AAC Technologies' Big Comeback Already Priced Into Stock?

Surging smartphone sales helped to power the acoustic component supplier to turbocharged profit growth last year, but the stock failed to rally strongly on the news

Key Takeaways:

• AAC Technologies said it expects to report that its profit rose as much as 145% last year
• The acoustic component maker said car acoustics are expected to become a future growth driver

Talk about big noises falling on deaf ears.

On Feb. 13, acoustic component supplier AAC Technologies Holdings Inc. (2018.HK) made an announcement that should have been music to investor ears, saying after the market closed it would report that its profit more than doubled last year. The next day, which just happened to be Valentine's Day, brokerage UOB Kay Hian sharply raised its target price for the company to HK$48 from HK$38.10, while maintain its "hold" rating.

While the benchmark Hang Seng Composite Index logged an impressive 805-point Valentine's Day jump that day, AAC's shares attracted less love from investors, rising by a relatively modest 3% to close at exactly HK$48. The stock is up 45% over the last six months, amid a broader rally that has seen the Hang Seng Technology Index rise by an even bigger 70% over that time. But the muted response to the positive profit alert could show AAC's own rally may be running out of steam at around the HK$50 level.

Having made it to UOB Kay Hian's new target price, the new question for AAC now becomes whether there's room for any future upside, or if the stock may have peaked for now.

The $26-billion company

AAC Technologies once used its cutting-edge acoustic technology to win over major clients, including the likes of Apple. The company rode the smartphone boom for most of the 2010s to become a constituent stock of Hong Kong's Hang Seng Index, as its market capitalization peaked as high as HK$205.3 billion ($26.4 billion) in 2017.

But smartphone saturation and growing competition finally caught up with AAC, sending it into a downward spiral. Its shares lost more than 90% of their value, sending its market value to less than HK$13 billion at its low. Following several years at rock bottom, the company has finally begun to find its way past this darker period in its history.

According to its pre-Valentine's Day announcement, AAC expects to report a 2024 profit of between 1.7 billion yuan ($234 million) and 1.82 billion yuan, up 130% to 145% year-on-year. It attributed the rebound to a recovering global smartphone market and its own improved operations. It also completed its acquisition of Acoustics Solutions International B.V., a supplier of acoustic components and audio systems, during the year, providing a booster to its automotive business.

Big share gains

The big profit jump adds to previous signals that AAC's comeback isn't just a fluke. The company's profit actually grew by an even larger 257% year-on-year in the first half of 2024 to 537 million yuan. Calculations using the latest profit forecast show the company's profit was at least 1.16 billion yuan in the second half of the year, more than double the first-half profit, showing the business continued gaining momentum in the final six months of 2024.

In fact, AAC Technologies' share price has already risen strongly as its comeback gains steam, up 180% over the past year.

But is there further room for even greater gains? Let's explore that question further. After all, the company once had revenue as high as 21.1 billion yuan, and a net profit of 5.33 billion yuan at its peak in 2017. Thus, while the 2024 profit is up sharply from 2023, it's still a far cry from the company's historic highs.

Slowing smartphone market

A slowdown in the smartphone market could be a major spoiler for AAC's young comeback. Global smartphone shipments totaled 1.24 billion units last year, up 6.4% from 2023, according to data tracking firm IDC. But fourth-quarter shipments rose by a far smaller 2.4% year-on-year to 332 million units, and IDC expects the market to continue growing at a slower pace this year.

Fierce competition, which has led customers to pit their suppliers against each other in a quest for lower prices, has also made it nearly impossible for AAC to regain the high margins it once enjoyed. The company boasted a gross margin as high as 41.4% at its height back in 2017. But that figure has been nearly halved to just 21.5% in the first half of 2024. UOB Kay Hian forecasts the company's gross margin will stay at current levels for now, predicting figures of 23.1%, 23.7% and 24.5% from 2024 to 2026, respectively. So, a return to fat profits of earlier years looks unlikely anytime soon.

Outside acoustics, AAC has also been trying to get a toehold in the optical business. Revenue from its optical division grew 24.9% to 2.21 billion yuan in the first half of last year, accounting for nearly 20% of the company's total. But optical components have a far worse gross margin than acoustics, at just 4.7%, limiting the profit potential for that part of the business.

Overvalued?

Seeking to branch out beyond smartphones, AAC has been keen to expand its car acoustics business in recent years. It made a major move in that direction with last year's acquisition of Premium Sound Solutions (PSS), which was part of the previously mentioned Acoustics Solutions International B.V. deal. But its status as a relative latecomer to car acoustics will make it difficult for AAC to catch up with more veteran competitors like Sonavox and Harman, as well as Goertek (002241.SZ), which bought Dynaudio.

All this shows there's probably still some room for AAC to keep growing, though it's unlikely to return to its previous glory days anytime soon. After all, the era of breakneck growth in the early days of smartphones looks increasingly like a distant memory. The company's newer businesses certainly won't bring in big profits over the short-term, as it still needs time to build its credibility in those areas.

Accordingly, investors shouldn't be overly optimistic about the potential for more big gains for AAC's stock, especially after its recent run-up. The company's 2024 profit forecast gives it a sizable price-to-earnings (P/E) ratio of about 31 times. That's slightly head of the 28 times for Shenzhen-listed Luxshare (002475.SZ), even though Luxshare has a higher profit and market capitalization and Shenzhen-listed shares generally trade at higher multiples to their Hong Kong counterparts. Against that kind of backdrop, some may even begin to question whether AAC's stock may be overvalued after its yearlong rally.