China / Hong Kong Company Guide AAC Technologies Holdings Version 6 | Bloomberg: 2018 HK Equity | Reuters: 2018.HK Refer to important disclosures at the end of this report

DBS Group Research . Equity 25 Mar 2020

BUY Optics brightened by 7P/hybrid lenses Last Traded Price ( 25 Mar 2020):HK$40.20(HSI : 23,527) Reiterate BUY with lower TP of HK$70. We have a BUY call on AAC Price Target 12-mth:HK$70.00 (74.1% upside) (Prev HK$100.00) Analyst Technologies (AAC) with a lower TP of HK$70. Incorporating lower Susanna Chui, CFA+852 36684194, [email protected] revenue and margins amid the COVID-19 outbreak, we accordingly Tsz - Wang TAM, , CFA +852 36684195, [email protected] revised our net profit down by 32-33% for FY20-21F. We expect What’s New net profit growth to moderate to 10% in FY20F, but rebound to • 4Q19 results missed expectations on lower 54% in FY21F, led by growing optics revenue CAGR of 112% margins due to price cuts in acoustics and during FY19-21F, with gross profit margin to improve from 3% in FY19 to 40% in FY21, on increasing scale and product mix. haptics, without major iPhone upgrade in 2H19 • Strong optics performance in FY20F with mass Where we differ: Strong optics performance in FY20F with mass production of 7P and hybrid lens sets which production of 7P and hybrid lens sets which came earlier than came earlier than market expectations market expectations. We expect other product revenue to continue • Android’s fast specification upgrades to to grow strongly at 131% in FY20F and account for 13% of FY20F mitigate slow iPhone’s upgrades for acoustics revenue, with gross profit margin to improve from 3% in FY19 to and haptics in FY20F 20% in FY20F, on increasing scale and product mix. After commencing 6P lens set shipments in 4Q19, the company expects • Reiterate BUY with lower TP of HK$70, due to to start hybrid/7P lens set shipments by 2Q20/3Q20. AAC is just lower earnings forecasts and target multiple one year behind ’s commencement in 2H18 for 7P lens sets, versus two years behind Sunny Optical’s commencement Price Relative in 2H17 for 6P lens sets. This indicates that AAC is narrowing the technology gap at faster pace in high-end products with leading players.

Other critical factors: Android’s fast specification upgrades to mitigate slow iPhone upgrades for acoustics and haptics. We

Forecasts and Valuation estimate AAC’s revenue contribution from Android to increase FY Dec (RMBm) 2018A 2019A 2020F 2021F from 41% in FY18 to 57% in FY19F. We expect Android upgrades Turnover 18,131 17,884 20,600 26,731 of: (1) acoustics (super linear structure [SLS]), and (2) haptics (edge EBITDA 6,278 4,863 5,400 7,258 haptics), to compensate slow iPhone upgrades in acoustics and Pre-tax Profit 4,310 2,552 2,811 4,324 Net Profit 3,796 2,222 2,447 3,765 haptics. Net Pft (Pre Ex) (core profit) 3,796 2,222 2,447 3,765 Net Profit Gth (Pre-ex) (%) (28.7) (41.5) 10.1 53.9 Valuation: EPS (RMB) 3.11 1.84 2.02 3.11 EPS (HK$) 3.41 2.02 2.22 3.42 Our TP of HK$70 is based on 24x FY21F PE (historical average), EPS Gth (%) (28.5) (40.9) 10.1 53.9 versus 30x previously, for a more moderate outlook. Diluted EPS (HK$) 3.41 2.02 2.22 3.42 DPS (HK$) 1.37 0.40 0.44 0.67 BV Per Share (HK$) 17.02 17.58 19.32 21.83 Key Risks to Our View: PE (X) 11.8 19.9 18.1 11.8 Failure to tap into hybrid lens sets with its WLG technology. P/Cash Flow (X) 7.0 10.4 10.0 8.3 P/Free CF (X) 16.2 56.2 46.3 33.7 EV/EBITDA (X) 7.4 9.7 8.7 6.4 At A Glance Net Div Yield (%) 3.4 1.0 1.1 1.7 Issued Capital (m shrs) 1,208 P/Book Value (X) 2.4 2.3 2.1 1.8 Mkt Cap (HK$m/US$m) 48,562 / 6,264 Net Debt/Equity (X) 0.1 0.1 0.1 0.1 Major Shareholders (%) ROAE(%) 20.8 11.6 12.0 16.6 Wu (Chunyuan Ingrid) 21.7 Earnings Rev (%): (33) (32) Pan (Zhengmin Benjamin) 19.2 Consensus EPS (RMB) 2.55 3.02 GIC Private Limited 6.0 Other Broker Recs: B:17 S:6 H:13 Free Float (%) 53.0 Source of all data on this page: Company, DBS Bank (Hong Kong) Limited 3m Avg. Daily Val. (US$m) 87.19 (“DBS HK”), Thomson Reuters GICS Industry: Information Tech. / Technology Hardware & Equipmen

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Company Guide

AAC Technologies Holdings

WHAT’S NEW AAC is narrowing the technology gap at faster pace in high- 4Q19 results missed expectations on lower margins. Revenue end products with leading players. increased 10% y-o-y to Rmb5,305m, in line with market expectations. Gross profit margin (GPM) declined from Android’s fast specification upgrades to mitigate slow 29.6% in 3Q19 to 29.0% in 4Q19, lower than market iPhone’s upgrades for acoustics and haptics in FY20F. expectations’ 31.9%. Net profit decline 28% y-o-y to Dynamics component revenue (i.e. acoustics)/Electromagnetic Rmb757m, below market expectations of Rmb905m. We drives and precision components segment (i.e. haptics & RF believe the miss was attributed to price cuts in acoustics and mechanical) increased 19% y-o-y to Rmb2,240m/decreased haptics for Apple’s (AAPL US) new iPhone in 2H19 that lacked 7% y-o-y to Rmb2,498m in 4Q19. We estimate revenue major upgrades. contribution from Android to increase from 41% in FY18 to 57% in FY19. Android upgrades of: (1) acoustics (super linear Strong optics performance in FY20F with mass production of structure [SLS]), and (2) haptics (edge haptics), have been 7P and hybrid lens sets which came earlier than market compensating slow iPhone upgrades in acoustics and haptics, expectations. Optics & others increased 478% y-o-y to as well as slower global smartphone shipments, amid the Rmb307m in 4Q19. This was driven by the ramp-up of lens COVID-19 pandemic. We expect AAC’s acoustics/haptics & RF set shipments from 30m/month in 3Q19 to 45m/month in mechanical revenue to increase by 12%/3% in FY20F. Our 4Q19. AAC already started to ship 6P lens sets to forecasts have assumed global smartphone shipments to (1810 HK) in 4Q19. Segmental gross profit margin (GPM) decline 9% in FY20F (-25% in 1H20 and +5% in 2H20). improved from 3% in 3Q19 to 10% in 4Q19, on increasing scale and product mix. Reiterate BUY; TP adjusted from HK$100 to HK$70. We incorporated lower revenue and margins amid COVID-19 In FY20F, we expect other product revenue to continue to outbreak. We accordingly revised our net profit down by 32- grow strongly at 131% and account for 13% of FY20F 33% for FY20-21F. We expect net profit growth to moderate revenue, with gross profit margin to improve from 3% in to 10% in FY20F, but rebound to 54% in FY21F, led by FY19 to 20% in FY20F, on increasing scale and product mix. growing optics revenue CAGR of 112% during FY19-21F, (1) We expect shipments to grow 82% in FY20F, thanks to with gross profit margin improvement from 3% in FY19 to continual global market share gains from 8% in FY19 to 13% 40% in FY21F, with increasing scale and product mix. in FY20F. AAC expects shipments to exceed 100m/month by July 2020. Though the target is delayed from “by March/April We reiterate our BUY rating on AAC with TP cut from 2020” to “by July 2020” amid the COVID-19 outbreak, HK$100 to HK$70, now based on 22x FY21F PE (which is the 100m/month by July 2020 is still double the figure of historical average, vs. 30x or 1SD above the historical average 45m/month by 4Q19. (2) We expect ASP to grow 27% to in that derived our previous TP of HK$100), for a moderate FY20F, thanks to shipment contribution of 6P/7P sets from nil global smartphone outlook. We use FY21F earnings as our in FY19 to 27% in FY20F. After commencing 6P lens set primary valuation base, as AAC’s earnings should normalise in shipments in 4Q19, the company expects to start hybrid/7P FY21F following the distortions to FY20F earnings caused by lens set shipments by 2Q20/3Q20. AAC is just one year the COVID-19 outbreak. We believe AAC’s share price, which behind Sunny Optical’s (2382 HK) commencement in 2H18 has retreated c.40% after the lunar new year holiday, should for 7P lens sets, versus two years behind Sunny Optical’s have largely factored in earnings impact caused by the commencement in 2H17 for 6P lens sets. This indicates that COVID-19 outbreak.

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Company Guide

AAC Technologies Holdings

Quarterly / Income Statement (RMBm) FY Dec 4Q2018 3Q2019 4Q2019 % chg yoy % chg qoq

Revenue 4,838 5,012 5,305 9.6 5.8 Cost of Goods Sold (2,994) (3,528) (3,765) 25.8 6.7 Gross Profit 1,844 1,483 1,539 (16.5) 3.8 Other Oper. (Exp)/Inc (709) (655) (738) 4.1 12.7 Operating Profit 1,135 829 801 (29.4) (3.3) Other Non Opg (Exp)/Inc 64.3 51.9 116 81.2 124.6 Associates & JV Inc 0.0 0.0 0.0 nm nm Net Interest (Exp)/Inc (57.5) (60.5) (73.4) (27.5) (21.3) Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm Pre-tax Profit 1,142 820 845 (26.0) 3.0 Tax (97.8) (125) (87.4) (10.6) (29.9) Minority Interest 0.0 0.0 0.0 nm nm Net Profit 1,044 695 757 (27.5) 8.9 Net profit bef Except. 1,044 695 757 (27.5) 8.9 EBITDA 0.0 0.0 0.0 nm nm Margins (%) Gross Margins 38.1 29.6 29.0 Opg Profit Margins 23.5 16.5 15.1 Net Profit Margins 21.6 13.9 14.3

Source: Company, DBS HK

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Company Guide

AAC Technologies Holdings

CRITICAL FACTORS TO WATCH Revenue contribution from Android (%) (1) Optics (6% of FY19F revenue): shipments and ASP (i) Shipments and (ii) ASP are key drivers of optics revenue which is expected to deliver a 112% CAGR during FY19-21F. (i) Shipments: The key determinants of this factor are: (a) Global smartphone shipments, (b) global tri/quad camera adoption rate, (c) AAC’s market share in lens sets. AAC’s optics shipments will be driven by specification upgrades to tri/quad cameras and continuous market share gains. (ii) ASP: The key determinant of this factor are: smartphone optics specification upgrades. AAC’s optics ASP will be driven by Acoustics ASP for Android smartphones (Rmb) improving product mix (i.e. 6P/7P and hybrid lens sets), with improving yield rate.

(2) Acoustics (46% of FY19F revenue): shipments and ASP (i) Shipments and (ii) ASP are key indicators of acoustics revenue, which is expected to deliver a 11% CAGR during FY19-21F. (i) Shipments. The key determinants of this factor are: (a) global smartphone shipments, and (b) AAC’s market share in acoustics are key indicators of acoustics shipments. AAC’s acoustics shipments will be driven by recovering global smartphone shipments riding on the 5G wave. (ii) ASP. The key Haptics ASP for Android smartphones (Rmb) determinant of this factor are: smartphone optics specification upgrades. We expect increasing penetration of high-ASP SLS by Android smartphones, to offset Apple’s acoustics lack of major upgrades in FY20F/21F.

(3) Haptics (23% of FY19 revenue): shipments and ASP (i) Shipments and (ii) ASP are key indicators of haptics revenue, which is expected to deliver a 1% CAGR during FY19-21F. (i) Shipments. The key determinants of this factor are: (a) global smartphone shipments, (b) haptics adoption rate, (c) AAC’s RF Mechanical ASP for Android smartphones (Rmb) market share in haptics. AAC’s haptics shipments will be driven by increasing adoption of edge haptics by ’s smartphones. (ii) ASP. The key determinant of this factor are: smartphone optics specification upgrades. We expect China’s smartphones to increasingly upgrade to edge haptics, while Apple’s haptics will not undergo major upgrades in FY20F/21F.

(4) RF Mechanical (22% of FY19 revenue): shipments and ASP (i) Shipments and (ii) ASP are key indicators of RF Mechanical revenue, which is expected to deliver a 29% CAGR during Optics ASP for Android smartphones (Rmb) FY19-21F. (i) Shipments. China’s smartphone vendors are AAC’s RF mechanical clients. Therefore, The key determinants of this factor are: (a) China’s smartphone shipments, (b) AAC’s market share in RF Mechanical. AAC’s RF mechanical shipments will be driven by increasing order allocation from Huawei. (ii) ASP. The key determinant of this factor are: smartphone optics specification upgrades. AAC’s RF mechanical ASP will be driven by “metal middle frames integrating with antenna” solutions, which would help ASP to increase by 10%. Source: Company, DBS HK

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Company Guide

AAC Technologies Holdings

Balance Sheet: Net debt position. AAC’s net capital expenditure was Leverage & Asset Turnover (x) Rmb1,471m in FY19, with Rmb2,215m operating cash inflows. As of December 2019, it had total debt of Rmb8,411m and cash and bank balance of Rmb5,523m. This translated into net debt of Rmb2,888m (Dec-18: Rmb1,792). Accordingly, net debt-to-equity ratio increased from 10% in Dec-18 to 15% in Dec-19.

Share Price Drivers: Adoption of 6P/7P and hybrid lens sets by smartphone vendors other than Xiaomi. According to channel checks, AAC started Capital Expenditure to ship 6P lens sets to Xiaomi in 4Q19 and will ship hybrid/7P lens sets in 2Q20/3Q20. The adoption of 6P/7P and hybrid lens sets by other smartphone vendors could provide further upside to our earnings estimates.

Key Risks: Slow upgrades in acoustics, haptics, and cameras. Smartphone makers may not migrate to SLS, edge haptics, and hybrid lens, due to late launch of meaningful applications and high costs. ROE Failure to tap into hybrid lens sets with its WLG technology. AAC has a competitive advantage in the hybrid lens set market versus plastic lens set market, with its proprietary wafer-level glass (WLG) technology which has higher scalability versus its peers’ (i.e. Largan [3008 TT] and Sunny [2382 HK]) moulding technology. Therefore, the adoption of AAC’s hybrid lens sets could provide upside potential to the company’s optics market share. Yet, according to our channel checks, there is yield rate hurdle in its module process, as handset camera module (HCM) suppliers have no experience Forward PE Band in its WLG technology-based hybrid lens. If AAC fails to overcome this by having its own HCM business in FY20F, it may negatively impact its potential optics market share.

Environmental, Social, Governance: As smartphone components have a short product cycle, suppliers’ ability to develop innovative products to meet customers’ changing demands is critical for sustainable growth. AAC has consistently reinvested significant resources (7-11% of revenue) in R&D to build broad sustainable technology roadmaps. PB Band

Company Background Established in 1993 and listed in 2005, AAC Technologies Holdings (AAC) is the world’s leading supplier of comprehensive smartphone components. The company has proven its ability to tap into new verticals, moving from Acoustics (i.e. speakers and receivers), MEMS microphones, Electromagnetic Drives & Precision Mechanics (i.e. haptics and RF mechanical), to Optics, which would account for 46%, 5%,

43%, and 6% of its FY19 revenue respectively. Benjamin Pan, Source: Company, DBS HK Chief Executive Officer, is the founder of the company.

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Company Guide

AAC Technologies Holdings

Key Assumptions FY Dec 2017A 2018A 2019A 2020F 2021F Revenue contribution 33.3 39.9 58.1 69.0 77.9 from Android (%) Acoustics ASP for Android 6.5 6.1 8.7 10.7 22.5 smartphones (Rmb) Haptics ASP for Android 0.0 7.2 10.8 14.4 18.0 smartphones (Rmb) RF Mechanical ASP for Android smartphones 162.0 145.8 131.2 144.3 158.8 (Rmb) Optics ASP for Android 3.6 3.6 3.5 4.4 5.5 smartphones (Rmb) Source: Company, DBS HK

Segmental Breakdown (RMB m)

FY Dec 2017A 2018A 2019A 2020F 2021F Revenues (RMB m) Acoustics 9,580 8,675 8,167 9,171 9,970 Electromagnetic Drives & 10,496 8,073 7,694 7,945 10,678 Precision Mechanics MEMS components 848 814 929 958 1,191 Optics & Others 196 569 1,094 2,525 4,891 Total 21,119 18,131 17,884 20,600 26,731 Gross profit (RMB m) Acoustics 3,908 3,228 2,536 2,799 2,991 Electromagnetic Drives & 4,578 3,275 2,280 2,118 2,661 Precision Mechanics MEMS components 190 217 256 276 357 Optics & Others 44 23 35 505 1,956 Total 8,720 6,743 5,107 5,698 7,966 Gross profit Margins (%) Acoustics 40.8 37.2 31.0 30.5 30.0 Electromagnetic Drives & 43.6 40.6 29.6 26.7 24.9 Precision Mechanics MEMS components 22.4 26.6 27.5 28.8 30.0 Optics & Others 22.3 4.0 3.2 20.0 40.0 Total 41.3 37.2 28.6 27.7 29.8 Source: Company, DBS HK

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Company Guide

AAC Technologies Holdings

Income Statement (RMB m) FY Dec 2017A 2018A 2019A 2020F 2021F Revenue 21,119 18,131 17,884 20,600 26,731 Cost of Goods Sold (12,399) (11,388) (12,777) (14,901) (18,765) Gross Profit 8,720 6,743 5,107 5,698 7,966 Other Opng (Exp)/Inc (3,945) (4,228) (4,698) (5,364) (6,576) Operating Profit 4,775 2,515 409 335 1,390 Other Non Opg (Exp)/Inc 1,393 2,013 2,391 2,713 3,168 Associates & JV Inc (7) 0 0 0 0 Net Interest (Exp)/Inc (165) (218) (248) (237) (233) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 5,996 4,310 2,552 2,811 4,324 Tax (671) (514) (330) (363) (559) Minority Interest (1) 0 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit 5,325 3,796 2,222 2,447 3,765 Net Profit before Except. 5,325 3,796 2,222 2,447 3,765 EBITDA 7,467 6,278 4,863 5,400 7,258 Growth Revenue Gth (%) 36.2 (14.1) (1.4) 15.2 29.8 EBITDA Gth (%) 31.9 (15.9) (22.5) 11.0 34.4 Opg Profit Gth (%) 34.5 (47.3) (83.7) (18.3) 315.4 Net Profit Gth (%) 32.3 (28.7) (41.5) 10.1 53.9 Margins & Ratio Gross Margins (%) 41.3 37.2 28.6 27.7 29.8 Opg Profit Margin (%) 22.6 13.9 2.3 1.6 5.2 Net Profit Margin (%) 25.2 20.9 12.4 11.9 14.1 ROAE (%) 33.5 20.8 11.6 12.0 16.6 ROA (%) 19.4 12.5 6.9 6.8 9.4 ROCE (%) 20.0 9.0 1.3 1.0 3.7 Div Payout Ratio (%) 40.7 40.1 19.6 19.6 19.6 Net Interest Cover (x) 29.0 11.5 1.6 1.4 6.0 Source: Company, DBS HK

Interim Income Statement (RMB m) FY Dec 2H2017 1H2018 2H2018 1H2019 2H2019

Revenue 12,474 8,424 9,707 7,568 10,316 Cost of Goods Sold (7,296) (5,330) (6,059) (5,483) (7,294) Gross Profit 5,179 3,095 3,648 2,084 3,023 Other Oper. (Exp)/Inc (1,535) (1,139) (1,339) (1,243) (1,393) Operating Profit 3,644 1,955 2,309 841 1,630 Other Non Opg (Exp)/Inc 11 144 120 161 168 Associates & JV Inc (3) 0 0 0 0 Net Interest (Exp)/Inc (97) (103) (115) (114) (134) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 3,555 1,997 2,314 888 1,665 Tax (357) (218) (296) (118) (212) Minority Interest 0 0 0 0 0 Net Profit 3,198 1,778 2,017 770 1,453 Net profit bef Except. 3,198 1,778 2,017 770 1,453

Growth Revenue Gth (%) 25.5 (2.5) (22.2) (10.2) 6.3 Opg Profit Gth (%) 19.9 (19.8) (36.6) (57.0) (29.4) Net Profit Gth (%) 19.7 (16.4) (36.9) (56.7) (28.0)

Margins Gross Margins (%) 41.5 36.7 37.6 27.5 29.3 Opg Profit Margins (%) 29.2 23.2 23.8 11.1 15.8 Net Profit Margins (%) 25.6 21.1 20.8 10.2 14.1 Source: Company, DBS HK

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Company Guide

AAC Technologies Holdings

Quarterly Income Statement (RMB m) FY Dec 4Q2018 1Q2019 2Q2019 3Q2019 4Q2019

Revenue 4,838 3,753 3,815 5,012 5,305 Cost of Goods Sold (2,994) (2,623) (2,860) (3,528) (3,765) Gross Profit 1,844 1,129 955 1,483 1,539 Other Oper. (Exp)/Inc (709) (642) (601) (655) (738) Operating Profit 1,135 488 354 829 801 Other Non Opg (Exp)/Inc 64 63 98 52 116 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (58) (56) (58) (60) (73) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,142 494 394 820 845 Tax (98) (62) (56) (125) (87) Minority Interest 0 0 0 0 0 Net Profit 1,044 432 338 695 757 Net profit bef Except. 1,044 432 338 695 757 EBITDA 0 0 0 0 0

Growth (QoQ) Revenue Gth (%) (0.6) (22.4) 1.6 31.4 5.8 EBITDA Gth (%) N/A N/A N/A N/A N/A Opg Profit Gth (%) (3.3) (57.0) (27.5) 134.3 (3.3) Net Profit Gth (%) 7.3 (58.6) (21.7) 105.8 8.9

Growth (YoY) Revenue Gth (%) (32.3) (19.1) 0.8 2.9 9.6 EBITDA Gth (%) N/A N/A N/A N/A N/A Opg Profit Gth (%) (46.7) (59.0) (53.8) (29.4) (29.4) Net Profit Gth (%) (43.0) (61.7) (48.2) (28.6) (27.5)

Margins Gross Margins (%) 38.1 30.1 25.0 29.6 29.0 Opg Profit Margins (%) 23.5 13.0 9.3 16.5 15.1 Net Profit Margins (%) 21.6 11.5 8.9 13.9 14.3 Source: Company, DBS HK

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Company Guide

AAC Technologies Holdings

Balance Sheet (RMB m) FY Dec 2017A 2018A 2019A 2020F 2021F

Net Fixed Assets 13,526 15,440 16,911 18,082 19,434 Invts in Associates & JVs 0 0 0 0 0 Other LT Assets 2,589 2,444 2,489 2,455 2,421 Cash & ST Invts 4,043 4,151 5,523 6,240 7,201 Inventory 3,398 3,319 3,664 4,273 5,381 Debtors 7,155 4,474 5,576 6,423 8,334 Other Current Assets 11 41 44 44 44 Total Assets 30,722 29,869 34,207 37,516 42,816

ST Debt 4,349 3,493 1,876 2,161 2,804 Creditors 6,369 4,548 5,474 6,384 8,040 Other Current Liab 379 276 361 546 742 LT Debt 1,941 2,428 6,535 6,535 6,535 Other LT Liabilities 133 190 600 607 646 Shareholder’s Equity 17,551 18,934 19,351 21,273 24,040 Minority Interests 0 0 10 10 10 Total Cap. & Liab. 30,722 29,869 34,207 37,516 42,816

Non-Cash Wkg. Capital 3,816 3,010 3,450 3,810 4,979 Net Cash/(Debt) (2,247) (1,769) (2,888) (2,457) (2,139) Debtors Turn (avg days) 115.0 117.1 102.6 106.3 100.8 Creditors Turn (avg days) 192.7 206.7 170.7 172.5 163.9 Inventory Turn (avg days) 99.1 127.2 119.0 115.4 109.7 Asset Turnover (x) 0.8 0.6 0.6 0.6 0.7 Current Ratio (x) 1.3 1.4 1.9 1.9 1.8 Quick Ratio (x) 1.0 1.0 1.4 1.4 1.3 Net Debt/Equity (X) 0.1 0.1 0.1 0.1 0.1 Net Debt/Equity ex MI (X) 0.1 0.1 0.1 0.1 0.1 Capex to Debt (%) 84.7 61.3 41.5 40.1 43.0 Z-Score (X) 5.0 6.2 5.7 5.0 5.0 Source: Company, DBS HK

Cash Flow Statement (RMB m) FY Dec 2017A 2018A 2019A 2020F 2021F

Pre-Tax Profit 5,996 4,310 2,552 2,811 4,324 Dep. & Amort. 1,306 1,750 2,062 2,353 2,700 Tax Paid (671) (514) (330) (363) (559) Assoc. & JV Inc/(loss) 7 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (779) 841 (7) (354) (1,130) Other Operating CF 0 0 0 0 0 Net Operating CF 5,859 6,386 4,277 4,446 5,336 Capital Exp.(net) (5,328) (3,627) (3,489) (3,489) (4,019) Other Invts.(net) (486) 346 (271) 0 0 Invts in Assoc. & JV 8 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (193) (237) 182 0 0 Net Investing CF (6,000) (3,519) (3,578) (3,489) (4,019) Div Paid (2,168) (1,523) (437) (481) (740) Chg in Gross Debt 2,197 (370) 2,491 285 643 Capital Issues (14,090) 0 (1) 0 0 Other Financing CF 14,269 (890) (1,358) (44) (259) Net Financing CF 208 (2,782) 695 (240) (356) Currency Adjustments 0 0 0 0 0 Chg in Cash 68 85 1,394 716 961 Opg CFPS (RMB) 5.42 4.54 3.54 3.97 5.34 Free CFPS (RMB) 0.43 2.26 0.65 0.79 1.09

Source: Company, DBS HK

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Company Guide

AAC Technologies Holdings

Target Price & Ratings History

S.No. Date Closing 12-mth Rating HK$ 77.0 Price T arget 7 Price 72.0 1: 25-Mar-19 HK$46.45 HK$66.00 Buy 67.0 2: 3-Apr-19 HK$48.25 HK$66.00 Buy 1 62.0 3: 26-Aug-19 HK$36.95 HK$45.00 Buy 57.0 5 4: 21-Oct-19 HK$45.75 HK$56.00 Buy 52.0 5: 8-Nov-19 HK$51.60 HK$56.00 Buy 3 6: 12-Nov-19 HK$48.80 HK$56.00 Buy 47.0 2 4 6 7: 17-Jan-20 HK$64.15 K$100.00 Buy 42.0 37.0

32.0

Jul-19

Jan-20

Jun-19

Oct-19

Feb-20

Apr-19

Sep-19

Dec-19

Dec-19

Nov-19

Mar-19

Mar-20 Aug-19 May-19

Source: DBS HK Analyst: Susanna Chui, CFA Tsz-Wang TAM, CFA

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Company Guide

AAC Technologies Holdings

DBS HK recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame)

*Share price appreciation + dividends

Completed Date: 25 Mar 2020 19:14:23 (HKT) Dissemination Date: 25 Mar 2020 19:33:06 (HKT) Sources for all charts and tables are DBS HK unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER

This report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS Vickers (Hong Kong) Limited (“DBSV HK”), and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS HK.

The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.

Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.

This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.

The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.

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Company Guide

AAC Technologies Holdings

ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.

COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have a proprietary position in AAC Technologies Holdings Inc (2018 HK) recommended in this report as of 23 Mar 2020.

2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. Compensation for investment banking services: DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from AAC Technologies Holdings Inc (2018 HK) as of 29 Feb 2020.

4. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for AAC Technologies Holdings Inc (2018 HK) in the past 12 months, as of 29 Feb 2020.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

5. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBS HK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.

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Company Guide

AAC Technologies Holdings

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Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

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Wong Ming Tek, Executive Director, ADBSR Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. United This report is produced by DBS HK which is regulated by the Hong Kong Monetary Authority

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In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608-610, 6th Floor, Gate International Precinct Building 5, PO Box 506538, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Financial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for Centre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

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Company Guide

AAC Technologies Holdings

United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Emirates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent. United States This report was prepared by DBS HK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

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Company Guide

AAC Technologies Holdings

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HONG KONG MALAYSIA SINGAPORE DBS Bank (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 13th Floor One Island East, 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 18 Westlands Road, Capital Square, Marina Bay Financial Centre Tower 3 Quarry Bay, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 3668 4181 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E

INDONESIA THAILAND PT DBS Vickers Sekuritas (Indonesia) DBS Vickers Securities (Thailand) Co Ltd Contact: Maynard Priajaya Arif Contact: Chanpen Sirithanarattanakul DBS Bank Tower 989 Siam Piwat Tower Building, Ciputra World 1, 32/F 9th, 14th-15th Floor Jl. Prof. Dr. Satrio Kav. 3-5 Rama 1 Road, Pathumwan, Jakarta 12940, Indonesia Bangkok Thailand 10330 Tel: 62 21 3003 4900 Tel. 66 2 857 7831 Fax: 6221 3003 4943 Fax: 66 2 658 1269 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand

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