AAC:Strong execution

Change in target price.

AAC’s 2Q16 revenue and net income was largely in line with consensusbut beat our estimate by 5-6%. Chinese customers’ revenue doubled YoY(58% of sales), driven by RF mechanical and increasing adoption ofspeaker boxes and receivers, which offset weak Apple-related revenue.

Management expects strong demand for RF mechanical in 2H andincreasing internal capacity by 50% with incremental capex of Rmb900m.

We reiterate our BUY rating with a new target of HK$101.25, based on21x 17CL EPS (up from HK$83.68, based on 20x 17CL EPS).

2Q16 above our expectation.

2Q16 revenue was Rmb3,019m, up 19% QoQ or up +26% YoY, 6% above ourestimate but in line with consensus. Gross margin improved 120bps QoQ due toless lower margin MEMS mic and speaker revenue. Opex ratio of 14.3% declined -70bps QoQ due to operating leverage. Net income of HK$736m was above ourestimate by 5% but below consensus by -2% due to lower non-ops and a highertax rate.

Acoustic mix improving.

2Q16 dynamic component revenue of Rmb1,724m accounted for 57% of revenue,up +3% QoQ and +14% YoY; of which speaker box and receiver sales were up 3%and 35% QoQ as customers are increasing adoption of higher spec acoustics.

MEMS component revenue of Rmb120m was down -33% QoQ, while the grossmargin also declined by 160bps to 13.4%, as the company walked away fromsome low profitability projects due to keen pricing competition without a strongspecs upgrade.

6-7 RF mechanical projects in 2Q, more ramping up in 2H.

Non-acoustics revenue accounted for 38%, of which RF revenue was up 8x QoQ or2.9x YoY. Gross margin in 2Q inched above the company average. AAC isincreasing internal CNC capacity by 50% with the Rmb900m in additional capexwith increasing customer engagements. Annual capacity of RF casing will reach 50-60m by 2016. AAC is also adding 3D glass capacity of 0.5m per month andhandset lens capacity of 2m/month by year-end to strengthen its total solutionofferings.

Maintain BUY with new target of HK$101.25.

We are revising up net income by 4%/15%/13% over 2016-18CL due toimproving profitability and the shipment outlook in the RF casing business. Wereiterate our BUY rating as we expect AAC to execute and deliver strong growth inthe non-acoustics business (Cagr 36% over 16-18CL) in the coming years.