Earnings Call: H1 2020

Aug 24, 2020

Our leadership position as well as investing in new businesses to capture new market opportunities. During this period, we have continued the organizational transformation project, focusing on enhancing our organizational structure and improving operational efficiency. Going forward, we strive to establish a more efficient and agile structure to achieve our mission and to establish a solid foundation for long term sustainable growth. For the Q2, healthy improvements have been shown across all 4 business segments and all segment revenues reported year on year growth. Optics business continued its fast growth trend. Revenue grew significantly by 43.1% year on year to RMB380 1,000,000, accounting for about 9% of the group's total revenue, up from 7% in Q1. Gross margin continued to increase to 13.8% on the back of improved ASD and yield. Acoustics business showed a strong recovery in Q2 with revenue up by 34.2% Q on Q and 7.9% year on year respectively to RMB1.91 billion. Acoustic segment blended ASP in Q2 maintained a year on year growth with a healthy gross margin of 26.4%. For electromagnetics drives and precision mechanics business, the Q2 combined revenue has increased by 11.4% year on year on the back of shipment volume growth with blended gross margin stood at 22.8%. Haptics business continued its solid growth trend in shipment volume with penetration rate increased further into mid and lower tier smartphone markets. For precision mechanics business, gross margin improved compared to Q1 on the back of higher capacity utilization rate. MEM segment revenue grew by 14.5 percent to RMB259 1,000,000 with a healthy growth in shipment volume. During Q2, net operating cash inflow amounted to RMB1.46 billion with CapEx of RMB2.32 billion. Out of the total CapEx, 70% are for production equipment and around 50% of which are for Optics business. Net gearing stood at a healthy level of 10.4 percent with a cash position of RMB5.09 billion at the end of June. The Board of Directors has declared an interim dividend of Hong Kong $0.10 per share to be paid in cash on 25th September. Amid the uncertain global economic outlook, the group will remain prudent in financial management and strong in cash position continue investing in technology roadmap across various business segments, so as to create long term value for our shareholders. Next, we will look at the performance for each business segment. During Q2 2020, revenue from optics business grew significantly by 55.4 percent Q on Q and 43.1% year on year, respectively, to RMB380 1,000,000 and gross margin further increased to 13.8% from 9.8% in the previous quarter, demonstrating our improved profitability. For the first half of twenty twenty, Optics revenue grew close to 50% to RMB625 1,000,000. As shown in the graph, both ASP and shipment volume has exhibited remarkable increase due to improved capacity utilization rate and higher percentage of high spec plastic lens in the overall product portfolio. In Q2, shipment volume and AST of plastic lens has increased to 102,000,000 units and RMB3.74, respectively, resulting in a higher gross margin. We are making good progress to improve our gross margin with certain projects achieving higher than 35% gross margin currently. With a systematic approach utilizing simulation and data modeling, we're confident to improve production efficiency and yield in order to bring the gross margin of our project to be best in line in the industry over time. Steady progress has been made in new product development including telezoom, wide angle, small head, main camera and ToF. Our proprietary WLG hybrid lens exhibiting a superior optical performance in light intake and image resolution has been considered by the market to be one of the major future directions in optics upgrade. Compared to plastic lens with the same number of lenses, our high grade lens could reduce the thickness by 10%, increase light intake by 15% and increase resolution by 5.8 percent to 8%. We're proactively promoting our WLG hybrid lens products via 2 main approaches. First is the platform approach to provide fully compatible product for replacing traditional plastic lens. We target to have shipment in the second half of this year. The second approach is to produce customized hybrid lens with high specs and high resolution, targeting to complete certification by this year with mass production next year. We're making steady progress in WLG Lens production and target to produce 30,000,000 pieces of WLG glass lenses for 2020. Camera module business has a strategic business position for us. It's important to promote optics lens business and provide a holistic optical solution to our customers with vertical integration of lens modules and algorithm going forward. Acoustic segment exhibited a considerable recovery in Q2. Q2 revenue from Acoustic business significantly increased 34 percent Q on Q and 7.9 percent year on year, respectively, to RMB1.91 billion. Our acoustics blended ASP maintained a year on year growth due to changes in product portfolio. Q2 gross margin of acoustics business remained at a healthy level of 26.4%, demonstrating a stable profitability. Overall, due to adverse impact from Q1, in the first half of twenty twenty, revenue and gross profit margin declined by 8.7% and 3.8 percentage points year on year to RMB3.33 billion and 26.3 percent respectively. Stereo Acoustics has been widely adopted by high tier models this year with further penetration expected to take place to mid and low tier models next year. This will allow stereo acoustics to become a new standard feature for smartphones and provide greater market opportunities to our acoustic segment. The penetration of SLS platform in terms of our total shipment volume of Android models has maintained at a high level of 70%. With a higher proportion of classical SLS version in total shipment volume, we expect ASP for Android Acoustics products to stabilize. The upgraded classical SLS speaker box with diaphragm vibration amplitude of plusminus0.75 millimeters is scheduled for mass production and begin shipment by second half of twenty twenty. As a global leader in miniaturized acoustics technology, we will continue to invest in our proprietary SLS product platform and bring advanced acoustic experience to end consumers. During Q2 2020, the combined revenue from electromagnetics drives and precision drive and precision mechanics segments has increased by 11.4% year on year. Meanwhile, the blended gross margin lowered by 4.1 percentage points to 22.8%, due to higher sales contribution from Precision Mechanics changing the revenue breakdown of this segment. For the first half of twenty twenty, the revenue of this combined segment increased 9.7% year on year to RMB3.42 billion, whereas blended margin declined by 6.3 percentage points to 23.2%. Our X axis haptics motors have been widely adopted by Android flagship models and penetrated further into mid and low tier smartphone markets. We see positive growth momentum in Android haptic market as traditional motors and Z axis haptics are being replaced by our X axis haptic motors over time. At the same time, the gross margin of Android haptics has shown healthy increase on the back of improved production efficiency and scale. The group will gradually develop vertical integration capabilities to combine software and hardware solutions, so as to provide consumers with better user experiences. Precision mechanics business has been playing a strategic role to help the group better understand the smartphone upgrade trend. In Q2, our precision mechanics business showed a sequential recovery compared to the previous quarter. Higher proportion of 5 gs smartphone metal casing projects further enhanced the shipment volume and ASP. Gross margin of the segment has improved compared to Q1. We have been ranked as a preferred supplier for our major Android customer and we're proactively expanding our customer base. We will also adjust the production capacity flex fully according to the market demand. Going forward, we will strive to outperform the 1st year peers to ensure satisfactory profitability for this segment on the back of improved capacity utilization rate and expanded customer base. During Q2, revenue from MEMS components grew steadily by 14.5% year on year. For the first half twenty twenty, revenue increased 20.4% to RMB416 1,000,000 whereas gross margin declined by 7.3 percentage points to 16.2%. The strong demand for MEMS microphones was fueled by the improvement of intelligent speech interaction in the past 2 years, Increasing the number of MEMS microphones installed per handset alongside the popularity of wearable and smartphone appliances also helped to boost market expansion of the segment. Our high end miniaturized microphone product with high signal to noise ratio and low energy consumption has gradually been adopted by laptop markets. To satisfy the market demand, we plan to expand our production capacity and increase our market share. We will also increase the proportion of in house production of MEMS chips to further lower our production costs and improve gross margins. On sustainability and ESG, we have published our 7th sustainability report in May. We will continue to strive for best practice for ESG in the industry. We established Sustainability Working Group, which reports the Board on a regular basis. This helps to strengthen our governance structure to ensure continuous effort from the Board level all the way to each level of the company, paving the way for realizing our ESG strategy and achieving sustainability growth. We aim to achieve best practice on ESG, which are highly recommended in the hardware industry. Our disclosure adheres to the top international standards. We have been part of the 30 constituent stocks of the Hang Seng Corporate Sustainability Index for 7 consecutive years. In addition, we have been included as a constituent of the 60 4 Good Index series, which demonstrates broad recognition of the group's commitment to corporate social These conclude the overview of our Q2 results. There are more supplementary information in the appendix section of the PPT for your reference. And our management, Mr. Pan and Richard are both here to answer your questions. Thank you. Thank you. We will now begin the question and answer session. Our first question comes from the line of Leopin Huang from CICC. Please go ahead. Thank you for taking my questions. I have 2 questions. So the first question is about the lens business. So I remember in previous quarter you mentioned that you target 100,000,000 units per month shipment maybe by end of June or early July. Do you have any visibility on now on the shipment volume in Q3? And based on that, so what's your view if you can reach higher volume? What's the profitability or what's the gross margin you reach, especially I think you mentioned that you reached 60,000,000 per month shipment volume in June already. What's the gross margin in June? Thank you for that question, Luvink. When we talk about Optics sales revenue and we looked at the sales we made to specific customer, we have to acknowledge that essentially what we call a platform production approach, I. E. When we produced from our factory, the production lines can turn out the final products to different individual customers. Hence, for us, it's much more meaningful and relevant to look at what we call production statistics, I. E. Production yields or what we call production gross margins. Basically, in Q2 and for the rest of the year, the direction and what we have achieved has not differed to what we have set out from the previous quarters or from the beginning of the year. For the Q2, when I looked at when the CEO looked at the internal production gross margin number, for the Q2, we have achieved gross margins of 25 0.9% gross margins in terms of production gross margins. And the latest production gross margin for the month July for the past month, we have actually achieved 31% already, 31%. When we looked at shipment targets and plans by end of Q3. I think in the earlier targets, we have set out $100,000,000 per month. I think we are not far from that. I think between the 3rd Q4, we are going to deliver something in between $80,000,000 to $90,000,000 per month. And with bearing in mind the production gross margin we already have achieved for July, we think the gross margins of 40% by that time of $80,000,000 to $90,000,000 dollars something of 40% is highly achievable. More information about what we are thinking for the rest of the year when we enhance our product portfolio. We believe a realistic range for our AAC sales of optics products will range from ASP RMB4 dollars to 4.50 dollars Possibly that is a strategy of stabilizing a high production gross margin production yield and enhancement of costing. We strongly believe that by the year 2021, next year, we could see a longer term target of 50% gross margin in this optics business. So there is no change in terms of what we have set out in the earlier kind of description of our business. Thank you, Benjamin. For what was happening? Please continue. As we have said earlier on in previous calls, we aimed to build up the hybrid lens momentum this year. In terms of stock building for WLG, the glass lenses, as of today, we have already built 2,000,000 in stock already. And I think before, we have targets for by the end of the year something 30,000,000, 30,000,000. I think we are not again, we are not far, but maybe we turn up a little bit short from that, something around 20,000,000 by end of year, but that would not affect the progress of the market's adoption. Generally, as we have said before, there are 2 different paths that we are promoting the hybrid lens and WLG. The more I think the more closer to what we would see is the replacement or adoption of hybrid lens in terms of delivering a 64 1,000,000 resolution pixel design. In similar to plastic lens, we believe it's a platform approach whereby I think we can achieve mass production of products of something like 100,000,000, but we can handle different many projects from different individual customer covering maybe 48 or 64 resolution design whereby I think the WLG has a very strong competitive pricing. As we have said in before, we do not aim to price out or price too much higher than a pure plastic lens design. We expect something like renminbi5 dollars And in terms of a 48 resolution periscope design, around not more than, I think, dollars 1.50 is what we are expecting to see. But more importantly, I think we are seeing the glass lens costing definitely have a very strong advantage in terms of comparing to the other traditional GMO process. We believe the glass lens can deliver something like 1 third of the GMO glass lenses. So this is the platform approach. On top of that, we definitely are also working on and developing and promoting to different customers on higher specs hybrid lens design, 7 p, the periscope, etcetera. Again, our timeline is not changed. I think overall, we would see a couple of projects in mass production before the end of the year. Thank you. We are confident and we are we have well prepared not only for the business side of what we just talked about, but more importantly in as we have mentioned in the past, we have facilities in Denmark and Czech Republic. We have already have 120, 1, two zero, direct what we describe as professional precision technicians and some of them are classified as professional engineers. But these direct technicians, precision professionals have been receiving our training already in the past few months already. This expertise is not about paying them salaries, but really it's about investing in training, enhancing their know how and putting the efficiency in to the preparation of the tooling production lines. In terms of financial investment, I think we only estimated something like 40,000,000, it has been spent already of which RMB151515 million be directly related to the technician's salary cost. These costs is something that we believe actually is not only in terms of financial barriers. The RMB50 1,000,000 includes the R and D people who work in the WLG. The R and D and the production and the precision, technicians that I described are included in the $15,000,000, dollars 15,000,000 cost that CEO just described. So more importantly, this is we believe through the training, through the timely investment that we have already invested and the logistics setup, we are well established in terms of the preparations for the required tooling to deliver the mass production backup to support the onslaught of the hybrid lens business. Thank you. May I take the next questions? The next question comes from the line of Nao Wang of Credit Suisse. Please go ahead. The cycle of a rolling inventory is a typical arrangement for business to match production to the sales plan or forecast from customer. We believe an average of maybe when we talk about the production we prepare for a forward looking sales plan. Maybe we're talking about a time gap of 1 to 1.5 months. So generally, I think we can work on the basis that the sales performance kind of black behind production by 1.5 months to reflect the rolling inventory that keeps in the company. But more importantly, I think we need to focus on the what we call a stabilized achieved efficiency in terms of yields, in terms of our tooling. I think we need to focus on the stabilized yield production yield and the arrangements for tooling. And from there, we can definitely perform fine tuning enhancement to the base whereby we use as we have mentioned before data simulation to continue to improve. Hence, I think the focus here is to establish a sustained stabilized high efficiency on a certain mass volume plan and turn that into what we call 1.5 months later of sales performance. We are quite positive that the CapEx required or incurred or to be incurred in the second half is going to be less than the first half amount. Mostly we are focusing on the optics business whereby we are looking at different developments and preparations for plastic lens and some for hybrid lens and thirdly for the module camera module business. In terms of the preparation for $90,000,000 to $100,000,000 per month plastic lands, as we have said before, most of the major equipment have already been in place. I think we are left with adding some what we call mold forming machines. These are the final kind of adding to the capacity, which I think by that we can look at by the end of later this year, maybe some more additional capacity to take capacity beyond the $120,000,000 to $140,000,000 per month. But mostly, I think we also want to make sure that the portion of hybrid land of shipment are increasing and hence making use of the hybrid lens, the increasing of the molding machinery for WLG glass lenses. Finally, the module production lines, as we have said before, we have 10 lines already in place delivering 8,000,000 per month capacity. But whether I think by the end of the year when we have as accreting customers' projects development, I think by that time, we will make some more judgment whether we are to add another 5 to 10 lines. Thank you for the questions. I will now move on to the next question from Wei Jing of Citi Securities. Please go ahead. Capacity. We will lend the capacity. I think it's only realistic that the inventory cycle kind of behave to the implementation as we grow the business. I think at the moment when we describe 1.5 months, I don't think we have reached that kind of duration yet. Maybe at the moment, it's slightly more than a month. We anticipate the largest kind of duration is 1.5 months. I think clearly as we see the cycle possibly peak or climax by Chinese New Year next year, thereby, I think from then on, we will work to reduce that cycle lag period to around 3 weeks. But certainly, we have to bear in mind, we need to look at the market demand and the time to set up kind of match the market demand to AAC shipments capability because the shipment of plastic lens is not a very, very flexible, very kind of quick setup in terms of, for example, when we looked at the operators that are responsible for the escalated gross margins that we have delivered, we are looking at the same kind of laborers or the number of optics operators, workers that we have since November last year. So it does take investment in terms of training your teams of people, setting up the our own kind of production lines as well. So I think it's realistically speaking at the moment is a month and a little bit more, but the maximum is 1.5 months, but the longer term is to reduce that to something like 3 weeks, but and we will pay attention to the market demand. To talk about obviously, we briefly talked about the CapEx outlook for Optics business in the previous question. I think the reduction of holding inventory and the review of market demand has a lot of relevance when we look at the incremental extra CapEx required. And hence, as we have said just a while ago, we don't anticipate any big significant CapEx on the plastic lens. But then again, I think we are already in talks and in discussions with customers outside the smartphone industry in terms of these droids, devices, automobiles. We believe these projects are of interest not only to these potential customers, but also to verify our WLG capability and our optic capability as well. I think we also described and we are very, very confident that the WLG capability, the design process and the production process has a marked advantage in terms of comparing to the traditional GMO process. Also in terms of new momentum in the new sector, we have several joint ventures ongoing. So all these are in progress, and we believe the optics business is a good start at this moment, but we have not neglect the capability of its strength in terms of user experience in the other markets. Thank you. We'll now move on to the next question from Susana Choi of DBS. Please go ahead. Hey, thank you management for taking my questions. I have two questions. The first question would be, I would like to update the product mix. Maybe below that 6P shipment contribution in the 2nd quarter and 15% to 20% contribution by the end of 2020, are you still on the track? And may we also know how about the 7P target shipment in Q2 as well? And my second question is actually about the competitive landscape, because your peers, largest peers, so the slow smartphone camera spend upgrade in first half. So how you view the OpEx spec upgrade outlook in second half and also 2021? And do you think that AAC could take advantages of the slow upgrade? That's all for my questions. Thank you. At the moment, we are developing and progressing well with 6P. But at this moment, product mix wise, 6P is not a major percentage. Our ASP at the moment, rmb3.75 I think slightly fall short of our competitors. But at this moment, we see we already are seeing orders and shipments request for 6P up to RMB5 1,000,000 per month in the Q3, going up to RMB7 1,000,000 by 4 quarter, thereby enhancing the overall product mix and increasing the blended ASP. But more importantly, although as we have said previously, we expect 1,000,000 shipment of 7P projects. We still prefer to focus and promote the alternate hybrid LAN design in terms of 6P. I think the differentiation of hybrid LAN is very clear in terms of its user experience proposition for different customers. And with that, we believe that I think going forward next year, the continued enhancement of the product mix will more be able to deliver a higher kind of 6P plus hybrid land 6P projects. Thank you. In the interest of time, I'll now take the last question from Frank He from HSBC. Please go ahead. The $20,000,000 that we talked about earlier in the call, we are referring to a total output. We don't by any means we are quoting a shipment number. What is important is here as we have said, the hybrid lens based on the WLG is more like a platform approach whereby we believe several customers are already expressing interest and could be satisfied with 1 to 2 platforms I. E. The capacity of the capability of building up a mass production of not only in terms of a stabilized monthly production output, but also in terms of making sure these are go through the production verification by our customers is also very important. Hence, we don't mean $20,000,000 by the end of each shipment number to the customers. But more importantly, we have already said that we have already achieved $2,000,000 per month capacity and we are expanding that by October. The new facility, a 4 inches facility in Chongqing, I think, is going to be online in October time, thereby increasing well substantial amounts to more than the €2,000,000 per month as of today. So it's a capability that our customer not only through the adoption of hybrid lens design, but also a verification of AAC preparations in terms of capacity, readiness and also the building up of inventory. Hence, we talked about $20,000,000 is an important number, but by no means we need a shipment target before the end of the year. Let us clarify that point. VTM, we are already in the process of qualification with our customers. We expect the time line maybe 12 months that we will see projects, shipments and customers' projects actively involvement of AAC design of these VZMs. We like to I'd like to sorry, I apologize for the translation error. I think by Q1, Q2 next year, we will see the VCM design come out. I think we have answered we have taken the last question. If I may, I would ask, I think our CEO, Mr. Peng, would like to give a few concluding remarks before we end the call today. CEO wants to conclude on give conclusions on the recent development not only on what we have discussed in lanes about optics, but also on acoustics. In optics, I think we have plenty of questions and answers. We believe the development not only give us to deliver the momentum in rapid sales revenue, but also the continued uptrend deliver a better betterment of gross margins in terms of plastic lens and coming online the hybrid lens project. And also lastly, but not the least, we talked about the timeline of AAC Proprietary VCMs coming to the market shipment stage in Q1, Q2 next year. I think those are quite certain that we are going to deliver. In acoustic, I think we did not talk much about acoustics at all during this call. But for those who are familiar with our acoustic development, I think some 7, 8 years ago, we already see quite a significant upturn and kind of deliver of our strong strength not only in design, but working with different customers that we gradually conquer the market on transition from a what we call single speaker design to a speaker box design some 7 8 years ago, whereby I think we are at the stage whereby we are seeing many of our Android customers coming to the market. We are working with them on many kind of different smaller projects that leads to a fragmentation of design whereby kind of impacting the gross margins that we used to deliver in the speaker box projects. But we are pleased to hear the feedback on the recent kind of sales and design migration to back to a what we call an integrated speaker box design whereby we believe through our automation process and through our continued research and implementation of new material, we will be able to pass on some of the latest innovative design in terms of savings, kind of making the speaker box smaller and smaller, but on a what we call again platform approach without not at the expense of the acoustic performance. And already at this stage, most of our Android customers are very positive in responding to this what we call minimalization design of integrated speaker box. We are very confident that this will be a very good opportunity for us to deliver better and better kind of road map, but also better and better enhanced financial performance in terms of margins as well. I think as of this stage, we believe as quick as I think later this year and maybe early next year, this integrated minimized design speaker box will conquer or take something like 20% to 30% what we call penetration rate. And clearly, the long term target is to see something like 70% to 80% penetration. We believe this is a very strong opportunity for AAT to deliver solid and good gross margins like what we have already done so some 7 or 8 years ago when we launched the speaker box design. I think that's the 2 major conclusions that CEO wants to kind of emphasize. But at this point in time, I'd like to thank all the shareholders and investors for their interest for this Q2 interim results call. I think our IR team will get to work this week, and we will talk more about the different business segments that all of us are interested in. Participation. And this concludes today's conference. You may go ahead and disconnect.