Hong Kong, March 31, 2021 -- Moody's Investors Service has downgraded the issuer rating and senior
unsecured rating of AAC Technologies Holdings Inc. to Baa2 from
Baa1.
At the same time, the rating outlook has been revised to stable
from negative.
"The downgrade reflects our expectation that AAC Technologies' profitability
will be lower and leverage will be higher than our previous expectation,
stemming from competitive pressure as well as investment needs associated
with its diversification into optical components," says Gerwin Ho,
a Moody's Vice President and Senior Credit Officer.
"The stable outlook reflects AAC Technologies' long operating
history and prudent financial management, with a track record of
maintaining a solid capital structure and strong liquidity, that
will help it navigate its business diversification, product upgrades
and industry cycles," 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 profitability and 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.
AAC Technologies' revenue fell 4% to RMB17 billion in 2020 compared
with the same period last year, while its adjusted EBITA margin
fell to about 11.6% in 2020, from 15.9%
and above 20% in 2019 and 2018, respectively. This
decline was driven by pricing pressure, a fall in global mobile
phone demand reflecting weak economic growth, greater revenue contribution
from lower gross margin business segments, and higher operating
expenses, including those relating to research and development costs
for its growing optics business.
In addition, the company's adjusted debt, including
RMB1.7 billion of contingent settlement provision relating to a
strategic equity investment in its optics business that resulted in a
cash inflow of RMB1.7 billion, rose to about RMB12 billion
as of the end of 2020 from RMB9.9 billion as of the end of 2019.
Its leverage, as measured by adjusted debt/EBITDA, rose to
about 2.7x in 2020 from 2.0x in 2019, as its weakened
profitability weighed on EBITDA and debt level rose. Excluding
the impact of the contingent settlement provision, adjusted debt/EBITDA
would be about 2.4x in 2020.
Moody's expects that AAC Technologies' operating performance will stabilize
over the next 12-18 months, supported by a recovery in its
acoustics and haptics businesses, and the ramping up of its optics
business.
Moody's forecasts AAC Technologies' revenue will rise by about 12%
over the next 12-18 months compared with 2020, supported
by improving mobile phone demand driven by a recovery in global economic
growth, 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 projects the company's profitability,
as measured by its EBITA margin, will recover to about 12.9%
over the next 12-18 months. This expansion reflects cost
and efficiency improvements, as well as rising profitability in
its optics business, as it benefits from a growing scale.
As a result, its adjusted debt/EBITDA will improve to about 2.4x
over the next 12-18 months from about 2.7x in 2020,
driven by a rise in EBITDA and stable debt. Despite the likely
improvement, this leverage level is consistent with those of Baa2
rated regional and global rated peers.
Moody's expects AAC Technologies' prudent financial management to mitigate
the challenges relating to its business diversification, product
upgrades and industry cycles, as reflected in its stable 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.
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 a 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 and received approval from the Hong Kong stock exchange
in February 2021 to proceed with the proposed spin-off.
The proposed listing of AAC Technologies' optics business 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 RMB7.5 billion as of 31 December
2020 and projected operating cash flow over the next 12 months will be
sufficient to cover its short-term debt -- including
lease liabilities -- of RMB3.8 billion, 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
as of 31 December 2020. 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 stable outlook reflects Moody's expectation that AAC Technologies
will (1) grow its revenue and maintain its profitability; (2) retain
its market position in the acoustics and haptics markets; and (3)
continue to demonstrate prudent financial discipline in its capital expenditure,
investments and acquisitions.
Upward rating 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,
thereby increasing the stability of its revenue and profitability and
mitigating the low visibility into product demand; (3) improves its
free cash flow generation on a sustained basis; and (4) continues
its prudent financial management, indicated by continued stable,
low leverage and strong liquidity. Metrics indicative of a potential
upgrade include adjusted debt/EBITDA below 2x 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 profitability
declines, such that its EBITA margin falls below 10% on a
sustained basis; or (3) its credit profile deteriorates, such
that adjusted debt/EBITDA exceeds 2.5x--3.0x or liquidity
deteriorates on a sustained basis.
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,
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.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for
Designating and Assigning Unsolicited Credit Ratings available on its
website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. Unless
noted in the Regulatory Disclosures as a Non-Participating Entity,
the rated entity is participating and the rated entity or its agent(s)
generally provides Moody's with information for the purposes of
its ratings process. Please refer to www.moodys.com
for the Regulatory Disclosures for each credit rating action under the
ratings tab on the issuer/entity page and for details of Moody's
Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social and
governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed by
Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main
60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's office
that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed by
Moody's Investors Service Limited, One Canada Square, Canary
Wharf, London E14 5FA under the law applicable to credit rating
agencies in the UK. Further information on the UK endorsement status
and on the Moody's office that issued the credit rating is available on
www.moodys.com.
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 - 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
