that we are setting up the Vietnam plant to do so. So the margins in any quarter generally will depend upon precise product mix from each customer. But at the end of the day, I think it's the technology content and the value that we create for our customers for that quarter and the volume of shipments. All these factors contribute to the margins we can achieve. We have not changed our target of 40% or above for all our technology segments. But whether how quickly we can get there or whether we are being challenged by any competition is a long -- is medium long-term kind of consideration that we take seriously. Whether the fourth quarter, we'll be able to do that, I think it is -- there are a few uncertainty factors, but there are also some positive reasons that we could strive towards making that happen. But we are, at this moment, not going to give guidance on any precise margins anymore. But we feel confident that we would, if not, maintain the better margins, not only in acoustic segments.
Okay. Are you able to kind of break down or prioritize, is it pricing or shipment volumes or upgrades that would be the most impactful for margins to get back to 40%? I mean, just kind of give us some granularity.
I think, first of all, the overall kind of mix of different legacy products with SLS, et cetera, and the volume of each of our customer projects do contribute to the actual margins we achieve and how -- because Benjamin also mentioned that we turn on existing equipment, although we talk about the semi-automatic as well. But in acoustic, when we have a lot of very higher level automation as well. So how quickly we can ramp up the full utilization of automation and modify the existing modify -- existing automation equipment towards the new generation and the kind of ASP increase we get from the next generation all contributed. It's very difficult to say which of those matters, that I would have thought -- I think at the end of the day, the upgrading will be a very important contributing factor.
Our next question comes from the line of Narci Chang from JPMorgan.
[Foreign Language]
Thank you for helping us to talk more on this segment, very important segment. I think when -- in the announcement that we talked about a current kind of low point or trough in a upgrade cycle is the fact that it -- in the last quarter or in the last kind of 9 months, we did not see any -- we did not see a lot of new design or new applications. What we are seeing already is there are many, many projects involving a stronger kind of design, a more complicated design and new applications, which will create new user experience. And those are a result of different factors, different use of the full screen or ideas that need to better functioning of the kind of -- perhaps you have read something about the different potential screens, et cetera. And there are many exciting new projects involving haptics, involving stronger design, et cetera, more complicated design. And we believe those projects that we are actively working on indicate strong business potential opportunities in the not near -- in the not so far away, and it will happen very soon. But precise timing, that's a lot of software, customers, market, et cetera, that will make that happen. So -- but nevertheless, we believe the low point, we have almost passed already.
[Foreign Language]
Yes. Ben helped me to remind me to talk about -- we also pointed out that there are trends that customers are promoting what we call the audio display and also the kind of pop-up design of camera, et cetera. And those involves our understanding of haptics, and turning that into new components could create these new user experience. What is important to note here is that the fundamental kind of technology that AAC possess and the already kind of invested CapEx machinery are already appropriate for the production of these new products. And, we believe there will be a very good -- continue utilization of such CapEx and production machinery. In the third quarter, the utilization in the month of July and August was -- were relatively kind of on a low level. But already, there, we have reached a turning point in the last 2 months. The utilization continue to rise. And especially, on the Android front, AAC is embarking on a major project and so on and so forth. We do not see the pricing pressure to continue, especially when we go into 2019 outlook when we are also paying a lot of attention to continuously up -- improving our efficiency while -- in creating utilization of our production machinery as well. Hence, this haptics segment is a segment that we are quite confident that we are positive. We have a positive outlook in the year 2019.
Our next question comes from the line of Kyna Wong from Crédit Suisse.
I have questions about the optics business. So in the lens shipment, I think in that second quarter, the month issue [indiscernible] reached to a 25 million to 30 million per month. And looking into third quarter, is this -- how about a one way? And -- but we see the capacity continue to increase. And is there any impact in the utilization, given the -- sort of the weaker smartphone demand? And second is about the impact, like from Opium expanding their in-house lens positions. And would that be in any like pressure that -- driven by the customer? Maybe one more. It's actually related to the lens as well about the hybrid lens because we see your [indiscernible] is actually recognized by customer. But may I confirm if there's any mass productions happening in the second half this year? And given the company continue to invest in the R&D in this field, like setting up the R&D center in Finland and also Singapore, is there -- operation will start from second half 2020. Can we expect a meaningful contribution from optics like from that time?
Thank you. Thank you For your question. I think it's a very important segment that we are very excited about. You mentioned about weakened smartphone market and the competition. I think what is important for AAC is that we continue to improve, not only to build up our own internal proprietary capability on the tooling and on the automation production, but it's also important to improve our use. I think there are rooms for further improvement. But having said that, there are project that we are already achieving what we call the industry yields, and we are very happy with such performance. But we are not complacent about the current kind of capacity, and we are going on track to expand our capacity as well. I think there will be continued progress early next year when we move into more complicated lens design production. What we have already achieved is that we have firmly penetrated into all PRC Android customers of shipment of our plastic lens. In hybrid lens, we continued to work on the shipment. I think there is only what we call -- maybe a little bit delay, as such. Whereby we are putting all the equipment in place, but the important work is a little delay. We're not seeing matters change in our time frames. But as all things, we are very eager to see, to start mass production and mass adoption by the market. And at the moment, our progress and our customers' feedback are still very, very positive and encouraging. We are moving very quickly on implementing our plans on our expansion of business to start the potential of hybrid lens. I think you mentioned the timeline for optics to make contribution. I think -- as we have said not only in this quarter but in the first 9 months, I think optics revenue has jumped tremendously, I think continue improvement, more importantly, on our margins as well. So there isn't a timeline whereby it will be an important segment to AAC. It is already a very important technology segment because it reflects our proprietary capability on a fully kind of independent. And we don't need to rely on any external source to improve or to expand our production. Hence, we are on track to deliver the exciting growth we expect in optics.
Our next question comes from Kylie Huang from Daiwa Capital Market.
My first question is a follow-up on optics. Could you share us about what's the capacity for hybrid lens right now? And you mentioned some delay schedule, I was just wondering is more driven by our clients' side or our side in case of protecting yields because of delay. And going to next year, when will we start to see hybrid lens has a meaningful revenue contribution for our company? That's my first question.
[Foreign Language]
The delay -- Ben is helping me to give you some specific answer. The shipment schedule of our equipment was delayed by roughly one -- more than a month. So that is the major reason.
So how about the capacity of hybrid lens by year-end? And what's the outlook for like first half next year? Where will we start to see a certain volume of revenue contribution of our company?
I think previously, and also at the moment, we are not -- we have maintained what we have set out, the target of approximately 10 million per month. But subject to this 1 month or so delay, we should get there. So in terms of capacity, with on track but subject to the 1 month delay. Other than that, I think optics revenue, next year, we are projecting growing contribution. From the likely calculation, I think maybe the contribution from the plastic side will be a little bit more than the hybrid side. But nevertheless, I think next year, we believe hybrid lens project will begin to make meaningful contributions.
Our next question comes from Susanna Chui from DBS.
My question is also in the optics side. Could -- management expect a hybrid lens adoption were moved to the sensing to imaging. And is there any differences of the [indiscernible] way between the hybrid lens for sensing and imaging? That's for my first question.
[Foreign Language]
Ben confirmed that the current project mostly are imaging on the -- for the use of hybrid lens, so on taking pictures on the imaging side.
Okay, that's great. And my second question is about -- also on the optics. I would like to ask if there's 3D sensing change from the structure light to the ToF. Which is the lower power one? What will be the impact on the hybrid lens could -- [indiscernible] enhance. Share with us your view sense.
The structure light and ToFs, the design [indiscernible] hybrid lens, the [Foreign Language]
Ben clarified or mentioned that, at the moment, it seems, in the Android segment, there is not huge amount of interest in applications of the structure lights. Hence, our project with hybrid lens is more on the imaging side.
Our next question comes from the line of Laura Chen from BNP.
My question is also a follow-up on haptics and the precision business. I'm just wondering that for the new design for audio display, how would that impact the ASP of the haptics product? And also how would that impact the current speaker or acoustic design?
[Foreign Language]
So first of all, the audio display is not to replace haptics component, as such, but this design is to make use of the full screen to replace the receiver function. And what is important is that we -- as we have mentioned, that the manufacturer or the design process is something in-house that AAC is very familiar with in terms of not only audio display but also the step-up motor design. Especially in the audio display, we have an actuator, whereby those are fundamental technology capability coming from existing haptic-related production equipment. And hence, the utilization or the increasing return on capture would be able to be improved. And we expect that this is a long-term contribution, long-term improvement to the possibility of what we turn as haptics segment, which includes these haptics components.
[Foreign Language]
And the complementary important note is that the audio display is not meant to diminish the importance of upgraded stronger stereo possibility acoustic performance from adopting better kind of speaker boxes. It only kind of add to the design aesthetics to improve the full screen function and ensuring that the importance of the overall acoustic user experience on new products. Sorry, Laura, did I interrupt you? You were adding something in your questions.
Sorry. I'm just wondering that for that kind of design, is there any kind of trend of like patent or any specialty design that may -- like we know like -- there's some patent on small companies who would do this kind of design. Any concern on like a patent? And also I just wondering, any penetration we may expect into next year for that kind of audio display?
[Foreign Language] happen. We're not concerned [Foreign Language] haptic, if I may, your [Foreign Language] happen. [Foreign Language]
The actuator itself already kind of the design and production related to -- I think of our -- we can recall now more than 20 IPs we already possess. But we believe the other related function are also strong. We are very strong in our portfolio. We lease it to electromagnetics. And hence, we don't see a problem, as such, of -- in terms of the ownership of related IPs.
Our last question comes from the Narci Chang, JPMorgan.
[Foreign Language]
[Foreign Language]
I think the haptic dollar content will be more impacted or changed by the pullback in Android phones. As we mentioned in the call, we are embarking on an important major project in Android phones, which we believe will start the fabrication in Android phones' adoption of haptics components. But we can only a comment that the ASP of haptic components in the Android phones will be what we described as reasonable, but the important contribution is the start of increasing shipment volume. And also in the call, we mentioned that what is important is also the continue assets in increased return on already invested CapEx or invested capital in this segment, and we will be able, when we are confident, to achieve that through this strategy and this outlook in the adoption of haptics by Android.
We have reached the end of our question-and-answer session. I'll now turn the floor back to the hosts for closing comments.
Thank you for joining us today. We will speak with you again at end of March next year for our full year result of 2018. Have a good day, thank you.