Earnings Call: H2 2017

Mar 27, 2018

Ladies and gentlemen, thank you for standing by and welcome to AAC Technologies 2017 Annual Results Investor Webcast and Conference Call. At this time, all participants are in listen only mode. There will be a presentation I would now hand over to your host today. Please go ahead. Good evening. Welcome to our conference call. I'm Richard Manc from our team of AAT. And joining us today, we have our CEO, Mr. Benjamin Tang our Managing Director, Mr. Richard Mok and our new Head of Investor Relations, Mr. Eddie Gong. Before we start, we would like to remind you some information you may hear during our discussion today may contain forward looking statements. As a result, our trends may turn out differently. We will briefly review the results before opening up the call to questions. Richard, please? Hello. Good afternoon, everyone. AEC, the company, had another great year for 2017. New heights were recorded on both revenue and net profit. The year on year revenue rose 36% to RMB211 1,000,000,000 and net profit was up 32% to RMB5.3 billion. We have proposed a total dividend for the year of the amount of Hong Kong, dollars 2.10 implying up 43%, roughly equal to a payout ratio of 40%. This year, as forecasted, sales of haptics and the RF mechanical segment combined exceeded the acoustic segment for the first time. Gross margins of both segments were over 40%. For the past 3 years, as we ramped up our new businesses, we continue to deliver continuous growth of acoustic. We have maintained the good profitability and overall revenue growth of 30% plus in each year. When we look at the performance of each major product segment, Sales of the speaker module was up 42%. We have experienced greater specification upgrade for better stereo sound solutions, which deliver ASP expansion. At the same time, total shipments of the speaker module has been lift by continuous migration from our speakers design and some even transformed design from receivers. That's the main factor for receivers and speaker being slightly down for the year. As a whole, the acoustic segment was up 20% year on year. Also during this reported year 2017, over a third of our total CapEx was on acoustic and that was for our new platform, super linear structure. That would migrate new user experience to a new milestone and also we expect wider adoption of this new platform which will drive our acoustic growth along with dollar content increased. I'll talk a little bit about haptic and RF mechanical. The sales revenue of haptic and RF mechanical surged 51%. Both segments, haptics and RF mechanical, posted very good growth. It showed our strong capabilities on production and design. For haptics, in 2017, we saw some of our advanced solutions start its shipment in Android phones. And furthermore, we expect much wider adoption for this year. In our mechanical business segment, last year, we shipped mostly metallic casings and some volume of 3 d covered glass already. This year, we will continue our work on our focus to further improve production efficiency and further penetrate into more Android flagships with different design solutions. Last but not the least, most importantly, the optic segment. The development of WLG is on track. It has received wide market attention and very positive interest. The unique properties of wafer level gas will continue to deliver the WLG Hybrid Lens Solutions for better 3 d structure light applications. At the moment, we have built 5,000,000 monthly capacity for WLG. Meanwhile, for our plastic lens, we have already prepared a monthly capacity of 20,000,000 sets. And throughout this year, we will continue to implement further expansion capacity plan. Thank you. Great. We can go into Q and A session. Thank you. We will now begin the First question comes from the line of Nancy Zhang from JPMorgan. Please ask your question. Hi, Richard and management team are Li Bin Nasi from JPMorgan. Two questions from me. The first question is, could management share more details on the optics division performance last year? We noticed total revenue of around RMB 200,000,000 from these others. And could you share more detail on how much LENSAT were shipped during last year to give a little bit color on whether the margin trend and ASP trend on this division? That will be my first question. Thank you. Thank you for your question. Last year, as you know, the plastic lens business really started late in the year. We did not have a full 12 month period for plastic lens business. The revenue for plastic lens have been lumped in others as you rightly said. But most importantly, we are looking at the yield and efficiency on our classic lens manufacturing. As I said, last year, we already reached 10,000,000 pieces monthly shipment capacity. And currently, we are on a we already have established 20,000,000 sets monthly capacity. And the margins definitely are on the uptrend because this is very much showing a lot of potential in improving our efficiency and use as we increase as we grow our capacity. And also, I think we are on a very good positive learning curve to deliver better efficiency. So this year, we expect overall performance margins to further improve from what we see as current indicators of our production efficiency. Your next question comes from the line of Sherry Ma from CLSA. Hi, Benjamin and Richard. Thanks for taking my questions. My first question is also related to optics. In the remarks you made earlier, you mentioned that your customers are showing strong engines for WLG hybrid lens. Are these customers you're working with preferring WLG Hybrid over 7P plastic lens for the future roadmap? Do they accept AAC's price range given it's higher than the traditional plastic lens? And could you give us more color in terms of the competitive dynamics or production mass production schedule, the scale of project we expected to deliver and if margins could be closer to the corporate average? The plastic lens for related to the previous questions that asked, the total shipment came up to approximately 40,000,000 for 20.17 at the average price of RMB4.3 and mostly are for 5P. As we said already, 20,000,000 per month production capacity, which means that looking at the projects on hand, looks like the $20,000,000 capacity will be fully utilized as shipments in sometime in 2 months' time. On WLNG, as we said, it is an important technology platform, AAC process in our through our investment 7, 8 years ago in KALYDO. At that time, we believe the unique properties that WLG give to the hybrid lens design will definitely be an important trend and in terms of innovation in the image quality and properties. But 3 d sensing at that time was more kind of far fetched, but we are very pleased to see the properties of such hybrid lands being fully considered. We believe the good characteristics of our better reflection indexes, better player control, etcetera, that are found in the current applications of mobile devices are very, very possibly extended to other used applications in the non mobile devices market. Hence, the 5,000,000 pieces per month capacity that we have prepared not only clearly, the preparation includes tooling and our molding facilities in China as well. And looking at the project underway, we believe most likely shipments will start in 2nd quarter or Q3 this year. And we expect the RMB5 1,000,000,000 capacity will again be fully utilized there. So very exciting, very strong progress. And my second question is related to MEMS microphone business. The revenue scale of this business has declined between 1Q 'sixteen and 2Q 'seventeen and started picking up again in second half last year. Profit also started picking up as well. How should we think about this business segment going forward? And in terms of cost structure, will we able to see increasing in house ratio of MEMSDAI and to again see more better improvement in gross margin? This year, we have continued to not only work on our in house development on developing capabilities to be a very competitive MEMS microphone supplier, but also the fact that we our efforts in developing ASIC have come to a very fruitful stage in our digital ASIC design. I think we will see more growth in shipment volume, not only this year, but continue to 2019, whereby that would help us to capture the a stronger AAC value. Also, we have mentioned that during 2017, we have made an acquisition of an established industry players design and IP portfolio of men's dies, which have been already used by AAC before. And that acquisition of owing the design will definitely not only bring new, but already can reinforce and enhance our capability to be have our own kind of products. We expect in this year 100,000,000 pieces of our own AAC men's dye with our own digital ASIC will be shipped. Definitely, our objective, like the other technology platforms that we have interest in, we aim to be the industry number 1. And that is a very clear mission that we set out not only last year or this year, but all along this is a key technology. We have strong capability and roadmap how to get there. I'm sorry, a quick follow-up. How much is $100,000,000 out of the total shipment? So we expect more than 10% of the total shipment will come from our own AAC MEMSDA. Your next question comes from the line of Sam Lee from Credit Suisse. Please ask your question. Thank you, moderator. First, congratulations on the very good earnings. And secondly, welcome Eddie to get on board. I have two questions. First is about still about the hybrid lens. I'll just express it in Chinese. The topic or the questions asked related to the various considerations in promoting hybrid lens design. World War AAC, clearly, we have developed and conclude the 3 d sensing consideration for glass is based on the advantage of its thermal stability, which is a key in giving good 3 d sensing performance. And as we have said before, on photography, imaging requirements, aspects like low flare, large aperture and the sea height considerations that hybrid lens can give definitely are key advantageous considerations. But overall, when we look at the encryption of WLOG in hybrid lens design, I think if we look at the AAC approach in terms of WLG and the traditional molding techniques process for a piece of glass lens, clearly, we believe there's a lot of momentum and advantages behind the, what we call, the costing, the value for the specs consideration, I. E, on a volume production basis, this is a very clear interesting roadmap for WLG process to deliver the guidance. And when we discuss the future kind of specs requirement that are capable from 6 gs or 7 which obviously AAC is also partaking in the 6p plastic lens business. We believe the optic images improvement are clearly presented much stronger with a costing value proposition under the WLG process. Thank you. My second question is about the RF business. We strongly believe 5 gs will present exciting opportunity. As indicated by our preparations on this business, the application the usage of new materials in designing and producing antenna on their own and also the acquisition of Wi Fi, the MEMS tuner capability. And not only in addition to those potential, we are looking at the various components in the design overall antenna, including these, what we call, onoff switches, etcetera. The importance is that AAC should develop or should clearly present a, what we call, an integration capability that we could encompass all these important components for a 5 gs antenna. As we have done in the past, we have incurred we have spent 7 years' time on preparation for optics capability. We believe antenna possibly in a period of 5 years, based on our current already incurred experience in the precision processing and precision manufacturing, the 5 gs antenna business deliver enormous exciting opportunities to show all our operations. Okay. Definitely, we are very interested in assessing and development in developing new materials, suitable and appropriate for the 5 gs antenna. We believe it's a critical part of a solution. Otherwise, it makes the kind of platform uninteresting and meaningful. That's it from me. Thank you very much. Thank you. Thank you. Your next question comes from the line of Liping Huang from CICC. Please ask your question. I think in both the segments, haptics and RF mechanical, 2017 has been a very exciting, very interesting year. Actually, it showed off our preparations for business to come. In both segments, AAC as planned has further progressed with a more advanced approach, not only in terms of specs upgrade, but also in the value adding for both business segments. I think as targeted Android markets are opening up for both segments nicely in a nice way as planned. And what's more important, I think, I think 2018, we are in a very, very good position to capture more growth in both business. So, I think we are not done with the growth in both segments yet and so far. The discussion centers around sustainable growth to go after business, which can deliver 40% or above gross margins. I think Benjamin was describing a little bit about the heritage of AAC. Some years ago, I think the company's focus as we have done very well in the traditional mobile home market, we were looking at the various kind of capabilities that we can serve and deliver within what we call the customers of the traditional mobile phones. But I think it's very obvious that these in these years, the capabilities of delivering these products or solutions are very much tied to the extent how these technology platforms can deliver user or interesting innovative user experience via what we call technology platforms, which could help us on delivering a sustainable progress, meaningful way. In summing up, I think there are 2 directions that AAC have undertaken or categorized. I think the first one is the electromagnetic capability whereby that's very much our DNA, our heritage of which we've done a great acoustic business. And that also to some extent include the at the moment untapped voice coil motor, VCM products and solutions, which is also this fundamental of physics dynamics and production capability that AAC is very strong in. The second direction or the second feature that AEC process definitely is the capability of improving and delivering what we call precision manufacturing, whereby not only about the scale that we could do this, but also in terms of the details and the kind of the fine tooling fixtures that we design, we control throughout the production process. And interestingly, I think if we look at the experience we have so far in developing the design and production process for plastic and WLG, there are some what we call cross inferencing. What we meant by cross inferencing is that the experience or some of the process capabilities have benefit the other direction as well. So that is a mutual kind of beneficial way that the 2 are linked together and serve a very great purpose. But going forward, I think we discussed briefly about 5 gs components and related MEMS kind of solutions, which brings back the subject of although in the past when we developed the RF capability product business segment team, in early stage, we have this mechanical capability of applying LDS on our acoustic products that has again served us a great extent in terms of improving how we could not only on the existing capability, but adding to our core competency. We believe those are the things that we have learned a lot and will continue to focus on these two directions and will serve us very well in the segments that we have identified so far. We want to reiterate and add to the fact that fundamental capabilities that we already process and we are on the way of developing will get us will extend our business into further than the current mobile devices market maybe in 5 years' time. What is recognized is that we are already on the way to process the scale in order to go into this exciting market and the fundamentals of the SME will serve us very well. But in addition to that, in the last few years, we already started reviewing and looking at ways to enhance our management kind of capability in a meaningful way. What we mentioned is that we as we have indicated in the past, we have not been interested and we do not rely on what we call existing teams of people of our competitors to join AAC in order for us to have that capability. We are very much interested in looking at our kind of work design and production experience and added to that our own kind of theoretical fundamentals, which give us the target, which give us the genuine directions for us to come up with a sustainable path in order to deliver such capability. And one of the important kind of capability or mode of practice that we have already adopted is how we could turn all this interesting useful information and capture in what we call a digitalization process whereby when we look at such production improvement processes can be represented by digital information, numbers, etcetera. We believe through that process, we can definitely very clearly present the differentiation between ourselves and other players in the industry or our competitors. And that would be the AAC kind of method in not only utilizing the current platform capability, not only serving the mobile, the current mobile devices market, but achieving how we grow by our scale production, by our fundamentals, by our digitalization, by clear management methods, scientific methods to get us there. Your next question comes from the line of Wei Chen from Goldman Sachs. Please ask your question. Okay. Thank you. Yes. So a lot of good question was asked across business lines. So it sounds like the setup into 2018 is pretty robust. And Fisher also showed that for the past few years, sales has been growing over 30% every single year. So can you talk about what kind of growth you be expecting in 2018? And also the gross margin in Q4 was also pretty strong. How should we think about gross margin in 2018? That's my first question. We previously, we have already said this year we're going to work the same half way as we do every year. We are committed to deliver sales top line revenue growth of not less than 25%. So this is unchanged. The management is very focused on delivering that. And in terms of gross margins, as we said, all along, I think the gross margins is something that we really kind of have a lot of kind of very clear open kind of target not only for management, but for our stakeholders as well. Hence, for not only the new business, but existing acoustic business and very much established now the RF, Mechanical and Haptics, we have still the same target of delivering that kind of level of gross margin. So that is clearly definitely not changed. Okay. Thank you. In acoustic, we are definitely very much in the expectation that 2018 will bring a, what we call, a double digit growth rate. Clearly, we mentioned the new super linear structure that are very much catered or looked at by the Android app. Bear in mind, this is the 1st generation, as we have said. The 2nd and even the 1st generation are already in the pipeline. For the 2nd generations, prototypes actually are being done and they are made demos for our customer. We believe this platform has genuine, genuine capability of lifting the much very much required user experience, not only in the high tier, but also in what we call high tier, mid tier and low tier except for the extra ultra low market that we are not interested. But overall, I think our customer has shown initial kind of very strong interest in this new user experience that this platform can bring. And more importantly, we believe this is only a beginning or as we said, a 1st generation new platform that enable a lot of our customer to fully promote another upgrade of genuine, very easily detectable user experience in upgrading their products and devices. We have always reiterated that we don't comment on the non Android market. We talk about Android market only in the current discussion. But what we like to emphasize is that, as always, our business model is not reliant on driving up or getting the, what we call, good margins from a high ASP product. What is most important that we believe on a demonstration on AAC being a leader in our business segment is the capability of developing is delivering what we call a good pricing in terms of the best performance over the solutions we are capable of bringing to the various customers via the different technology platform. And at the back of the capability of doing that is what we call our in-depth or clear direction focus on high level of automation and developing our proprietary, not only on just buying the equipment, but really having our own influence and design and control over the various kind of tooling, molding and the various adoption of the standard equipment. And that is what we meant by our capability of fully utilizing our smart manufacturing in order to come up with such good business, good pricing for listing the user experience, not only in acoustic level, but the same approach is applicable for our other business as well. And that is the same theory that we will carry on driving AAC to a new height. Your next question comes from the line of Alice Chen from UBS. Please ask your question. Hi, Benjamin, Rui Chen and team. Thank you for taking my question. My first question is about acoustic business, especially for the receiver module. Receiver receiver module actually record year on year decline, especially I think for the Q4. So can we have a rough idea about is it because of the shipment decline, but ASP actually increased on a year on year basis? And looking into 2018, are we still expecting receiver module, maybe Xiamen to stay flat, but ASP continue to expand? That's my first question. Thank you. Thank you for your question. I think in every quarter, our different performance for various business products will very much kind of reflect what is being shipped over that quarter. So there are different kind of happenings in individual courses. But one thing as I mentioned in my opening speech, there is some indication that the speaker module design has encompassed the receiver. So to some extent, there is some kind of adjustment in the shipment of receiver due to overall acoustic speaker model design, which takes up the traditional receiver as well. But I think the receiver module design going forward, we will continue to demonstrate a capability of specs requirements by different customers and fully, fully leverage on our automation production. We don't expect much big variation to the overall profitability and production kind of hurdles will be faced by AAC. I think overall, we are very confident that receiving module will have a very strong growth and potential for AC to deliver even in 2018. Okay. And my second question is about the non acoustic business. Is it possible to have a breakdown of the haptics and RF in 2017 or Q4 or at least maybe have some rough idea about which business among the non acoustics showing more stronger growth. The reason I'm asking is, I think if my gas wire gas is correct, Q4 have been actually showing quite strong growth with the design upgrade and AC expansion. So just want to have a rough idea whether this could be continued into 2018? At the moment, we are still not in a stage to give definitive clear breakdowns between the two components within that business. But I think generally, as I said, the combined business, the two business in both the haptics and iron and mechanicals have made very strong, very interesting progress in the year 2017. I think each has its own kind of development path. What's more important, I think 2018, both business segments will continue. We have high confidence in that both segments will do very well in 2018. But at the moment, no breakdowns are available, I'm afraid. Okay. Thank you. So very quick update follow-up on the haptics. So for 2018, because I think your management team just mentioned MVKAM will also widely adopt haptics product. So does that mean that the shipment volume on the haptics will also grow combined with the expansion in 2018? Optics definitely will grow, as we said, in our production capacities. We are planning for further capacity expansion, which is on the way already. So at the moment, I think early on, we have said the optics revenue possibly a single percentage of overall revenue. We are again, that's unchanged. So overall, bearing in mind the guidance that we said, the top line growth for the year 2018, I think the 4 business segments that we discussed in the last 15 minutes will are very much on track and to deliver that growth potential. Okay. Thank you so much. Your last question comes from the line of Yoonjun Thai from Morgan Stanley. Please ask your question. I think usually, we don't talk about the first, second half until May. I think definitely by that time, we will have much clearer light. But at the moment, I think as you have seen, various different customers projects are already happening, not only our kind of the new acoustic platform that we talk about, but the various new projects are very much underway. So I think in a couple of months' time, we will have definitely more information to share about the split. There are many, many kind of interesting opportunities in the smart markets, including the ARVRs and also smart automobiles. Clearly, when we talk about the new acoustic platform SLS, they are very much suitable and appropriate for the kind of upgrading specific acoustic design that are desirable in these smart automobiles and WLG sensing capabilities that these automobiles form. So I think at the moment, we are keeping our hands open and looking at various design opportunities to fully reflect how these miniaturized technology platforms can grow into the design. We have not changed our kind of target shipments for the new kind of business in that haptic segment for 2018. I think progress are again normal and on track. So pretty much we believe haptic again, as we said earlier or last year late last year, haptics will in the other new market will continue to emerge. Yes. So, yes, the last time we have mentioned numbers of 30,000,000 to 50,000,000 shipments. So that's remained in order to for clarity, I'm repeating the numbers that we mentioned last time. And thank you for your question. Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to the host today for closing comments. Thank you all for your time to dial in and all your questions for the management to have to give us the opportunity to clarify and discuss more about various interesting developments of our technology platforms. On the fact that we delivered the results for 2017, the management and the Board and our management team are very committed to stay focused on what we're doing. We believe a long term sustainable development on our capability, including some of the topics that Benjamin and myself discussed in the call today, will continue to be an important part of our management daily operations in order to deliver the results and the various projects that we discussed, and we are so excitedly making that to happen. So all in all, again, we have different growth drivers in the various different product platforms. Again, I think Q1, we are tentatively scheduled in mid May. We hope all of you will have time and continue to support AAC. And thank you again. On behalf of Benjamin, thank you all again and we look forward to speaking to you again. Thank you. Have a good evening. Thank you for your participation and this concludes today's conference. You may go ahead and disconnect.