Earnings Call: H2 2019

Mar 25, 2020

Ladies and gentlemen, thank you for standing by and welcome to AAC Technologies 2019 Annual Results Investor Web Call and Conference Call. At this time, all participants are in listen only mode. There will be a presentation followed by question and answer session. I would now like to hand the conference over to her today. Please go ahead. Thank you. Good afternoon. Welcome to our 2019 annual results conference call. My name is Joyce Kwok, and I'm the Head of Investor Relations at AAC Technologies. I'm glad to have our senior management team joining this call today with Mr. Benjamin Tang, our Chief Executive Officer Mr. Richard Mok, our Managing Director and Ms. Guo Zhang, the Special Assistant's CEO office. Before we start, we would like to remind you that the copies of our results announcement and presentation are all available on our website. We would also like to draw attention to the disclaimer on the last page of this disclaimer of this presentation slides. Some information we discuss today may contain forward looking statements. I will now present the results. Full year revenue was down 1.4 percent to RMB17.9 billion, as the year on year decline was mainly reflecting the decline in the first half. If we focus on the 4th quarter revenue, it's actually up 5.9% quarter on quarter or 9.6% year on year to RMB5.3%. The gross margin for the full year I'm sorry, RMB5.3 billion. The gross margin for the full year is 28.6% versus 4th quarter gross margin at 29.0%, which is similar to what we've seen in the 3rd quarter at 29.6% or is higher than what we've seen in the first half. The net profit for the year was down 41.5%, mainly because of the reduced gross profit and the higher R and D. The R and D expenses is now accounting for 9.6 percent of the full year revenue. At this unusual moment, our management strongly believes in the strict discipline in the financial management. In 2019, we have CapEx of RMB 1,300,000,000, a drop of over 20% from last year, of which 1 third was in Arctic, around 20% on acoustics. The CapEx projection for FY 2020 is currently unfulfilled again by the top management given the current adverse situation all over the world. We are happy that in November last year, we successfully completed our 1st form issuance and raised $388,000,000 at 3% coupon rate, which has strengthened our capital resources. As at the end of 2019, we have over RMB4.8 billion cash on hand or RMB5.5 billion if we include the time deposits of over 3 months maturity. Our GAAP net gearing is at 10.5%, which we consider as healthy. In order to further preserve our cash at this very unusual moment, the Board did not declare final dividend for FY 'nineteen. For the uptick that we would very much like to highlight here, it's been doing well financially, whether on full year basis or only on 4th quarter. FY 2019 revenue is up 97% year on year to over RMB1 1,000,000,000 in renminbi. 4th quarter top line was up 100% year on year or up 9% from the 3rd quarter. Both ASC and Yield have been improved further in 4th quarter as compared with the previous quarters. So we are happy to report a much better gross margin for the Q4 2019. For the carpet lens, we have already started the shipment of 6 key lenses in 4th quarter. We expect to send the 70 demos in Q2 of this year and to ship our Q3 this year. We are targeting at $100,000,000 monthly shipments by July this year. For WLG, we remain confident of this given its competitive advantages over the conventional plastic vents in the market. Our progress is as scheduled and we are looking for shipment to happen in 2020 and with up to 13,000,000 shipments for this year. For camera module, we are working hard on the preparation and expect to start mass production by May this year. Hopefully, with Thermo Motors production capacity, we can further strengthen our capability in the first call integration in office and to provide more complicated solutions and more value proposition in this segment. For the Akoustis, full year revenue is down 5.8%. If we focus on just the 4th quarter revenue, it's flattish from the previous quarter or up 19% year on year. The margin for 4th quarter is 31.3%. The revenue trend is largely driven by volume, which has been up both year on year and quarter on quarter. ASP is still on the declining year on year trend in both quarters, although that magnitude has narrowed from the rest of the year. We're happy to report that SOS penetration has reached our 65% target by the end of 2019. And we are looking for further increasing such penetration rates to 80% by end of 2020. Also, we will continue to expand operating roadmap of SLS by launching more advanced versions in the future. We also look for module speaker products to be in the high demand smartphone models and further motivated by better user experience and also the ZXO mark assessment and ranking in the smartphone acoustics performance in October last year. For this combined segment, full year revenue was down 4.7%. But if we focus on just the 4th quarter revenue, it's up 16% quarter on quarter, but still lower 6% lower than last year. Margin wise, it stabilized in the 3rd quarter and is at 13.5% in the Q4 2019. Gross margin for whether the combined segment or H of the EM and PM both expanded in 4th quarter as compared to Q3. Product mix continues to shift a little bit more from precision mechanics given the higher growth rate there. For the Heptase, we have seen good growth with top line and modest expansion of margin. We see the interest in adopting our electromagnetic technologies by the Android smartphones such as virtual edge hat to air buttons. And we are looking for wider range of market opportunities beyond smartphones such as automobiles, games, controller, PC, etcetera. For stepper motor module business, we continue to see volume growth ramping in 4th quarter as well. We continue to have more technological upgrades to make the model smaller in size and rates and with other features such as simultaneous simultaneous popping up, rotating and scanning functions. That home was a module business still has ample potential whether it's in the smartphone or non smartphone applications. For precision mechanics, we managed to deliver more complicated design in 4th quarter, which drove both the ASP and margin higher. We are positive on the precision mechanics in FY 2020 and we are looking for wider product range such as hinges, liquid metal, LCC, etcetera to drive our growth. For the MEMS, full year revenue is nicely up by 14% year on year and margin also further expanded as we have further increased the adoption of in house MEMS design and manufacture of digital ASIC chips. We have become the 1st MEMS producer in China to break the technological barrier to produce the MEMS with signal to noise ratio of over 70 dB with all within China. We plan to expand the scope of application of high end MEMS beyond smartphone and to the smartwatches. We will also explore more sales and distribution channels to expand our market share. We are positive on doubling our production capacity here and to reach $3,000,000,000 per year within mid 5 years. On sustainability and ESG, we have set up communication of our ESG efforts to invest communities in process last year. In the upcoming sustainability report that is going to be our segment 1 and to be published in May, you will see our expense scope and disclosure such as GxG emissions, energy consumption and our work related to climatic changes, etcetera. We are also working on further enhancing the involvement from our Board on ESG on a regular basis. And of course, at this very unusual moment with epidemics all over the world, staff safety is our top priority. We set up special task force teams under the leadership of its CEO and get all our senior management involved, not only to ensure the work assumption was done on track and in line with various regulations and guidance, but also by putting the staff's health and safety at the very top priority. This concludes our quick presentation on the 4th quarter results. There are more supplementary information at our panel discussion of the slide for your reference. In the meanwhile, we will now go to the Q and A session, where Benjamin and Richard are both here to answer your questions. Thank you. Thank you. We will now begin the question and answer session. Your first question comes from the line of Susanna Chen from BBS. Please proceed. Yes. Thank you, management, for taking my questions. I have maybe two questions. First one is congratulations to the great guidance on the OpEx. We now have the hybrid length target of RMB40 1,000,000 in 2.20. And I would like to know if there is any target on the 6P and also the 7P lens as well. And could we update ASP and also the margin outlook of the OpEx? And I will have the second question. Thank you, Zuzeta. It's Richard here. Regarding Osteek's outlook, as we have prepared to not only continuously improve on our production yield, but also to reflect our capabilities and gaining confidence with our customers on more complex optics lens structure, including 7T. I think earlier on, Joey mentioned that we are kicking our 7T design and prototype to our customer very soon. We believe we are confident to gain 7P projects and actually making shipments for these 7P projects around Q3 time. Clearly, the ASP overall for Optics Classic Lens will depend upon product mix. We have shown in the year 2019 gradually improving on the ASP, but also as a precaution, the market is saturated on the lower end. I think it will not do any supplier any good to stick with kind of low end length design. What is important is that while we will improve our production yield and increase the preference on 6P and or even 7P product mix, we will gradually be able to also at the same time increase our production shipment to our customers. As you know, the optics lens business is very much determined the performance of that classic lens business is very much dependent upon internal production use and also the production capacity. We believe certainly as we have said all along, the margin, the gross margin on Optics Lens business, there's no reason why we shouldn't be setting a target of above 40% or even higher as we deliver more complex land design to our customers. So the plans have not changed. We do not see any obstacles in terms of technical production or even the market for us to deliver that. So that is clear something for us to deliver in this year. Okay. Thank you. Thank you, Richard. And my second question is about other business wide. We saw the accretive growth very good in the Q4. But I think I'd like to know that the 2 zero two outlook for the acoustic side and also the haptic side and also the RF and the can rate ending the coronavirus situations, could we have some revenue growth outlook and also the margin outlook in Q2 for this segment? Thank you. Okay. Thank you, management. Could I have a quick follow-up that could we still expect 40% gross profit margins and the scale which are $100,000,000 and also ASP 4.2 or 4.5 say in July, could we expect that level of margin? Susanna, can I just quickly talk in any way about what Sam has been telling everybody, just a short concern for me, because you asked about the business segment in situation where we are facing now? Our CEO has talked about both for Q1 that we are seeing, we are in already mid March. In the beginning of March, we already have achieved 80% resumption of our operation, and we have almost reached 100% as of now of resuming our normal lines production. But what is quite certain is that as of today, we have seen the market reacting. But for the Q2, the market is still full of what we call demand from the CRC and DRAM and also some of the older models existing. And hence, in terms of that impact on AAT business, we believe both Q2 in terms of the normalized demand pretty much business as usual. But what is unclear is the current situation spreading over to Europe and United States, etcetera. So it is only correct and more prudent to describe Q3 situation as not so clear. But what we like to talk about is what we can certainly manage the situation well in terms of our product business segment. For example, starting with optics, we have already mentioned that we are moving, migrating to 60 and 70. I think the previous question you asked about ASP. I think at the moment, most likely when we reach to capacity of monthly RMB100 1,000,000, we are in the range of RMB4.2 to RMB4.5 and we migrate by around end of Q3 and then more so in Q4 times. We expect the branded ASP to reach almost $175 because this is this comes from the fact that we have already established AAT competitiveness, not only in terms of pricing, but in terms of production capability. And what is more important to achieve that $100,000,000 monthly capacity is that we already have the CapEx machinery in place. We do not foresee any further additional CapEx out there to reach that stage. So that is uncertainty that we can deliver no matter what happened in Q3 or Q4. And also talking about the RF mechanical business, I think we mentioned that we have already well established our position with 1 of the major players in China, one of the major Android customer player in China market. And we definitely have won their orders. And in those projects, we are definitely earning major allocations for that business as well. So in terms of that business, it's about how we could improve utilization and also improve in our production in our mechanical business. That is another certainty that we can deliver amidst the uncertain climate in Q3. In Acoustic, I think in the as you know, another thing that we've mentioned about, we are continuing with our developing and promoting 0.65 and 0.75 plusminus millimeter classic version and whereby our target is to deliver something like $30,000,000 for the whole year at an average price of US2 dollars We believe for that, that will capture a meaningful stronghold in the top end segment. In the mid segment, we are our management plan is to fully utilize existing production lines because we believe that will give us a very strong foundation for years to come, especially we have seen very strong acoustic specs, for example, the dual strong dual speaker that you're seeing in the top end devices launched this year recently. And lastly, but not the least, in MEMS microphone, we've already mentioned that we are in a very strong unique position whereby we have proprietary design and we are using a China based fab. In the Q1, we already are achieving deliver of 80,000,000, 80,000,000 units, whereby we believe there is strong business opportunity and good profitability when we get to SIM 3 to deliver 100,000,000 units in the Q3, especially fixing the situation that there is a very constrained demand supply situation for the Q2. So what we are doing at this moment is that we are paying very strong attention to deliver what we can be certain about in terms of business progress in optics, RF, mechanical and acoustic and MEMS. But at the same time, we recognize that as always, we need to put in solid plans to keep cost down and improve utilization of production lines. So we believe as the situation evolves, there may be opportunities that while we are keeping a very minimal, flexible kind of response to the customers' demand or market demand, it is very important that we watch very carefully our outlay in CapEx. So sorry, Suzanna, can you repeat your second question? You said that when the scale reach 100,000,000 and ASP reach about 4%, the margin will be 40%. So, we would like to know the guidance there, rather, for example, in July, because in July, the scale already reached $100,000,000 and ASP will be about $4 I think, as we said, we already have the machinery in place. There's no need for further, for example, depreciation or amortization costs relating to incremental deliver of doubling our shipment capacity. And from the current margin trend, I believe this target of about 40% is achievable. And if you look at industry, I believe that is a very realistic target for competent, capable suppliers to sell. Thank you. Please be reminded that we are limiting to 2 questions at this time. Next question comes from the line of Wenxi from Greenworks Asset Management. Please go ahead. Thank you. The next question comes from the line of Wei Chen Wen from Citic Securities. Please go ahead. So I do need to quickly do a translation for the English speaking Dalian people, although this will be very short and concise. I think CEO wants to reiterate that the design project on hand is involving the LNG of 48 Mega, 1G5G, 64 Mega, 1G60 and or even 108 Mega 1G60 or 1G70G designs and of which 1G60 are capable of delivering wide angle. Clearly, we have already built up experience of inventory or production of WLNG length up to a $1,000,000 and this experience has been turned or has been fully captured in what we call our last data simulation and more importantly in our land data base. Those will be capable of delivering or recording repeated capability in achieving our production use. So in the long run, we believe our capability, which now comes from the 60 plastic lands already target $100,000,000 per month. We will get similar capability when we come to do So, quickly, to answer your question about why we are so confident about successfully shipping 100,000,000 per month, I think this is back to the fundamental question of production yield and production efficiency. We have stated that by the month of April, we like to increase our production capacity to something like 60,000,000, 60,000,000 per month, whereby we believe our cost in terms of make, as Ming has insisted and as we have insisted our optics production, in fact, we are in control of the design and also manufacturing of the what we call the original facilities in the jetpack in the production to it, I. E, the only output in the the only input in our optics lens, plastic lens optics production is the raw material. Therefore, I think when we look at Q2, Q3, Q4 situation as a new supplier, I think the market, this is a normal process for new supplier to test the price and prove their technology capability. And once that is a proven effect, meeting the customer demand in the pricing that we have described will absorb our pricing competitiveness and hence our confidence of reaching $100,000,000 per month and also our gross margin target of 40%. And that has always been in the business model in terms of our positioning in the technology component industry. Thank you. The next question goes to Hina Wong from Credit Suisse. Let me just answer the questions on CapEx planning and execution of CapEx planning. As we have already followed, our CapEx is to deal with additional capacity of new product platforms, whether they are acoustic or optics. When we talked about RMB3 1,000,000,000 CapEx in the year 2019, we are talking about we have invested in the new SLS platform and also to some extent the new projects that Acoustic has entered into. And that should will not be a later percentage of 2019 CapEx. What we have stressed that in building up our 100,000,000 per month capacity from a couple of years ago, I think our CapEx in 2019 addressed some of the plastic waste capacity and also addresses some of the preparation to build up the already 1,000,000 industry of cellular LG. And hence, our CapEx is fairly tied to the development program of our product segments. Mainly in 2019, majority again is still related to OpEx to kind of split the remaining balance. I think as we have said, precision mechanics, CNC machines, we do not have we have not spent a lot in 2019 as we have already built up sufficient capacity. So the CapEx requirement for 2020, I think as we speak, we are continuing reviewing. And during this call, I think Ben has mentioned that in both the plastic lens and some of the WLG capacity we already mentioned, we have already invested the equipment already ready. So the CapEx this year will reflect again the new project requirement and some of the kind of new business, for example, in doubling capacity of MEMS Microphone. Ben has confirmed that the capabilities that we filled out for plastic land based on data simulation not only end up in kind of final production process, but actually affect our capability in deciding and coming up with the production tooling. And that is an important factor for enhancing the production yield. And what I'd like to clarify about the RMB3 1,000,000,000 CapEx incurred in 2019. I think Ben has reminded me to tell everybody to confirm that out of that RMB3 1,000,000,000 around something slightly less than 30 percent, around RMB850 1,000,000 is committed to what we call infrastructure, construction projects. Those are not production equipment. So the production equipment CapEx is the remaining RMB2.2 billion. In fact, the OpEx took up 50% around 50% of the remaining RMB2.2 billion, I. E, that is the major CapEx spend we have in 2019. Both the electromechanical drive and the precision mechanics, those add up to less than 12%. So the majority of the CapEx reflects the business footprint. Thank you. The next question comes from the line of Lafi Huang from CICC. Please go ahead. So in the uncertain key windows in Q3, Q4, we believe we are flexible and nimble enough to monitor CapEx required to pay demand assumption. Once its focus is clearly profitability and utilization of existing invested production CapEx, We believe in enhancing the technical gap between us and our competitors. We'll make sure we capture the full opportunity that may present itself in Q3 and Q4. For example, the plan for quarterly deliver our shipment of over 100,000,000 NAND microphone. But more importantly, the assets on what we can see, what we can see in the certain business opportunities. We always described the optics and the other business as well. So it is very important that as we see this importance of timeliness to review that tax and also enhancing utilization, but at the same time, placing very strong emphasis on widening the debt is what we are going to focus on. Yes, we've been managing our business on an international perspective as we have reported. Our progress in building up Vietnam already is low. But in Europe, where we have currently our 2 thirds of our normal operations are in place, actually going to be reporting to work. What is important is that both in terms of technology enhancement work and also the interaction with customers on our opinion qualification are still in progress. I mean, those are continuing work that we have benefit from a high localization. We employ a lot of localized experienced clinicians and operators to help us to achieve that. So in a way, we are ready. We are prepared for the assumption in case the business come back, demand come back in Q3, Q4. And we talked about AML module as well. The plan has already been linked and we can be confident that we will reach a capacity of about 4,000,000 to 5,000,000 per month based on 6 production lines by around May time or before June. And clearly, the plan of increasing that by another full production line are still in place. So we are pleased to say that our internationalization or take advantage of globalization capability in each of the different overseas locations has played out means helping us to still normalize interaction on both technology and also in terms of international customer. But at the same time, we are clearly well placed to take advantage of a strong potential that Q3, Q4 business will bounce back strongly. Thank you. You have reached the end of question and answer session. I would now like to turn the floor back over to the host today for closing comments. Charles, please continue. Okay. Thank you for your time on our FY 2019 annual results presentation and also the precious time and the elaboration from our top management here. Any further questions for our IR team, Guo Zhang, myself, Joyce Korps and Sheridan Zhou will be available here for your questions after this call as well. Thank you. Thank you for your participation and this concludes today's conference. You may go ahead and disconnect.