AAC Technologies:In line with expectation on 4Q16OP;strong 1Q17ahead

AAC reported 4Q OP of Rmb1.8bn, in line with GSe but beat BBG consensusby 21%. Sales of Rmb5.7bn (+36% qoq; +49% yoy) were slightly below GSe.

GM of 41.7% was roughly flattish qoq. However, opex saw leverage onhigher revenue scale (mainly driven by ASP increase). Hence, the opex ratiocame in at 10%, which was lower by ~3 ppt sequentially, leading to OPM of31.8%. EPS was Rmb1.28, below GSe by 8% on a higher tax rate. Keyguidance: 1) 1Q sales better than seasonality, implying 50% yoy growth; 2)2017E revenue to grow by at least 25% yoy; 3) GM/OPM could improve yoy;and 4) acoustic components/optics capex to increase yoy.

Maintain Neutral. 4Q16 results showed strong revenue growth from bothdynamic components and non-acoustic products, especially the latter,largely in line with our expectations. Dynamics components revenue (+11%qoq; +28% yoy) were driven by upgrades in receiver (stereo sound) andspeaker box (waterproof upgrade and higher adoption from mid-endAndroid smartphones). Non-acoustic revenue (+73% qoq; +92% yoy) wasdriven by RF mechanicals (Android metal casing). We believe the upgradecycle from acoustics and RF mechanical remain intact in 2017E, leading toour estimates of revenue/EPS growth of 39%/62% yoy.. To factor in betterproduction efficiency, we raise our earnings forecast by 7% for 2016E/17E/18E due to higher GM/OPM. Accordingly our 12-m TP increases by 6% fromHK$77 to HK$82, still based on 10% premium to 2017E sector average P/BROE(11X), implying 13X NTM P/E. However, based on current valuation, wefind limited upside to turn more positive and maintain Neutral. Risks:adoption of haptics & speaker boxes; smartphone pricing pressure.