Hong Kong, August 27, 2020 -- Moody's Investors Service has affirmed AAC Technologies Holdings Inc.'s
Baa1 issuer rating and senior unsecured rating.
At the same time, Moody's has revised the outlook on the ratings
to negative from stable.
"The negative outlook reflects the pressure on AAC Technologies'
profitability stemming from its competitive environment, as well
as the investment needs and execution risks associated with its diversification
into optical components, which will in turn keep its debt leverage
elevated," says Gerwin Ho, a Moody's Vice President
and Senior Credit Officer.
"At the same time, AAC Technologies' market position remains solid
as a leading miniature components manufacturer, with a long operating
history and track record of maintaining a strong capital structure and
solid liquidity, all of which underpin the ratings affirmation,"
adds Ho.
RATINGS RATIONALE
AAC Technologies' Baa1 issuer rating reflects the company's leading positions
in acoustics and haptics components, long operating history and
solid profitability and capital structure.
However, the Baa1 issuer rating is constrained by (1) fluctuations
in demand for its products, driven by end-products that change
with rapidly advancing technologies and product specifications; and
(2) end-market and customer concentration risk.
While AAC Technologies' revenue rose 4% to RMB7.8
billion in H1 2020 compared with the same period last year, its
adjusted EBITA margin fell to about 13.6% for the 12 months
to June 2020 from 15.9% and above 20% in 2019 and
2018 respectively. This decline was driven by pricing pressure,
an unfavorable product mix, coronavirus-related operational
disruptions and higher operating expenses, including from research
and development for its growing optics business.
In addition, its adjusted debt rose slightly to about RMB10 billion
at the end of June 2020 from RMB9.9 billion at the end of 2019,
while leverage rose to about 2.2x for the 12 months to June 2020
from 2.0x in 2019, as its weakened profitability weighed
on EBITDA.
Moody's expects that AAC Technologies' operating performance will remain
steady over the next 12-18 months, supported by a stabilization
in its acoustics and haptics businesses, and the ramping up of its
optics business.
Moody's expects AAC Technologies' revenue will rise by about 6%-8%
over the next 12-18 months compared with 2019, supported
by new product launches among the company's customers, rising market
share in the Android customer market and the growth of its optics business.
At the same time, Moody's expects the company's profitability,
as measured by EBITA margin, will drop to about 13.7%
over the next 12-18 months. This weakening reflects the
impact of greater competition, the company's ongoing investments
in research and development and higher contributions from lower-margin
businesses as it diversifies its revenue streams.
As a result, its adjusted debt/EBITDA will rise to about 2.0x-2.2x
over the next 12-18 months from 2.0x and 1.1x in
2019 and 2018 respectively, as the rise in debt level outpaces EBITDA
growth.
Such levels of profitability and leverage are weak for the company's Baa1
rating.
Moody's expects AAC Technologies' prudent financial management will mitigate
the challenges relating to its business diversification, product
upgrades and industry cycles. Such challenges are reflected in
its negative outlook.
In particular, the company's diversification into optical
components faces challenges in terms of improving production yield and
efficiency to raise profitability, expanding into higher specification
products and increasing its customer base.
In July 2020, AAC Technologies announced that it has agreed to receive
RMB1.15 billion in investment for its optical components subsidiary
from strategic investors, including a subsidiary of Chinese smartphone
provider Xiaomi Corporation (Baa2 stable), a customer of AAC Technologies,
in exchange for a 9.6% minority stake in the optical components
subsidiary. The investment will improve the company's credit
profile and demonstrates the fact that its customer is positive on the
prospects of its optics business.
AAC Technologies' liquidity is excellent. Moody's expects that
the company's cash holding of RMB5.1 billion as of 30 June 2020
and projected operating cash flow over the next 12 months will be sufficient
to cover its short-term debt of RMB2.6 billion including
lease liabilities, capital spending and dividend payments over the
same period.
The rating also takes into account the following environmental,
social and governance (ESG) considerations.
AAC Technologies' ownership is concentrated in its key shareholder,
Mr. Pan Benjamin Zhengmin, the CEO, and Wu Ingrid Chun
Yuan, who together held a 40.98% stake in the company
at the end of 2019. However, this risk is partially mitigated
by its status as a listed entity with transparent information disclosure,
and by the fact that the majority of its board consists of independent
directors. In addition, the company's management has also
demonstrated a track record of maintaining a prudent financial policy.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook could return to stable if the company (1) deleverages
whilst improving its profitability meaningfully; (2) retains its
market position in the acoustics and haptics markets; (3) improves
its free cash flow generation on a sustained basis; and (4) continues
its prudent financial management, with stable and low leverage and
strong liquidity.
Credit metrics indicative of an outlook change to stable include EBITA
margin reaching 15% or above and adjusted debt/EBITDA below 2.0x
on a sustained basis.
On the other hand, Moody's could downgrade the rating if (1) the
company's sales or market position weakens; (2) its EBITA margin
fails to improve to 15%; or (3) its credit profile deteriorates,
such that adjusted debt/EBITDA exceeds 2.0x or liquidity deteriorates.
The principal methodology used in these ratings was Manufacturing Methodology
published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Listed in Hong Kong in 2005, AAC Technologies Holdings Inc.
is a leading miniature components manufacturer with key products in the
acoustics, electromagnetic drives and precision mechanics,
MEMS (Micro-Electro-Mechanical Systems) microphone,
radio frequency (RF)/mechanical and optical components markets.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
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The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
