Hong Kong, May 17, 2022 -- Moody's Investors Service has affirmed AAC Technologies Holdings Inc.'s Baa2 issuer rating and senior unsecured rating.
At the same time, Moody's has revised the outlook to negative from stable.
"The negative outlook reflects the pressure on AAC Technologies' profitability resulting from its competitive environment, as well as the execution risks associated with its developing optical component business, 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 underline the rating affirmation," adds Ho.
RATINGS RATIONALE
AAC Technologies' Baa2 issuer rating reflects the company's leading positions in acoustics and haptics components, long operating history and solid capital structure.
However, the Baa2 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 14% to RMB4.9 billion in the first quarter of 2022 as compared with the same period last year, its gross margin fell to 19.5% during the first quarter of 2022 as compared with 24.7% in the full year of 2021. Revenue growth was driven by good customer demand in acoustics and haptics products and diversification of end markets, while margin contraction reflected pricing pressure, greater contribution from lower gross margin businesses and higher costs.
Moody's forecasts AAC Technologies' revenue will rise about 10%-12% over the next 12-18 months as compared with that in 2021, supported by diversification of end markets, revenue contribution from a newly acquired business, rising market share in the Android customer market and the growth of its optics business.
At the same time, Moody's projects the company's profitability, as measured by its EBITA margin, will contract to about 7%-8% over the next 12-18 months from 10.6% in 2021. This decline reflects pricing pressure resulting from competition and greater revenue contribution from lower gross margin businesses.
As a result, its adjusted debt/EBITDA will rise to about 2.8x-3.0x over the next 12-18 months from 2.7x in 2021, driven by a slight fall in EBITDA and a slight rise in debt. The company's adjusted debt as of the end of 2021 included RMB1.7 billion of a contingent settlement provision relating to a strategic equity investment in its optics business that resulted in a cash inflow of RMB1.7 billion.
Moody's expects AAC Technologies' prudent financial management will mitigate the challenges relating to competition, its business diversification, product upgrades and industry cycles. Such challenges are reflected in its negative outlook.
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.
AAC Technologies' optics business has raised a capital injection of RMB2.8 billion in 2020 in two rounds of investments from strategic investors. The strategic investors include a subsidiary of Chinese smartphone provider Xiaomi Corporation (Baa2 stable) and OPPO, which is also a smartphone provider in China. Both are customers of AAC Technologies, and they, along with other investors, have invested in AAC Technologies' optics business in exchange for an 18% minority stake in its optical components subsidiary.
The company is in the process of listing its optics business on a stock exchange in China. The proposed listing will provide an additional funding channel and allow the company to attract and retain talent for its optics business by improving its incentive structure.
AAC Technologies' liquidity is excellent. Moody's expects that the company's cash holding of RMB6.1 billion as of 31 December 2021 and projected operating cash flow over the next 12 months will be sufficient to cover its short-term debt of RMB2.9 billion, capital spending and dividend payments over the same period.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
ESG considerations have a moderately negative impact on AAC Technologies' ratings. The company's exposure to moderately negative environmental and social risks is in line with the wider manufacturing sector. In terms of governance risk, the company's conservative financial strategy counterbalances the high ownership of voting shares by its controlling shareholder and the high importance of its controlling shareholder to its operations.
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; (2) retains its market position in the acoustics and haptics markets; (3) increases 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 10% or above and adjusted debt/EBITDA below 3.0x on a sustained basis.
On the other hand, Moody's could downgrade the rating if over the next 6 to 12 months (1) the company's sales or market position weakens; (2) its EBITA margin fails to improve to 10%; or (3) its credit profile deteriorates, such that adjusted debt/EBITDA exceeds 3.0x or liquidity deteriorates.
The principal methodology used in these ratings was Manufacturing published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287885. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Listed on the Stock Exchange of 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, and optics products markets.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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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
