Earnings Call: Q3 2017

Nov 10, 2017

Ladies and gentlemen, thank you for standing by and welcome to AAC Technologies 20 17 Q3 Results Investors Webcast and Conference Call. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now hand over to your host today. Please go ahead. Good day, everyone. This is Wei Jin Lam from our team of AAC. And joining us today, we have our CEO, Mr. Benjamin Tang and our Managing Director, Mr. Richard Mok. Before we start, we'd like to remind you some information you may hear during the discussion today may continue forward looking statements. Actual results or trends could indeed turn out differently. We will now briefly review the results before opening up the call to questions. Richard? Good. Good afternoon, everybody. Thank you for dialing in. Quickly, for the 1st 9 months of 2017, we have hit new highs on both revenue and profits. Year on year basis, revenue rose 43% to around RMB14 1,000,000,000, while net profit up 42% to RMB3.5 billion, I. E. High profitability was maintained. Gross profit margin and net profit margin, respectively, 41.1% 25%. The strong revenue growth came from both acoustic and non acoustic segments. For acoustic sales increased by 20%, accounting for 40% of our total sales. We are witnessing wider adoption of stereo design, waterproof features among the smartphone flagships. And also, we saw that in some mid tier models too. Both shipments and ASP of our major platforms are growing. On an on acoustic side, sales increased by 39%, accounting for 47% of our total sales. We have very good progress to penetrate into more new customers and we are seeing growth on both ASP and volume due to operating design solutions that we are shipping. On the OpEx operating expenses, we maintained our discipline and it has paid off. The 1st 9 months, the OpEx ratio came down to 12.8% compared to last year 13.9%. Meanwhile, for the same period, we have maintained a higher R and D investment, roughly equal to 8.2% of our total sales. This larger increase is for both Neo Acoustic and optics directions, which as you all know, focusing on delivering new innovative design for our customers. On the 9 months revenue breakdown, as you can see, non acoustic and acoustic now become more evenly distributed, 47% and 48% respectively. We are still maintaining previous guidance and expectation that the revenue from both non acoustic business will exceed acoustic revenue for this full year of 2017. Meanwhile, top 5 customers contributed 90% of our revenue in the 3rd 9 months, up from 79% in the same period last year. When we look at the Q3 performance year on year basis, increasing shipment volume of major platforms of both acoustic and non acoustic was the main growth driver. I'd like to highlight the good excellent progress on our optics business, which we are turning the $10,000,000 monthly capacity into shipments. We are now speeding up for capacity expansion and hence, as you expected, increasing CapEx investment in this optics exciting business segment. Furthermore, our unique innovative solution of wafer level glass and hybrid lens are already receiving wide positive feedbacks from various customers. Without further ado, let's open up the floor and we welcome your questions for us to discuss more of our company's operations in the presence of the CEO and myself. Thank you. The first question comes from the line of Cherry Ma from CLSA. Please ask your question. Hi, Benjamin, Richard and Ricky. Congratulations on the results and thank you for taking my question. My first question is around optics. The press release mentioned that your wafer level lens solution is much more combined with the customers and you're accelerating in capacity expansion. Is it possible to tell us a little bit more the types of projects you're working on for which end application, how big of a scale capacity and revenue contribution we should see next year? So, our strategy remains the focus is the hybrid lens and the foundation of the hybrid lens is obviously our WLG capability. As we have said previous investor meeting when we talk about interim results, we are preparing for a $3,000,000 to $5,000,000 per month capacity for WLG, whereby we believe our initial thinking that for the whole year next year in terms of shipment for hybrid lens, it will be up to maybe 10,000,000 shipment. And we've indicated the ASP unchanged from the indication we had last time, US2 dollars So those have our main optic strategy. Just to clarify, it's the $5,000,000 to $10,000,000 it's per month or it's the full year? And my second my follow-up is that if the end application will be strictly for smartphone and if it's like if it's for camera taking pictures or if it's for 3 d camera? So, when we mentioned a range of $5,000,000 to $10,000,000 we're talking about per month's production capacity, but clearly, we are targeting by year end next year, this capacity will be turning into shipment capacity on a monthly basis. And you've asked about the application, I think it's very clear, the 2 types what we call 3 d sensing and the other one is imaging, because clearly with this hybrid lens design, the comparative specs are very suitable for both applications. For example, in imaging, the aperture and the issues of what we call structured light control is much more obvious. Hence, we think the hybrid lens will find its way into these two applications. Thank you. And my second question is on RF mechanical. I'm wondering how we are doing in terms of fulfilling our 30,000,000 shipment target this year. How is the progress of 3 d blast mass production? Because I remember we're supposed to start mass production this month or last month. And what are the product trends ASP of the metal frame and glass we are going to produce and the sales volume expectation for next year? We as we have said this year, there is a beginning alternative of putting glass on the front end of back cover that would kind of change the design from a complete metal casing to a metallic frame. And we believe also this year, we have achieved what we set out to do instead of in the beginning phase whereby 1 to 2 only customers. We are now firmly penetrated and we are completing projects for most Android major brands, whereby these projects are what we call they are the mid to high end. And during these projects, obviously, the ASP is better and it also gives kind of what we call reliability in terms of commitment or volume from the customer side and looking generally with these features, what we are seeing is our mechanical business is much more stable and has much improved from where we were in the beginning when we started. But clearly, we are also quite positive that our differentiating competitive advantage to other industry players is what we call free automation and digitalization. We like to be able to apply our already proven capability in design and arranging automation lines, but also the use of more and more digital data in terms of improving the process, improving the outcome of our efficiency of the production. That would be an important core advantage, strength and capability when we compare to our other industry players. And in terms of capacity, we plan to be able to a range of 3 $1,000,000 to $4,000,000 monthly capacity. With that capacity, we believe we would see an uptrend in the existing gross margins. But we do understand that the gross margins that this business segment would be able to give may not reach our average corporate gross margins because the structure of this industry. But nevertheless, it will be a lot kind of a mirror to our average gross margins. You mentioned about 3 d CoverGuard. By the end of this month, November, we already will be completed on the preparation of 1,000,000 pieces per month. We have also have planned by quarter 1 or around April, May time, we would be able to increase that by another $1,000,000 to $1,500,000 giving us a total capacity of around 2,000,000,000 to 2,500,000,000 per month. And that increase and that kind of volume, we should be able to meet what we call Android customers' demand for the 3 d cupboard glass. And my final follow-up will be on the ASP, if you can comment the ASP you'll be charging for the 3 d glass and the relative frame if it's going to stay at around $15 to $20? Thank you. I think the pricing definitely like all our when we commence our new platform or new product solutions offering, what we aim to do is to create a differential whereby our capability or our design, our production process reflects both perhaps the technology payment. But then again, as we have said, through our efficiency in automation, management, etcetera, we would like to bring that to a very competitive pricing for the trend to be firmly established in the industry. So I would say the ASP we get, first of all, we will be depending upon individual customer specification. But then again, I think there's a lot of technology premium that we will reflect the willingness of our customer to accept such a pricing, but clearly, we would be doing our best to deliver the gross margins we are after, but a realistic pricing for this trend to be penetrated in our customer. Ben just mentioned that he reckons that at this moment, we believe a range of $15 to $20 is reasonable from even from the customer's perspective. Thank you. Thank you. The next question comes from the line of Arthur Hees from UBS. Please ask your question. As we have discussed and I think there is lots of of study, which has stayed quite clearly on the design and the structure and the fact of hybrid lens involving wafer level glass lens in terms of not only 3 d sensing, I think the subject of a tolerance of higher thermal temperature, giving capability of giving more details on clarity, a larger potential of larger aperture and better reflected indexes performance. I think those are have been covered and been talked about. But more importantly, I think why such a design of hybrid land involving a grassland has not been kind of has not turned out in the market yet. I think we believe that the technique of creating a guard lens was very much dependent on molding technique whereby mass production was not possible and costing have been relatively unrealistic and unaffordable. But through our kind of capability that we've been developing, we are preparing, as I said, just now a 3 to 5 month capacity on a per month basis. We believe what is important is that from that a very accessible kind of mass production preparation or platform will be a beginning whereby it will meet existing what we call market demand. And this demand is not only a transient trend, we believe such optics capability is a must for the applications to be evolved to take place in future devices. But what we like to bring out and talk about is that our strategy and the directions that we have been developing this kind of capability. We are not just meeting selected customers' demand on a transient or short term trend. We are not a product company as such. We do not kind of invest it just because we saw projects that customer require. We believe the capability that we have long invested and through our hard work and R and D and continuous improvement, amending our direction, etcetera, we have found a genuine, a stable, long term evolving technology capability platform, whereby this is an important technology capability enabling our customers in the application. And this has always been our philosophy and method of approaching such a development of a new technology capability, we are very, very cautious if these capabilities do not enable us to give long term, stable, important innovative capability. So, we like to reiterate that AAT has always been insisting on this direction. When we mentioned that we are already reaching a capacity of 10,000,000, we are in a way referring to our capability of delivering what we call a structure comprising of 5P. We believe the 90% of our capacity are 5P, very small percentages are related to 6P or 4P as such. So, 5P is what our major core portion of our 10,000,000 set. When we look at when we also talk about the 5,000,000 hybrid, we are talking about clearly, we are putting one glass lens in between, whereby the 5,000,000 hybrid lens that kind of match took up some of the capacity within that 10,000,000. So all of it, it reflects our flexibility to capture the market needs in respective of our capacity. So we are not seeing a constraint as such. So, we are reiterating the stronger characteristics and features of plastic of glass lens when it's compared to glass lens. Clearly, glass lens has superior optical properties than what glass lens can offer. When we talk about a 3 d sensing design, clearly, the tolerance to a thermal temperature is very desirable. And when we look at the design of a front facing camera, the form factor of a optimal form factor can be derived from a hybrid lens design. And when we talk about potential qualities adopted by a major back lens, the flare control and a larger aperture, etcetera, is clearly again a very, very desirable design that hybrid lens can offer. The advances of the plastic lens capacity, we mentioned that we are turning existing 10,000,000 per month capacity into a shipment capacity. And we soon we have already arranged and we will soon see the arrival of equipment that enables AAC to reach 20,000,000 pieces per month capacity. And clearly, we will put that into use very quickly. We believe by Q1, we should be in a position whereby we will be working hard to turn the production capacity 20,000,000 per month into a shipment volume capacity on a monthly basis. That going, we have very much strong confidence that would go according to our plan. By first half next year, we believe it's reasonable to assume that we will soon be working on the same pieces of turning production capacity of 30,000,000 into shipment capacity around before 1st half. So, that is the threshold we have our team working very hard on at the moment. Next year, I think we are seeing exciting opportunities in the 4th segments. We already kind of have very good penetration and firmly set out a very clear strategy how to take things further. Overall, we would like to say the work is not done yet. For Acoustics, for example, we are seeing already high adoption of speaker boxes even in our Android phones and that has spread to mid segment. But in addition to that, we are already seeing very strong demand for better stereo sound and motor growth specs even in not only high segment, but also mid segment both. We've also mentioned a new structure that I think last time we talked about we are very excited about it. I think our customers are also very excited about this new design whereby we believe the acoustic performance will be taken another leap up. I think last year we talked about in 2018, we estimated for this new design, we are saying 100,000,000 units may be shipped. We are now much more kind of positive that this could grow to 150,000,000 pieces. So that's what it says, the feedback, the very, very exciting kind of positive feedback from our customers, trying out our solutions, working with us and we believe those shipments could turn into those opportunities for us in the year 2018. And I think we've discussed a lot about the hybrid lens and our calculations for further increase and further penetration, not only in the traditional plastic lens, but also as we have said, we are accelerating our CapEx. We are ready for stronger kind of shipment in hybrid lens design, not only in 3 d sensing, but also in imaging as well. And I think in the previous question, Benjamin has also indicated and it's been proven that we are very much on track on our mechanical structure business involving our RF. We have achieved Phase 2. We have firmly penetrated into most of our Android, most of not only our most of the Android customers, whereby we are doing completing projects in mid and flagship. And we are well prepared for turning that metallic casing capability into metallic plane, interacting with different materials. With our solution preparations for 3 d cover glass. I think we've already indicated some timing for that 3 d cover glass to happen. So that leaves the last segment, hectic component. Again, I think there is still scope for not only the current kind of design to AAT to work on to get even better specifications, but we also believe that in the untapped segment, I think gradually this segment where it seems when we see the devices trend of larger displays or potential of better, sneakier design without touching, etcetera. And now very kind of already tested already tested the set of haptic vibrations in the design. We will definitely see more in the Android app as well. So those are the activities we are preparing and we are embracing and working hard to deliver. And I think to take this opportunity, we believe mid teens grow our top line, we will be able we are working very hard, our teams are working very hard. We like to think we'll be able to deliver a growth year on year top line, not less than 25% growth for 2018. And on that, we believe the CapEx for next year possibly similar to similar level to what we have what we will be incurring for the whole of 2017. And again, those will be roughly kind of divided into the various areas. But clearly, maybe on acoustic overall, we'll take a slightly more higher percentage of our CapEx allocation, but still there will be a meaningful amount in Acoustic CapEx investment. And with all that said, we believe overall, I think the next kind of what we call profitability, we believe the opportunity after all these CapEx investments and the gen and the change of our capability of showing up in the spec design, there's no reason, there's no external issue that it does not create opportunities for AEC to work to keep working hard to improve the already existed average gross margins as a base to further improve. So, next year 2018, now we're in November, we are ready for exciting year and our team are ready to work hard and we believe all our members from R and D, automation department, procurement, etcetera, we are all ready for an interesting and hopefully a rewarding year for our shareholders as well. Thank you. So shall we move to the next question? Excuse me. Shall we move Yes, please. Thank you, sir. The next question comes from the line of Sam Lee from Credit Suisse. Please ask your question. Thank you. My first question is about the combination of glass lens technology such as loading, shooting glass, WLG and WLO? Thank you. So, the major difference between WLG and WLO, we have came to understand because back in 2,000 around 2008, we invested in 2 different wafer level companies. I think 1, Kaleido, as you understand now, we've also invested in a WLO company called Hepsico, which I think you all will not disagree it has been it is a good investment for AAC as well. The technique that WLO, HEP, to 9 company is using compared to Kaleido, WLG is completely different. In terms of a simple simplified technique, what Hatchagon is doing is to depositing a epoxy on a mask, whereby this will form the lens that the petrochemical is creating. In Kaleido, we are using a 2 inches wafer glass, whereby we are using molding technique. These spherical lens states are being molded on both surfaces on the top and the bottom for the wafer level glass laser. So as you can tell, the process and the output are completely different. We cannot pretend we are expert or kind of experienced manufacturer that's been playing along with molding glass kind of using machines. Our limited understanding is that when we study quite some time ago that the process could only involve perhaps 1 at a time or maximum 2 at a time of a relatively long cycle time where our individual lenses are being molded when we look at these molding glass machines from the Japanese a while back. And on that, we see kind of issues related to the precision nature and the yield, etcetera, that there are we understand kind of mass production efficiencies related to this technique, whereby our WLG capability using this wafer process on a 30 to 4 on a 2 inches wafer, we believe we could achieve good 30 to 40 lenses depending on the design and the shape and the depth, etcetera, of the lens that we are manufacturing. But 30 to 40 is a reasonable achievable on a 2 inches wafer. On a 4 inches wafer, easily over 100 pieces of lenses can be generated, can be made. And you do our investment, we believe it has reached whereby if we create what we call the proper mass production machine, it's not difficult to have something like 4000 to 5000 outputs of these lenses from 1 machine. And this is the major kind of basis when we discuss about molding process and using wafer glass, wafer level production process, we believe the mass production had much more control. It had this kind of better result on yield and etcetera. But with that low age, we believe that wafer level glass should clearly, in terms of output on the mass production consideration, could easily be a more huge, a lot bigger than under the 1 at a time molding glass process. So that would also kind of give rise to the costing consideration as well. We believe the answer to whether the WLG can be a substitute for WLO in a transceiver? The answer is clearly yes, because WLG has a very high position product or output capable of delivering such a feature required in the length of the transceiver. In the WIO, as we discussed, putting 2 waivers and layers together would also involve complicated process of precise precision milling capability as well. So, we're talking about different kind of capability, but we believe in short of the LG is a viable alternative with huge potential for adoption in the transceiver. My second question is about haptic development in the Android market. Thank you. We are still very much confident that major customers in the Android system or in the Android app will see why the adoption for haptics because of its successful features, etcetera, these interesting applications. But we also are quite prepared that the ASP for a less complicated design that Android market will firstly adopt may not reach may not fetch as high as ASP as what we normally see. Management personally believes that in the segments of the mid and high tier of Android phones, ultimately 50, half of the models in the mid and high segment of Android Cam will be using haptics in their design. But the timing, we have estimated our own internal kind of thinking for the year 2018, a range of 30,000,000 to 50,000,000 pieces in the year 2018. The next question comes from the line of Ann Lee from Nomura. In our preparation for developing and cultivating capability in wafer level glass lens, our investments took back from almost 8 years already. Not only we have the necessary equipment. In our early days investing in Kaleido, it was more like a R and D lab. But as of today, we already have in the past cumulating via various stages, something like tank production equipment, which is closer to what we describe as mass production and monolvent. And because of that, when we talk about a 4 ks to 5 ks per day capability, we are not in testing. We are already very fine, supported by what we have known to be what we call operating mass production data. And in further preparation, in our preparation for developing, designing, the tooling required, we have done that in Europe and we can conclude it's well, let's say, successful and we are moving on to the 2nd phase to further our capacity and capability in the tuning. We are with the approval from the Board, we have made a decision that it will be in Asia, in Singapore, whereby the European management team will be in charge of filling out the tooling capability out here in Singapore. And as you would guess, the production efficiency, the production kind of process and outcome of plastic lens will impact the success reduction yield of the hybrid lens and also the success the performance of production performance of wafer level class will in fact impact the percent of hydro lens design as well. So we are talking about interlocking situation. At AAC, we have to have our own internal kind of above our target and objective to achieve new set and production process, thereby, we are complete confident and success production efficiency in the hybrid land. So, with that in mind, when we have come to design and made our assembly machine, we are not just restricting ourselves to look at a 4 piece structure design. We are already making plans for structure closer like a 6 piece or 7 piece design for us to evolve further ahead. This feeds into what we have described, our thinking of looking at our SME in developing, not to meet a project required by a couple of customers, etcetera, but we are genuinely cultivating a technology capability to capture an application driven by advancement in design and manufacturing technology. And this is consistent and this will be our existing and future philosophy in looking at developing AAC capability. Just now, we certainly we are working very hard and we are making preparations to deliver year on year sales for 20 18, less than 25% year on year growth. And at this moment, we believe monoclonalcrestic will still be a larger portion of the overall sales. But whereby, we are not commenting or splitting into various segments of the non acoustic. Sorry, I was asking CapEx. Yes, I'd like to come to that. But I believe you would like to know the outcome of CapEx as well. So, okay, on the constraint to CapEx, for this year, I think in quarter 4, we are going to invest to take advantage of some business opportunities, not only in quarter 4, but also in directions of R and D that will enable us to deliver what Benjamin was describing in the last 45 minutes. So our CapEx, when we talk about preparations for production capability or production capacity for this year, I think our total CapEx will be something like RMB800 1,000,000 more, RMB800 1,000,000 more than what we described last time, a total of RMB 5,300,000,000 for 2017, whereby the non acoustic will take up 40%, acoustic around 35%. And as you recall, usually, there's something like 20%, 25% in our CapEx budget every year. We describe them as infrastructure, factories, R and D tools, equipment, etcetera. So this is in line with our business kind of focus as well. So within the non acoustic, as you will get, optics will be the major element ticking more than the other 2 business segments. For 2018, we believe similar kind of allocation on a total, as I said, I think $30,000,000 ago, similar level of CapEx amount towards the actual amount for 2017. So, not much big increase compared to the total for 2017 we are preparing for the 2018 CapEx. Thank you. Ricky, please bring I forgot to talk about sales percentage, which, yes, I always said, sales percentage, this year guidance we have not changed for 2017, optics percentage of sales contribution, single digit, that hasn't changed. And I think next year, when you talk about when we talk about world year on year growth, I think optics may not be I think Benjamin already described our plans for long term sustainable penetration in optics. With that preparation in mind, I think next year clearly optics contribution in terms of absolute amount will grow, but I believe possibly still around single digit of our total revenue for 2018. Thank you. The next question comes from the line of David Dye from Bernstein. Please ask your question. So when we describe a structure of 6P or 7P, we clearly are actually referring to hybrid lens design whereby the 6P, we are not talking about 6 plastic pieces as such, we are referring to hybrid lens structures whereby possibly maybe 1 glass or 2 glass, whereby 1 glass with 5 plastic or 2 glass with 4 plastics, that kind of 1 plus 5 or 2 plus 4, 6 piece structure. With that in mind, we already we can confirm we already have a very strong portfolio of related IPs. I think we are preparing for, as we said before, hybrid LAN shipments, dollars 5,000,000 to 10,000,000, but we are referring to possibly a 6P structure. I think 7P will come after later stage. But having said that, I'd like to clarify that we may be doing some pure 6P plastic lens structure for 1 of our customer, whereby the IP involved are completely different and will not be a problem for AAC to get involved with such a production of a PO-sixty plastic lens lens set. Benjamin is saying at to get to the upper range 10,000,000 pieces in the second half next year. But what is more important is not to kind of work on too much on a definite answer to split where the product will go into 3 d sensing or the camera because we believe at the end of the day this trend of hybrid lens is a very important differentiating innovative user experience kind of up whereby 3 d sensing and also the camera will greatly appreciate to adopt. And for us, we believe the ASP in between the two purposes are not materially different. So, for me, I'm not we are not going to talk about a split between the two At this platform, I'm not going to talk too much about you and clearly not about caustic. But what I have said about based on our empirical work, the 4 inches wafer delivering 4 ks to 5 ks, we are talking about good finished usable units, not just or just any outcome of it. So, we are quite in a way quite mature in this process. 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 for today for the closing comments. No doubt, smartphone are continually fast with more interesting features and application. As a leading midstream technology solution provider, we care very much about user experience on your sense of audio, vision and touch. Our 4 major technology platforms are well prepared to capture upcoming market opportunities for future growth. Thank you all for joining us today. If you like further information, please feel free to contact our IR team. We look forward to speaking to you again in March 2018 for full year results of 2017. Thank you. Thank you for your participation. And this concludes today's conference. You may go ahead and disconnect. Thank you.