Earnings Call: Q2 2016

Aug 26, 2016

Ladies and gentlemen, thank you for standing by and welcome to AUAC Technologies 2016 Interim 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 must advise you that this conference is being recorded today and lasts for around 60 minutes. I would now like to present opening remarks. We are happy to have Mr. Benjamin Payne, Chief Executive Officer Mr. Richard Mok, Managing Director and Ms. Connie Chin, Head of Investor Relations with us today. And now, I would like to turn the conference over to your moderator today, Ms. Connie Chin. Please proceed with your introduction. Good day, everyone, and welcome to AAC Technologies 2016 Interim Results Investor Webcast and Conference Call. This is Connie Chi speaking. Today, we have Mr. Benjamin Han, our CEO and Mr. Richard Mok, our Managing Director joining us on this call. In this quarter, we have achieved strong results with the highest record second quarter results and earnings in our history under the background of major smart mobile device players in transitional periods. Revenue and net profit amounted to RMB 3,090 1,000,000 and RMB736 1,000,000 respectively. The record setting performance was driven by the growth of dynamic components and RF mechanical sales to Chinese customers after the traditional slow first quarter. Non acoustic business grew over 70% sequentially and contributed 38% of total tax. Gross profit margin improved to 41.7% and net profit margin rose to 24.4%. For the first half of twenty sixteen, we attained revenue and net profits, reaching RMB55 64,000,000 and RMB 13.55 million, representing increases of 18% 9% year on year, respectively. Gross profit margin stayed firmly about 40%. Upgraded acoustic solutions drove dynamic component sales growth of 24% year on year to contribute 61% of total sales, while non acoustic achieved 23% year on year growth and contributed 33% of our sales. Net profit margin of 24.4 percent was achieved. The Board has declared payment of an interim dividend for the first half of twenty 16 of HK0.30. Looking ahead, we are encouraged by the solid order book and the sustained performance of the new auto mechanical business. We expect to grow further and capitalize on the market's accelerating demand for audio performance upgrade and increasing adoption of integrated RF mechanical solutions. We will continue to bolster our R and D and develop our technology platforms to capture greater market share for the non acoustic business, maintain our pioneering position in the acoustic market and achieve our goals of building a sustainable enterprise and helping our customers grow their business and remain competitive. Lastly, we are pleased that AAC Technologies has been selected as a constituent stock of the handset index effective on the 5th September 2019, which will place us among the blue chip companies in Hong Kong. We will further add that AAC Technologies has been a member of the Hanwhren Corporate Sustainability Index since 2014. Such achievements reaffirm market recognition of our significant position in the technology sector listed on the Hong Kong Stock Exchange. Before we move on our Q and A session, please note that some information that you may hear during our discussion today may contain forward looking statements. This information includes revenue, gross margin, operating expenses, other income and expenses, taxes, future products and capital allocation plans. Actual results or trends could materially differ from what you hear today. As always, we intend to update you with any new information of future events and developments at the appropriate time. We would just like to remind you that we have set aside around 60 minutes for this call. Now, we will start the Q and A session. Thank you, Connie. The question and answer session will be conducted electronically. As a reminder, each participant should limit the number of questions to 2 in each round. Your first question comes from the line of Saree Ma from CLSA Limited. Please ask your question. Hi, Benjamin, Richard and Connie. My first question is related to the RF mechanical business. Can you share with us the number of RF mechanical projects we have participated in the first half? If the improvement of the RF gross margin in the second quarter is sustainable into the second half? And in terms of strategy, if our customers grow larger and consolidates market share, what is the risk of these customer will hire internal antenna in 'nineteen and not require our integrated solution either next year or the year after? Hello. Can you hear me? Yes. Okay. RF mechanical projects that we have carried out in the first half amounted to 6 to 7 projects. And this year's RF Mechanical Projects business is a start of volume of scale, we believe and we will achieve better and better performance as we deliver more interesting projects to a wider portfolio of customers. And we believe in the second half RF mechanical business will continue to be a strong conformance in the so called non acoustic segment of our business. And regarding long term regarding long term roadmap of RF mechanical structures, I think the design element of the mechanical structures continue to portray AAC favorably as it is an integrated solution. But more than that, the speed, the quality and the design complexity of understanding individual customers' roadmap in antenna requirements and also mechanical structures design as they evolve into different materials. AAC will continue to participate an important contributor and will make interesting and rewarding penetration positions. So, 2016 is really a beginning year for AAC's portrait into this segment. Thank you. And my second question is related to the MEMS revenue. What is the reason behind the decline in MEMS revenue and gross margin? And do we expect a recovery in the second half? And to what extent the diversification of supplier will improve gross margin from the current level? MEMS business continue to be an important part of the overall solution that AAC can bring to customers' design and production of their models. But at this phase, I think we are seeing definitely more competitive landscape from more suppliers. And the backdrop of that customer specifications of mass microphones have not correspondingly risen very quickly. We AAC, as we have reported in the past, we are still developing our core control of the important element in the mass microphone business. Again, we recognize this is a scalable an economy of scale will be an important part of delivering profitable interesting margins on this business. I think the market share of AAC in this business globally will be maintained, but nevertheless it is of critical importance that AAC should develop our own core competency in the MEMS microphone before we will reach an important turning point of getting more market shares or delivering more interesting margins. Nevertheless, we believe we have a clear direction road path towards achieving that. Just a quick follow-up, how is the progress of developing the internal men's eye? We are again, I think as we have said, last year, the acquisition of WiSPY, which is also a MEMS kind of base design, our team of MEMS has gained more exposure into the different design elements of MEMS. Our team remains focused on the strategy and the direction we have assigned. It has taken some time, but we are continue working hard on it. And we believe possibly we will continue to modify the team if necessary in terms of design capability, but also in terms of preparation for volume production in order to deliver the economy of scale. Thank you. Your next question comes from the line of Ken Hui from Watai Securities. Please ask your question. Thank you for taking my question. My first question is related to some of your new products, which are not well discussed in the market. One is the molding glass cover, which is probably something that you mentioned about the difference material for your mechanical business and the other is handset lenses. Can you give us some updates on the latest status and what kind of revenue opportunities that we can expect for next year? That is my first question. The 3 d glass competency comes from our investment in a European company called Kaleido years ago. We are interested in folding out or developing 3 d design. We would not be very interested in the service covered glass nor the what we call the 2.5D glass. The design process and the control and various loading equipment for our product comes from the European company's team that over the years of specialized focus on this product. We believe AACs with the team of Kaleido in terms of the design and yield, it will be very interesting and it will deliver comparable superior characteristics than the current suppliers. It is with this proposition we will continue to spend resources and work on the 3 d Calf business segment. And handset lenses? We definitely have reached for the current month, for example, in August, we are delivering and have capacity of 5,000,000 The shipment for August for 5P structure for 8 mega and 10 mega, so 13 8 mega and 13 shipment in the month of August will exceed $2,000,000 Third capability comes from our investment in ISQL Japan some years ago back in 2009 around 2,009. And the capability of invested resources in developing tooling in this segment have enabled us to move forward. We believe by the end of this year, we will continue with upgrading the 5P structure and build on capability of extending to something 8, like 8,000,000 to 10,000,000 volume per month. And we are working on discussion with customers on individual projects. We are very positive and optimistic of the current development. Thank you for that. And my second question is related to your gross margin for the RF, Mechanical and Heptics. So if we just look at this segment, the gross margin was done both year on year as well as half on half. I guess is because of the increasing contribution from the RF mechanical business. If it is the case and if you continue to grow this part of the business, is it going to cause gross margin pressure on your overall gross margin? This is my second question. Thank you. The overall average margins that we are delivering on our mechanical is comparable to our average corporate margins. But individual projects of each customers will vary a little bit. The core RF design is the rationale that we've been successful in penetrating RF mechanical structure business. The design element is the winning solution that we deliver to customers. And overall, the gross margins of this RF mechanical business in a way can be referred to competitive advantage that we could deliver. And in some aspects, it's similar to the overall characteristics of Acoustic Business. In RF Mechanical Structures, I think we emphasize on the performances in area of yield and in terms of how automation can bring efficiency in the projects. The better performance than the average industry performance will enable AAC to deliver a continuous sustainable edge over our competitors and in delivering what we call average corporate margins of AAC. But in some way, it's also different to the current status of AAC Acoustic Business. After all, AAC Acoustic Business has been a leader and has established ourselves in terms of many different capability to bring about differentiation performance in acoustics. I think it will take some time for RF Mechanical to be performing or delivering the differentiation. But nevertheless, the performance on new and efficiency, we believe we could maintain. And with that maintenance, we definitely would be seeing RF mechanical business to deliver what we call again the corporate margin of AAC. Thank you very much. Your next question comes from the line of Mr. Song Lee of Credit Suisse. Please ask your question. My first question is about the acoustic upgrade trend in China smartphone market. How sustainable would it be? And what kind of new designs we are seeing in the next 2 years? Thank you. The The acoustic upgrades that we have seen in the PRC market, I think when you refer to the Android Eco the Android phones, I think we are referring mostly or describing as a PRC group of customers, because the Android phones are also found in the Korean brands such as Samsung and LG. But other than that, mostly we're talking about PRC customers. We believe we strongly believe that the acoustic upgrades will continue, most likely as we have seen a double digit percent rise in acoustic business of AAC. Clearly, the speaker box adoption rate has gone up is one of the factor. I think our internal estimates come up with something like 70%, seven-zero percent adoption across smartphones. Even what we have seen is also happening in the lower end of the segment of smartphones. For example, in a RMB700 phone, I think previously, I think last couple of years, it is hard to imagine the speaker box will appear be a part of the important specs design in these low end phones, but it has happened already this year. We believe not only speaker box, but also in terms of providing a stronger performance, acoustic performance for speaker standalone component, I think the acoustic performance has kind of reached a higher level and it has stabilized becoming a what we call maybe an industry standard such a stabilization of use adoption of higher specs of speaker as well, which is also part of the overall rise in acoustic business. In the longer trend, I think we think the smart devices, it would not be impossible to see what we call Hi Fi capability in the acoustic of smart devices because there are potential better design and use of newer and stronger materials in coming up with a strong possibility that these miniaturization of acoustic solutions could deliver hi fi sound. But in the current stages before we get to the hi fi sound, we have already seen customers recognizing that stronger acoustic design such as waterproof capability or stereo sound capability are already of very strong interest by the group of Android customers. We think in this current stage before we see Hi Fi sound becoming a common feature of acoustic performance in smart devices, most likely the functionality of stereo capability will not only be in a high segment, but rather spreading across segments. And that is a irreversible trend that Android customer and that is a continued base for stronger AAC Acoustic business. Thank you. To the home antenna. My second question is about the 3 d glasses application. We want to ask for a little bit more color on the AAC's competency on this in this market and the long term outlook for the business? Thank you. Competitive advantage in terms of approach of developing AAC3dglass business when we talk about the capability of molding comes which comes from the European company we invest, what we are referring here is we're talking about the essential elements of forming what we call the base for molding. It involves not only the process, not only involves the specific fixtures that and the production equipment that we use in the process, which overall from what we call the wafer glass molding expertise that our European company has developed. Furthermore, we specialize in using a stronger stepper what we call as kind of like a stronger steel mode. We believe using such specialized material mode help us to approach and deliver what we call more precise and more interesting shapes of the final objects. And in achieving such high precision and different shapes, we are possibly could come out with an improvement in the solutions that we can offer, not only design. But during this approach for molding, we believe the yield that AAC could deliver should be very interesting because it takes it kind of eliminates the post molding kind of a grinding process, which makes the molding process quite efficient. But clearly, as we have indicated when we come up with automation in Acoustics, the same approach we have taken towards pretty good. Most of the equipment is manufactured, not only in kind of design, but manufactured by AAC internally. And in addition to equipment, what we call the standard fixtures are also part of the core internal competency approaching the automation production for these 3 d glasses. Similarly, we have described the assembly of lenses, which includes tooling. That is also something that AEC through acoustic automation and our lenses preparation, we have developed our own approach on manufacturing the tooling equipment required for the process. And I think in short, I think such internal capabilities and approach and our focus on the molding mute would help us generate differentiation between our competitors and ourselves in approaching this solution. And that is the proposition that we are bringing to our customers. The development of smart devices continue to not only include smart mobile phones, smartphones, but also as the trends as different consumer devices such as more intelligent variables, VRAR type of devices have called for potential difference in the final mechanical structures involving not only the current what we call metallic material structures, but also potential mixed and inclusion of 3 d comfort glasses with different materials such as ceramics or even titanium, potential to discuss topics or design preferences. The challenge here for AAC to multiply or to incorporate our antenna design capability with offerings of wireless charger or NFC in potential environment of 5 gs gives all this capability a very interesting solution for different customers in this market. Clearly, the price of a solution could offer opportunities to deliver interesting margins. But what's more important and defines AAC kind of business directives is not only as we have seen in Acoustic, not only see AAC being the leader, but in fact in a way control an industry standard and to some extent getting to putting ourselves in a position to promote a more wider development of usage of such design and capability to spread to other customers to develop the next kind of characteristics of this technology. So the importance is not what usually is found in the industry. As a penetration, the entry pricing point could give short term interesting financial performance. But what AAC is more interested is through a study and full understanding of the technology trend affecting designs and usage of different technology solutions, how we could in that process continue to deliver improvement in use and efficiency and study the technology trends to make sure that this technology trend is a sustainable platform and whereby when AAC has improved the performance on new and efficiency, AAC could firmly proficient us as the leader and also the control and the promoter of an interesting design and miniaturization solution. And that is in a way the consistency and the core business model of AAC in delivering an interesting new innovation, design and technology. Great, great. That's very helpful. Thank you. Your next question comes from the line of Mr. Dennis Chen of Citigroup Taipei. Please ask your question. Hello, Benjamin, Richard, So my question is that can we quickly update our CNC machine CapEx plan? How many machine we'll buy this year? And the second question is that if we compare RF mechanical solution versus client sourcing from antenna and metal casing separately, how much time to market advantage do we have if client use the Art Mechanical solution? Thank you. CNC machines, I think we have discussed that the arrangements of availability of CNC for usage by AAC comes from our own purchase of owning the machines and also leveraging on suppliers giving us access to machines. I think we have a plan that by year end, we should reach in terms of these two numbers. I think AAT is only machines. I think by year end, we should possibly around 3,000. And in terms of the access to third party supplier, maybe around 3,000 3,500. So by year end, we're not saying that we have this at this moment, but by year end, we should have availability of something like 6000 to 6,500 machines of CNC machines. And we believe by the year end, we should have proved and widened our customer portfolio when we compare to the beginning of our onslaught of this business segment. And in terms of next year's current the current thinking on 20 seventeen's machines number, we believe may not be a big jump, but maybe we are talking about the range of 6,500 to 7,000 machines. But we are very interested that on achieving a widened customer portfolio, could see AAC working and delivering solutions in what we call major projects. And by that, I think we estimated on an annual basis 60,000,000 pieces is our kind of target of achieved pieces, completed pieces. But clearly, I think you mentioned about the advantages or the approach when customers could go for a non integrated solution. Clearly, I think we have seen AAC's successful penetration and proven established capability for those customers who have less resources in the RF segment. For example, in China, ODMs, we are very strongly represented in Xiaomi and also Leci, whereby AAC definitely are assisting our customers to a large extent on filling in a major design requirement. But on other customers, there are customers who have their own RF design and who have capability of coming up with what they like to achieve in their new models. But what AAC has been or is already offering the integration of the RF and the mechanical structures whereby we definitely are involved with these customers whereby we identify and define clearly and concisely about the link between the intended design and the mechanical structures. We're not saying that we are the only unique integrated solution, but what AAC has been and proven to continue to deliver value in this segment is the confined definition of the link, whereby it will be a strong proposition for customers to have that knowledge. Where we have the advantage over the proposition over by ordering an integrated identification of the bridge, clearly, we have seen pure what we call pure RF player, their market share has shown a decline. And it is of no surprise to hear pure RF player has widened their capability to expanding to mechanical structures capability And binderversa, meaning mechanical structures capability, suppliers are moving into acquiring or developing RF design space, which prove this proposition of offering an integration of the RF mechanical structures is of a sustainable important value that the customers appreciate and need to have. All right. Thank you. Thank you. Your next question comes from the line of Mr. Jeremy Song from UBS. Please ask your question. Hi, this is actually Arthur Xie from UBS. Thanks for taking my question. Given the upside in the CNC machine and also the idea to expand to the 3 d colored glass, Can we have an update about the CapEx for the year? And also considering more machines and also the progress with optical lens, how is the guidance for the year? That's my first question. Thank you. Early on, we have estimated and referred to an annual 2016 CapEx of RMB3 1,000,000,000. We have revised looking at the second half business opportunities and various projects. We are going to increase the CapEx to around maybe less than RMB4 1,000,000,000 roughly RMB3.9 billion CapEx. The incremental top up will mostly be spent on RF mechanical house factory, production space that we could house all this additional equipment. So yes, I think the current CapEx, we are talking about RMB 3,900,000,000 which is up a little bit from the previous figures of RMB 3,000,000,000. Thank you. So for the 3 d graph, do you have any target timing in terms of the mass production? And help me to understand your strategy because I think for the metal casing, we previously emphasized that the main purpose is to sell the solution to integrate the RF antennas. Like for the 3 d glass, is it going to be available on a standalone basis? Or it's going to be like separate that kind of a basis. So a similar question is that in terms of the metal casing with the capacity on hand, obviously, there could be still more demand. And I think previously we mentioned about potential to outsource and even license to others. So is that still a plan that is going to happen sometime this year? Or how is the latest? Your next question comes from the line of Wei Chen of Goldman Sachs. Please ask your question. Sorry, hold on. We haven't answered the question yet. Hold on. Sorry. I'm sorry, sir. I'm sorry. As we have said, the plan for RF mechanical capability is to reach a capacity of an annual capacity by year end of something like 50,000,000 to 60,000,000 pieces on an annual basis. What we need to achieve or what we could be privileged at that time is that we have gained a lot of access or understood our customers, a widened audience of our customers portfolio of RF design and the chemical structures that they are thinking ahead. With that assessment, we are definitely in a very good position to apply our core competency in designing what we could bring in terms of value in RF mechanical structures. When I think 3 d glass can be part of an interesting solution that customers are kind of considering with as we have said new materials like ceramics and or even titanium, how these different materials can interact with RF design capability. We are definitely be keen to innovate and learn more how we could apply these such understanding design and production on a mass volume basis because our current plan for 3 d graph, I think by the end of this year, we are talking about a monthly capacity of 500,000 and maybe possibly after that it will grow to maybe early part or middle part of next year to around 3,000,000 pieces per month sorry, 2,000,000 per month. And the value proposition is that AAC could understand a lot about what we have suggested a composition of different materials interacting with RF design and the 3 d covered glass in a meaningful volume, prepared for different customers roadmap. That is our strategy and proposition. Thank you. Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Ms. Connie Chin for closing comments. Thank you. With the advance of IoTVR and ARD's new developments have opened up new opportunities for us and we are preparing ourselves to seize these opportunities. At AAC Technologies, we are constantly striving to offer an ever wider range of solutions that cater for different customers' requirements By bolstering our product expertise, introducing innovations to design and development and continuing to build our multi platform business model, we will be the company best positioned to help our customers succeed at a time when the global consumer electronics industry is rapidly evolving. We are confident that AAC Technologies will continue to deliver outstanding results and maintain a leading position in the global miniature technology's component solutions industry. To conclude, I wish to thank you for attending today's webcast and conference call and for your interest in AAC Technology. If you have any further inquiries, please feel free to contact our IR team. We look forward to speaking with you again to discuss the 2016 Q3 results tentatively scheduled in mid November 2016. Thank you. Thank you for your participation. And this concludes today's conference. You may go ahead and