AAC:In-line 3Q results;lack of excitement

AAC released 3Q results with GM of 41.8% in line with consensus of 41.7%.

Net income came in 5~6% higher than our and Street estimates mainly onimproving opex ratio. We maintain our Neutral rating and see limited upside ofthe stock given 1) the company is in a defensive position defending frommarket share loss, 2) increasing competition in both speaker box and hapticsgiven rising new entrants, and 3) limited contribution from new businesses ofhandset lens and 3D glass.

Unsustainable valuation premium: We trim our PT to HK$67 from HK$82given what we view as an unsustainable valuation. The stock was traded ataround 21x in Aug-Sep (Fig 2) supported by the management announcementon the new business of handset lens and 3D glass (up to Neutral, link, Aug29). Our new PT is based on the updated historical avg+1stv PE of 17x. Wesuggest investors to switch to Sunny Optical (growth play, EPS CAGR of50% in 2016-18E) or Lenovo (value play, 8x P/E). [Note: Sunny Optical(2382 HK, HK$38.20, Outperform, TP: HK$50.00); Lenovo Group (992 HK,HK$4.76, Outperform, TP: HK$8.00)].

In-line Gross margin: GM of 41.8% (vs 41.7% in 2Q16 and 41.6% in 3Q15)was largely in line with our 41.3% and Street’s 41.7%. Opex ratio improvedfrom 14.3% in 2Q16 to 13.0% in 3Q16, leading net income to be 5~6% higherthan our and Street estimates.

4Q16 guidance as expected: Management guided for strong double-digitrevenues QoQ in 4Q16 driven by both speaker box and RF mechanical. For2017, management expects revenue contribution of non-acoustics to be largerthan acoustics.

Limited contribution from new business: 1) handset lenses: In the 2Q16earnings call, management stated it shipped 2m units in Aug and guidedmonthly shipment to up to 8~10m by end-2016. However, given 3Q16revenues from “others” is similar to previous quarters, we believe thecontribution should be limited. 2) 3D glass: Management toned downguidance of 1H17 monthly capacity to 0.5m from 1~2m. Given the limitedcontribution from new businesses and the unsustainable valuation, we trimour target price PE multiple from 21x to 17x, in line with recent historicalavg+1stv PE.

Factor in 3Q16 numbers, leading our 2016E EPS slightly up by 1.5%. We trimour PT from HK$82 to HK$67 via a lower PE multiple of 17x (historicalavg+1stv updates).

12-month price target: HK$67.00 based on a PER methodology.