Earnings Call: Q1 2021

May 14, 2021

Ladies and gentlemen, welcome to AAC Technology 2021 Q1 Results Investors Webcast and Conference Call. The presentation will be conducted in English and question and answer sections will be in English and Putonghua in the live channel with English simultaneous interpretation in Interpreting Channel. At this time, all participants are in a listen only mode. To be in the question queue. I will now hand over to your host today. Please go ahead. Good afternoon. Welcome to AAC Technologies' Q1 2020 2021 results conference call. I'm Maggie Huang, Investor Relations Director of AAC Technologies. I'm glad to have our CEO, Mr. Benjamin Pan Managing Director, Mr. Richard Mok EVP and CINO, Mr. Kevin Pan CFO, Ms. Dan Guo and our Optics Business Group Chairman, Mr. Jack Xuen and the Before we start, we would like to remind you that copies of our results announcement and the presentation are both available on our website. We would also like to draw your attention on the disclaimer on the last Page of this presentation, some information we discuss today may contain forward looking statements. With that, I'm going to present our results for the quarter. In the Q1 of 2021, the group achieved a revenue of RMB4.29 billion, representing a year on year RMB4.29 billion, representing a year on year increase of 20.6%. The demand of the global smartphone market is Various business segments of the group had further penetrated into domestic Android markets. All of the reasons above contributed The effective cost control and the continuous optimization of product mix, the overall gross profit margin increased by 8 percentage increased significantly year on year to RMB532 1,000,000. The revenue contributed by Optics business continued to increase in Q1 2021, which accounted for 15.7% of the total revenue, indicating a healthy growth trend of optics business. For optics business, the group's market share continued to grow, While gross profit margin of plastic lenses reached 36.3 percent for the 1 gs5p hybrid lens product, Mass production and shipment were completed in the Q1 of 2021. Differentiated user experience We will accelerate the introduction of other high end hybrid lens projects. For the camera module business, shipment increased steadily. Gross profit margin started to turn positive in the Q1, and high end projects progressed smoothly. Acoustics segment's enhanced management efficiency helped the gross profit margin of Android Acoustics products to improve. The standardized small cavity speaker module to be launched is expected to fit the market trend of stereo acoustics. By improving user experience, it will further strengthen the market competitiveness as well as profitability for the segment. For electromagnetics, drive and precision mechanics business, our haptics feedback solution leverage On the high performance, X Axis Haptic Motors provides a high quality user experience for all application connections in the ecosystem. This helps to enhance customers' haptic perception in order to promote product upgrade and integration of our customers. For the Precision Mechanics business, the group expanded smoothly in new businesses such as notebook and tablet. With respect to the MEMS segment, our market share in the smartphone market further increased. Moving forward, The group will accelerate the expansion in IoT, smart home appliances, wearable devices and automotive markets. Which ensures the group's ability to continue to innovate and develop in the future. As at 31 March 2021 net operating cash inflow amounted to RMB872 1,000,000 with CapEx of RMB1 point 1,000,000,000 out of the total CapEx, about 68% are for product lines and about 31% are for the construction. Net gearing ratio stood at a healthy level of 2.7% With a cash position of RMB6.71 billion as at 31 March, the group remains prudent in financial management and strengthenedly manages capital expenditures and R and D expenses to conduct active liquidity management. In the Q1 of 2021, along with an increase in shipment of plastic lens and the stated growth of the camera module business. Revenue from the optics segment increased by 175 year on year to 27.8%. The market share of the group's plastic lens business further expanded With the steady improvement in the production yield and efficiency, the gross profit margin of plastic lens Products reached 36.3%, which indicated the Group's capabilities In terms of technology, operation and production management had further improved. The proportion of 6P and above high end plastic lenses has increased in Q1 2021 and is expected to increase continuously. Furthermore, we have successfully obtained the supplier certifications for certain Android flagship smartphones and will steadily increase our market share among overseas Android customers. 2021. The group's unique WLG hybrid lens products have been mass produced and We received positive feedback from our customers and we continue to work closely with customers on the application for this product in other mobile phone models. Currently, we are having close dialogues with leading global OEMs With respect to the 1 gs6p hybrid lens project, projects with 2 pieces of WOG Glass lenses are steadily in progress. It is expected that samples will be sent to customers by the end of this year. In terms of production capacity expansion, the Chongqing glass lens plant was completed at the end of last year, and the jack Moding tool plant is expected to be completed in the Q2 of this year. Our production capacity will be improved Significantly, which will boost the customers' confidence to adopt hybrid lens instead of traditional plastic lens. The camera module business has shown a steady progress as planned. The group's camera module R and D and manufacturing capabilities have been well recognized by customers. Its gross profit margin has turned positive Going forward, the group will continue to improve high end camera module manufacturing capabilities. Operation of the VCM production lines has begun, and certified shipments in small batches have been made to customers. In the Q1 of 2021, due to the major overseas customers' peak season partially postponed, The revenue from the Acoustics segment increased by 47.5 percent year on year to RMB2.1 billion, With the management of Acoustic's product lines continued to be optimized and the cost reduction and efficiency enhancement efforts Through project based closed loop management, the gross profit margin rose by 11.4 percentage points year on year to 37.4 percent. With the stereo and the multitrack solutions becoming standard features For flagship and foldable phones and gradually penetrating into the low and mid tier models, We expected the market size of the acoustics industry to increase. With a smaller size and The group's standardized small cavity speaker module is seen to be perfectly fit to the stereo design The standardized small cavity speaker modules will be launched in Q2 2021. The standardized products will be able to fully leverage on the group's advantages in automated Under the decrease in shipment volume of the metal casing business, revenue for the combined segment decreased by 27.3 percent year on year to RMB1.23 billion Due to increased profit margin from the metal casing business, the combined gross profit margin for this business segment increased slightly by 1.9 percentage points from the same period last year to 25.5%. The total shipment volumes of X Axis Haptics increased steadily year on year, mainly because we have successfully Promoted the X Axis haptics to Android market. The Android haptics shipment increased by about 60% on Q on Q. The haptics solution launched by the group has a precise, exquisite and the rich human computer interaction function, which provides the best user experience and enhances consumer's haptic perception. We have received positive feedback from the customers. The group will continue to promote product upgrade and integration for customers The effect of product upgrade is expected to show more results in the Q4 of 2021, thus driving a potential multifold shipment volume growth in 2021. The group's precision mechanics business was affected by customer shipment decline, and its revenue decreased notably compared to last year. However, benefiting from the flexible assessment of production capacity and effective cost control measures, The gross profit margin remained relatively stable with a slight increase. Relying on the advanced precision manufacturing In response to an uncertain external environment, we are proactively expanding into different product markets. At the moment, we have successfully introduced multiple smartphone brands in metal casing business and entered notebook and tablet metal mechanics markets. It is expected to result in higher production In the Q1 of 2021, given the increase in market share, Revenue from the MAM segment grew by 42.2 percent year on year to RMB283 1,000,000, And gross profit margin remained stable from the same period last year to 16.7%. To meet rising market demand, we have successfully expanded the production capacity of MEMS microphone this year to 100 and 20,000,000 units per month. While maintaining a high market share in the smartphone market, the group will continue to expand into IoT, Smart home appliances, wearable devices and automotive markets. TWS earphones and notebook markets help demand For product upgrades, for microphones with a higher signal to noise ratio, Smaller size and lower power consumption, further market penetration in these markets will help to improve the Proportion of high end MEMS products. On sustainability front, we continue to strive for best practice For ESG in the industry, our disclosure adheres to the top international standards, maintaining a high level of transparency and to be more efficient and responsible in ESG management. We have received several Key ESG awards, including HKICPA Best Corporate Governance Awards 2020, Grand Awards in Best Large CAAP ESG report, which fully demonstrates market and the industry's recognition for our ESG performance and reporting. In addition, our ESP performance is well recognized internationally as well included in the FTSE Full Goods Index and Hansen Corporate Sustainability Index, and we received high ranking by MSCI. We hope to build a truly sustainable business Conscientious in environmental, social and government aspects with strong corporate governance and risk management structure to bring long term This concludes the overview of our Q1 financial results. There are more supplementary information in the appendix section for your reference. Our management team are here to take your questions. You can ask questions in Chinese and English. We have simultaneous interpretation in other line from Chinese to English. Thanks. Thank you. We will now begin the question and answer session. First question is from Huatai Securities. Please raise your question. I want to ask The first question is about Acoustics, because many people Are concerned about Acoustics. So I want to ask the GP margin, And before, It was 40%. So whether it will return to 40%, so how do you see the outlook of acoustics? Okay. Thank you for your question. I will answer the question first, and then I will let other colleagues and the management to Generally speaking, last year, And we faced a severe situation. And for the last year's Q1, the Baseline was low, but for this year, the Q1 is resuming. And according to the IDC, Thank you, Yi. The global shipment volume for cell phone is increasing and global is also in the high digit growth. Therefore, the overall shipment volume is very good. And in terms of the acoustics and gross margin, it has reached 37 point 4%, it has two reasons. The first is related to the overseas Clients, we have a very sound JP Margin. And we are also influenced by the external factories. And some The peak sales was postponed to this quarter and this boosted And other than the external factors, we also shared about the information on our management And we have a detailed management and those improvement and upgrading of the management Also, help the growth of our JP margin. So for the Enjoy, it Increased 4 percentage points to 27%. For Q2, it is relatively low season in sales, And we are also influenced by the upstream 3 Seas market, so it depends on the specific situation of the market. But all in all, we still foresee an experimental increase in the smartphone market, And the market is also focusing on the differentiation features of different smartphones. So for this upgrade trend And also the increase of the smartphones, and those are the positive factors To us, the combined both external and internal factors, We have the confidence for the GP margin and we still have a prudent attitude towards the GP margin. Okay. I will add a little. So This is about the GP margin on Acoustics. I also want to Mentioned that and we emphasize we Our technology oriented and technology platform is important for us. And we also see a structural reform In this JP Margin and Ms. Kuo mentioned The gross margin is less than 27%. It's about 27%. And in the future, this will become stronger. And this is Due to this small cavity speaker modules and other markets are promoting the Stereo products, so these are very important products. And this caused a structural reform and change for us is not related to the price. And in the new platform, the price is a little increased, but more importantly, based on this small cavity speaker module, It caused a fundamental change to the Android system. And we in the past, we had this 300 to 400 modules But since last quarter and also for this quarter, The change will be very obvious. So we will maintain the user experience While developed the small cavity speaker, and this is very important for us, And we don't have certain models. We don't have certain models, and the models will reduce from 300 to 400 to 200 and next year, it's about 100 And which significantly improved our production and also the efficiency of So in terms of the JP Margin of Acoustics, We have already returned the profitability track And JP Margin Track Years ago. My second question is on Optics, And this introduction is very detailed. You talked about the Czech plant and the Chongqing plant. And the overall deployment is broad and WLG is Mass produced and shipped. So what's the strategy on this segment? Any change on its With the acoustics, it's upgrading and some clients are withdrawing. So we witnessed a lot of change in the Android market. So with the change of the market, How do we cope with these changes? For the optics, especially on the export, we are still following Our strategy, you will remember in the past, Many people think there was a big gap between the productivity margin and the JP margin. And actually, the plastic lens gross margin is about 36%. And in the second quarter, this trend This momentum will be stronger. And for the Q4 and the 3rd quarter, our target and Expectation of the gross margin is about 14%, and we have very prudent attitude towards the And we will also And for the plastic lens, we emphasize the cost. The cost represent our technology and digitalization technology as well as management efficiency. And from the statistics of the Q1, it will continue to prove our strategy is correct. So from the ASP and some Companies in any industry have a pessimistic attitude toward The ASP, for us, we think the ASP is continuing to decline because of the technology improvement. And for this plastic lenses, we think it will still in the growth Because the industry is welcoming. And second, We still think, for example, this glass plus The plastic, it will be a very good strength. And glass plastic, this is the So based on this structure, we think the Future trend of the hybrid lens and glass and plastic will And we also have the WALG technology. They can meet the need Of the higher requirements of smartphones and also the cameras demand And the GMO's mass production has a large gap Between WLG and we have already proved it, our main clients admitted. So from the development of With the completion of the account in Chongqing and check, We are just followed our plans and our WLG will challenge 5,000,000 production capacity. And the next step, We will challenge a 10,000,000 to 15,000,000 production capacity. Maybe there's a little delay than our expectation, but from the strategy as well as the value and the statistics, Thank you for your question. Next question is from Quochen. Good afternoon. I have several questions. First, I'd like to ask about the optics, and you talked about the continued growth of our optics. And we don't have very obvious growth In the Q1, so this is my first question. And Q1 and Q4, in terms of their gross margin, This growth is very prominent. Okay. And for optics, actually, the sales is seeing a great growth and has improved significantly. It is due to our production yield and the gross margin reflected this cost of control and the data of the management and those are our core competitiveness. So from the 4th quarter, 28%, and we improved it to Over 30%. Another thing I want to comment, on the product mix, We shed our light on the structural optimization of our plastic lens. And for this 6 years, About 4%. It's also improved. And for this ASP, it also has a steady growth. So those are the important sectors. So we are not only considering the shipments of volume, the cost control as well as ASP level are also important for us. And for the on optics and for plastic lens, Revenue is about RMB 100,000,000. So can you give the intros and the breakdown? Other than this and the profitability of the optics And also, this the loss of the optics was Yes. And another growth area is from the module. And the sales for the module is about 15 And it increased to 25%, and this growth is prominent. For the modules, we started To extend its production capacity, the gross margin has already reached the high digit Hi, single digit growth, and this is a very prominent phenomenon in the industry. 2nd, Our plan on the production capacity I will make some supplements. For the Q1, our optics is still So it's not reviewed in our report. Actually, uptake contributed to our net profit. Yes. So this is a very good sign. Yes. So the net profit is Positive and profitable in Q1, right? Yes. So I just want to clarify this. For the second point, other than the plastic lens And the modules accounted the largest percentage And other than G plus P, and this is for the future momentum of the OpEx. And when we tap to the 7 P and 8 P, actually the P doesn't mean plastic, p means pieces. It means 7 pieces to 8 pieces. And those are in the discussion In our Android client, so that's also we have the confidence in the And we also see this LGP Margins Growth and the Growth is also related to the Demand of our clients and our clients need us to be the main supplier. And for the modules, we also have our major clients. And for the Q1, Our sales have embarked in Q2 and Q3 and even Q4, we will become the Android Systems' main WLG has another question. You also talked about 1,260, and this will be delivered in the end of this year, right? So any other key products Other main projects on WLG, We mentioned the project in the end of this year and this is very confirmed. And for those main Android clients, We have 3 to 5 projects in the program. But at present, We cannot confirm whether this will be Completed in the end of this year or not? So we wanted to We want to show that we have this confirmed production capacity to our clients first. Thank you for your question. Next question is from Citi. Good afternoon. We talked about optics and acoustics, But I want to know more information on the management Reform and change. So what the reform is There was a detailed change on the management. So Compared with the strategy of 3 to 4 years, what's the biggest change For the future development, maybe we invite Kelvin to answer this question. For the management reform and change, it's not only Refer to our management, it's also covered on our Business and structure and the multi product Our structure needs more efficient management and system. So based on this, We propose the reform under management and the results and our business model change Have already showed the efficiency of our reform under management. And at The beginning of 2020, we did the change of departments, and we also set a clear target goal In each production line, for example, the new strategies on the report It's the results and the fruit of the reform of the management. So we have actively planned for our production and business development in the future. So it's The Natcomen include the traditional business, but also some new business segments like Automobile and IoT, etcetera. And for us, The management reform or the core reform under management, it includes several Aspects first, each production line and each department are Closed the loop management, and this will increase the efficiency of Our department. And second, for the AAC, Arctic, We have this incentive equity incentive And this group also expanded to other departments. 3rd, All the closed loop management So other than the value of proposals and the short and long term And we think the efficiency will be largely improved based on the free form under management. Okay. Thank you very much. Thank you for your question. Next question is from HSBC. Good afternoon. I want to ask 2 questions. The first one is about our electromagnetic And we saw the decline in the revenue, and you also mentioned the price decline of the clients. So this is the general situation in Android system or in the industry, can you elaborate on it? In the Q2, you talked about the laptop and notebook, Whether this will boost the revenue on this segment? Thank you, Ben Johnson. And for our drives and precision mechanics, The decline of the sales It's related to different departments and aspects And also the price cost of our clients, they will influence the revenue. And also the reduction of the shipment volume of Enjoying products and those The reason for the revenue reduction and for us, we actively Developed into the laptops and notebooks, And they have already created the revenue for us and even we tap into the tablets And we will increase our production efficiency and Our gross margin and it's not easy for us to comment on the export clients because of The confidentiality that I want to emphasize, another driver is from the motor from Android. The shipment volume is in great growth in the last Several quarters and the growth is about 60% to 70%, and the gross margin is sound. And for example, our excess haptics motors, this will help to solve The problems and also increase the customers' experience as well as Gain the market share and based on those technology, and we think this will help us to increase gross margin. My second question is Optics and the gross margin is increasing on the lenses And for the ASP, it's also hiking. Yes. 4, I want to ask whether we still have the potential to increase our gross margin. And for the Q2, many people estimate there will not be And from the perspective of plastic lens, Q2, we used the same production equipment, But the efficiency will be increased, and this is due to the management and the technology and based on the statistics. The Q2 shipment will be bigger than the Q1, and this is Due to our expansion of our business and work, so those are the fundamentals for our growth. And in terms of the ASP, 60, the price will hike, And we also had some adjustments on the traditional and old Product, this is in line with what you have heard in the market. So the gross margin is from technology And also the efficiency of the shipment volume. Okay. Thank you. Next question is from Jeffrey C. C. First question, I want to ask about the modules And Mitsuko mentioned starting from this quarter, our modules, It's in high efficiency. And for these I can answer the question. For the modules development, It's based on several aspects. And we also changed the management concept. Based on the traditional business, Traditional Acoustics and Optics, we self developed technology and also And I learned from the outside experts that for modules, and we can rely on The talents of the industry. So modules become the first segment for us. Therefore, the development of modules are promising and the modules Development is stronger than the 1st quarter and the production capacity as well as And also the 64 and MP And even for some prescriptive as well as other industries, we Want to expand our business to those markets, and those are based on the technology development. And also invited the team's face as our management and also the reform of our business department. And the compared with our competitors, we Our advantages as well as these advantages, we have those incentive And close the loop management and for some assured production line, we need to find experts and talent as soon as possible to speed up our development. So this must be in line with The overall reform and efficiency improvement of management. Okay, I don't need to add. My second question, And we see the shipment volume of smartphone for the Q2 is weakening And the other factors, for example, the pandemic in India is out of control, whether those If There's some change on the external demand or big change of the pandemic. This We will cause impact on us and we are actively discussing with our clients On the production plan, last year, we also experienced a volatile market That even in such a severe situation, we also face, For example, the shortage of the chips, but we still observe an obvious Q on Q increase. Quitting up the severe situation of last year, We constantly improve our detailed management and cost control And the reform of our structure and management, and we achieved the results On the closed loop management, and this is also related to our results and performance. And with this linkage of the results and performance, I think we will Thank you very much. No further questions. Thank you. Next question is from Credit Suisse, Tina Wong, thank you, management. My first question It's on the Android Haptics. You told this obvious results in Q4 And this has a multiple shipment growth. So this is on the retail project And my second question is on Optics. So I want to ask When you can disclose the shipment volume and in your vertical integration, I want to know the deployment plan and ACM is in operation. So with the performance or Any results, it's a cost control or any influence For the Engineered Haptics Motor, I would like to invite Kelvin to answer. You can see related to the overall production lines and strategies. Yes. For the Android haptic motor, it is market driven. And in different scenarios in social media, we can observe that clients So there are high expectation on some gaming And also those social media scenarios And this is the new demand from the market. We also observed Many enjoying our top clients were actively cooperating with us, And we have the high cost effective Solutions and products on this motor, so it helps those young Customers to experience the new motor, so this will create the macro trend, which is based on the ecosystem and also the long term Android deployment. And Q1 is just a start, and we think there will be a continued The Q on Q growth and based on our Customers' demand and also the market, we are still in the preliminary stage. For your second question, on modules, we Also talked before that the module production and the layout In the study expansion at current, we have 15 production lines and every month it's about 7,000,000 to 8,000,000 per month for the production capacity and the Based on the market demand, we will we may expand the business production line To setting lines, of course, we have hold a prudent attitude. And the module's gross margin for this quarter is Very obviously increased and next quarter is negative and this quarter is positive and with the scale effects, We are actively and have this confidence for its Gross margin of the whole year. I also want to ask about the optics. The inventory of the optics in the past, we have the increase of the Production output, so whether this is in line with your previous plan and And in the Q2 and Q3, this inventory will reach a normalized level. This is In terms of inventory, The production capacity is in growth. So The production will be higher than the sales, Our production is in line with the demand of our clients and based on our overall production, It's about 3 months and it's similar to last year's level and we have the confidence in the future we will actively promote the sales and also this will match our production output. Due to the time constraints, we will have the last question. The question is from CIGI Research. Thank you, Mr. Pan and Ms. Kuo. I have 2 questions. The first question, you talked about this Electronics, so from next 3 to 5 years, what's the opportunity? What are the opportunities you can share to the long term investors? And second question is the high end smartphones. You mentioned on those game smartphones I mean there's a big upgrade. And in the recent, for example, April and May, And what's the sales situation of those smartphones in the market? And we also heard there's a weakening sales in the markets in the recent months. So what's your opinion on this regard? As for your first question, for the new deployment and the plan on the New business segments, the Automobile and Electronics, We see some obvious trends. The first is the MUVs, and this will Then on the passenger cars and the passenger cars are in the upgrading and transitional period. So those are the Starting with us. And we are actively to discuss with those automobile Companies and also their clients, when we have Detailed progress, I will disclose the information to you. As far as I know, our technology is from the macro technology, And so we have a lot of opportunities for us to break through. And also, we can create a differentiation based on those add points, And it's easier for us to create to be created. And for And the positions have higher requirements for us. And in order to support them, We will focus on the scenario application. So we will focus on the scenario support The scenarios supported not only limited smartphones and the trackpad notebooks or the Other game equipment, those are the new business areas we can tap in. Would you please repeat the last part of your question? The sales? So you're asking the sales volume, some high end So whether you see any Recognition and acceptance of those high end smartphones, so any figures on the terminal sales? And for our shipment volume is Maintained at high growth. And as Kelvin also mentioned, our company It's focusing on the clients' demand and we offer our differentiated and unique Solutions, and actually, we are meeting the transition of the whole industry. It's not only In the Android Haptic Motor, in different segments, we wanted to offer our customized and differentiated solutions, therefore, to increase the value of the whole industry. And based on this, we We will need to gain more market share and also increase our profitability. Yes. This is also related to the market situation and it's Not convenient for us to comment on others. And for the Chinese market, the mid and high end Market, especially on the customer experience and acoustic and optics and haptics C. Wei:] Generally speaking, I think it meets the expectation and in some public information, you can also say this. That the shortage of chips and the concern of the market So this is just a kind reminder and the statistics also support our opinion. If the functions cannot improve in customer experience, we And make some adjustments on the sales, it's also very normal. I think the 5 gs smartphone, It's very active in the market. So whether this will boost the sales, it's not it's hard to say. So that's We emphasize the experience and acoustic drives and OS, The optics drives and also other customer experience is Similar in the acoustics, In terms of the software and the hardware, we have Reached the preliminary stage, we enjoy haptics and motor will have a great growth and we think And this will be a very helpful factor in its sales. And with this Development of haptics, it will boost the sales and increase the customer experience. And our efforts is very confirmed according to the results of our quarter results. Any supplement from management? No further comments. Operator,