The following is a sample equity research report, presented here for illustrative purposes only.
1. Company Overview: AAC Technologies is a leading global supplier of miniaturized technology components for smartphones, tablets, wearables, and laptop. By far, most components produced by AAC go into smartphones. AAC’s top customers include Apple, Huawei, Samsung, Xiaomi, Oppo/Vivo. As of H1 2018, top five customers made up 85% of AAC’s sales, while the top customer (Apple) alone constitute 45% of AAC Tech’s sales. AAC Tech has four business segments: dynamic components, haptic and precision components, MEMS components, other products. Dynamic components and haptic and precision components account for more than 90% of revenue. AAC’s main competitors are Goertek, Foster Electric, Merry and Knowles in the dynamic components and MEMS businesses. AAC competes against Hon Hai, Catcher, BYDE, Everwin, Tongda, Nidec, Alps, and Jinlong Machinery & Electronic haptic and precision business. AAC also competes against Himax, Sunny Optical in the optics business. AAC’s suppliers include related parties associated with the founding family such as Zhongbeitong.
2. Margin Analysis: AAC’s margins are generally higher than the majority of its peers. AAC’s margins are significantly higher than the average and median. AAC’s gross margins are close to the 75th percentile, while its EBITDA and operating margin are significantly higher than the 75th percentile. What is even more notable is AAC’s net margin, which is the highest among its peer group. There are only two possible reasons for this. AAC has some level of pricing power against its customers because AAC is one of the two/three potential suppliers to its customers, and is the largest in its main business segments. The other possible explanation is that AAC can keep its costs down much higher than its competitors, possibly as a result of economies of scale and operating leverage works in favor of AAC.
3. Operating Margin Analysis: We chose Goertek and Alps as direct comparisons because Goertek is the biggest competitor in the dynamic components space while Alps is a major competitor in the haptics and precision components space. From this analysis, we see that AAC is the least operating efficient from all metrics except metrics associated with returns. AAC has the highest day sales outstanding, highest capex outlay to sales, longest inventory turns, and lowest revenue per employee. This may suggest that the company is the least efficient ran, and is least capable of delivering investment returns. Surprisingly, AAC delivered the highest ROE and highest ROIC. The other two direct competitors delivered respectable returns, ranging from 15-20%. However, AAC delivered outstanding returns that may be too good to be true, especially from a ROIC perspective. Given that AAC has the highest/one of the highest margins among its peers, we attribute the high returns to its outstanding margin performance. Given the poor operating metrics, we highly doubt that AAC’s solid profit performance can be effectively translated into strong cash generation.
4. Technical Analysis
As we can see from the stock chart above, AAC’s stock started to crash on May 10, 2017 following Gotham City’s report. The stock reached a low of 81.25HKD on May 18, 2017 from 111.30HKD on May 10,2017 before the stock was halted on the same day on May 18,2017. The stock rebounded when it resumed trading on June 7, 2017, and continued its uptrend.
As we can see from this chart, the stock continued its uptrend following the restart of stock trading. The stock reached a high of 185 HKD on November 13, 2017, and has fallen back down to the 80s HKD region since then. This is in line with the slide of Chinese technology stocks trading in Hong Kong, and disappointing operating performance as profits and sales decreased. Sell side also cut its outlook for the stock.
- Gugnir and Partners
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