not vested
AAC Technologies: Apple Watch Glitch Can Be Solved, Bear Jefferies Ups To Hold By Shuli Ren
Shares of AAC Technologies (2018.Hong Kong) jumped 6.4% in Hong Kong today after Jefferies, a bear, upgraded this stock to Hold.
AAC was sold off last Wednesday after The Wall Street Journal reported that its [b]components were defective, which caused delays in the delivery of Apple Watch. [/b]Apple (AAPL) reportedly has dropped AAC as a supplier.
In Jefferies analyst Ken Hui and team’s view, this glitch can be fixed. But the AAC bear said getting the Apple business back will take some time:
We believe the reliability problem with the vibrators supplied by AAC can be solved. However, even after issue is fixed, AAC will see orders flow back only slowly.
First, we believe Apple will perform rigorous testing on the vibrators produced by AAC, which will take time.
Second, since Apple has already asked Nidec to double capacity to fill the shortfall, it will unlikely shift meaningful orders back to AAC without an expansion in total Watch volume.
In longer term, consistent with guidance by Nidec. AAC can hardly reclaim to be the majority vibrator supplier for Apple Watch and new iPhones, although we believe it prices 10%+ below Nidec.
In the long-term, AAC’s business model is challenged, because its gross margin is abnormally high and it relies too much on Apple:
First, we believe the Apple Watch issue is partly due to ex-COO departure, for which the market has been underestimating negative impact on production.
Second, as AAC is losing acoustics technology leadership, the strategy of offering platform solutions does not work for all customers, because in practice AAC is effectively trying to take away the job from acoustics engineers at customers, thus facing big obstacles.
Third, management insistence on earning 40%+ overall GM will continue to hinder penetrations into new products.
Fourth, with Apple accounting for close to 70% of rev in 4Q14, customer concentration risk has gotten higher.
Jefferies has a price target of 38 Hong Kong dollars, implying 12 times their 2015 estimate. AAC Technologies is trading at HK$42.65 today.
Source: Barron's Asia