Hong Kong, May 08, 2018 -- Moody's Investors Service has assigned a first-time Baa1
issuer rating to AAC Technologies Holdings Inc.
The rating outlook is stable.
RATINGS RATIONALE
"AAC Technologies' Baa1 issuer rating reflects the company's position
as a leading miniature components manufacturer, with a long operating
history and a track record of adapting to changing market and product
demand," says Gerwin Ho, a Moody's Vice President and Senior
Credit Officer.
AAC Technologies' competitive strength is evident from its ability
to compete against global competitors and to supply its products to leading
mobile phone and consumer electronics makers.
The company has also demonstrated -- as mentioned --
its adaptability in relation to changing market and product demand,
while maintaining solid revenue and net profit growth, since its
predecessor's establishment in 1993.
This history of adaptation is evident in its expansion into haptics,
radio frequency (RF)/mechanical and optical component products from acoustics,
through focusing on its core competence of precision manufacturing.
"AAC Technologies Baa1 rating also considers the company's strong profitability
and low debt leverage," adds Ho, who is also Moody's Lead
Analyst for AAC Technologies.
The company has consistently posted strong profitability, with EBITA
margins at or above 29% since its listing in 2005.
This reflects the company's strong market position in acoustics
and haptics products, which is supported in turn by investment in
research and development, with R&D expenses averaging 6.3%
of revenues since its listing. It also reflects the company's
competitive cost structure, driven by its vertical integration and
automation.
Showing its strong profitability, AAC Technologies has posted positive
free cash flows in six out of the past 13 years since its listing in 2005,
despite rising levels of capital expenditure and dividend payouts during
the same period.
Debt leverage, as measured by debt/EBITDA, has also remained
at a low level at or below 1.0x during the same period, reflecting
prudent financial management.
Moody's expects that debt leverage — as measured by debt/EBITDA
— will remain stable at about 1.0.x in the next 12-18
months, supported by growing EBITDA, which Moody's expects
to reach about RMB9.5 billion in the next 12 to 18 months,
that will offset an increase in debt. Such leverage levels support
its rating.
On the other hand, the rating is constrained by the low visibility
of product demand, driven by end-products that evolve with
rapidly changing technologies, product specifications and customer
demand.
Nevertheless, AAC Technologies has the experience and capability
to adapt to advances in technology, as well as changing product
specifications and customer demand. Specifically, the company
has shown a track record of maintaining its competitive strength in acoustics
components, while diversifying into other components and growing
its business, against the backdrop of changes in end-demand
over nearly 25 years.
The Baa1 rating also takes into account AAC Technologies' end-market
and customer concentration risk, factors which are in turn mitigated
by: (1) large, stable and rising demand for mobile phones,
reflecting these products' high penetration globally and the fact that
they are essential modern communication tools; and (2) the company's
track record of customer migration, demonstrating its ability to
maintain growth, while changing its customer mix.
AAC Technologies' liquidity position is strong. Its cash
of RMB4.0 billion at the end of 2017 and expected operating cash
flow over the next 12 months are sufficient to cover its short-term
debt of RMB4.3 billion, dividend payments and capital expenditure
over the same period.
AAC Technologies' issuer rating is not affected by subordination
to claims at the operating company level as the company's highly
diversified business profile —including its subsidiaries in Singapore
and Vietnam -- mitigates structural subordination risk.
The stable outlook reflects Moody's expectation that AAC Technologies
will: (1) grow its revenue and maintain its profitability levels;
(2) retain its market position in the acoustics and haptics markets;
and (3) continue to demonstrate prudent financial discipline in terms
of capital expenditure, investments and acquisitions.
Rating upgrade pressure could arise over the medium term, if the
company (1) expands its revenue and improves its market position in emerging
product segments; (2) diversifies its product and customer exposure,
which will provide a higher degree of stability to revenue and profitability
and, therefore, mitigate the low visibility of product demand;
(3) generates positive free cash flow on a sustained basis; and (4)
continues its prudent financial management, as seen by continued
low leverage and strong liquidity.
On the other hand, rating downgrade pressure could arise,
if the company shows (1) weakening sales and/or a shrinking market position;
(2) lower profitability in terms of an EBITA margin that falls below 20-25%
on a sustained basis; or (3) a worsening in its credit profile,
such that adjusted debt/EBITDA exceeds 1.5x-2.0x
or liquidity deteriorates.
The principal methodology used in this rating was Global Manufacturing
Companies published in June 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
AAC Technologies Holdings Inc. listed in Hong Kong in 2005.
The company is a leading miniature components manufacturer with key products
in the acoustics, haptics, radio frequency (RF)/mechanical
and optical components markets.
The company's revenues reached RMB21 billion in 2017 and was 40.5%
owned by Mr. Pan Benjamin Zhengmin and Ms. Wu Ingrid Chun
Yuan at the end of 2017.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
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-Sr 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
Gary Lau
MD - Corporate Finance
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
