Rating Action: Moody's affirms AAC Technologies' Baa1 ratings; revises outlook to negative
Global Credit Research - 27 Aug 2020
Hong Kong, August 27, 2020 -- Moody's Investors Service has affirmed AAC Technologies Holdings Inc.'s Baa1 issuer rating and senior unsecured rating.
At the same time, Moody's has revised the outlook on the ratings to negative from stable.
"The negative outlook reflects the pressure on AAC Technologies' profitability stemming from its competitive environment, as well as the investment needs and execution risks associated with its diversification into optical components, which will in turn keep its debt leverage elevated," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.
"At the same time, AAC Technologies' market position remains solid as a leading miniature components manufacturer, with a long operating history and track record of maintaining a strong capital structure and solid liquidity, all of which underpin the ratings affirmation," adds Ho.
AAC Technologies' Baa1 issuer rating reflects the company's leading positions in acoustics and haptics components, long operating history and solid profitability and capital structure.
However, the Baa1 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.
While AAC Technologies' revenue rose 4% to RMB7.8 billion in H1 2020 compared with the same period last year, its adjusted EBITA margin fell to about 13.6% for the 12 months to June 2020 from 15.9% and above 20% in 2019 and 2018 respectively. This decline was driven by pricing pressure, an unfavorable product mix, coronavirus-related operational disruptions and higher operating expenses, including from research and development for its growing optics business.
In addition, its adjusted debt rose slightly to about RMB10 billion at the end of June 2020 from RMB9.9 billion at the end of 2019, while leverage rose to about 2.2x for the 12 months to June 2020 from 2.0x in 2019, as its weakened profitability weighed on EBITDA.
Moody's expects that AAC Technologies' operating performance will remain steady over the next 12-18 months, supported by a stabilization in its acoustics and haptics businesses, and the ramping up of its optics business.
Moody's expects AAC Technologies' revenue will rise by about 6%-8% over the next 12-18 months compared with 2019, supported by 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 expects the company's profitability, as measured by EBITA margin, will drop to about 13.7% over the next 12-18 months. This weakening reflects the impact of greater competition, the company's ongoing investments in research and development and higher contributions from lower-margin businesses as it diversifies its revenue streams.
As a result, its adjusted debt/EBITDA will rise to about 2.0x-2.2x over the next 12-18 months from 2.0x and 1.1x in 2019 and 2018 respectively, as the rise in debt level outpaces EBITDA growth.
Such levels of profitability and leverage are weak for the company's Baa1 rating.
Moody's expects AAC Technologies' prudent financial management will mitigate the challenges relating to its business diversification, product upgrades and industry cycles. Such challenges are reflected in its negative 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.
In July 2020, AAC Technologies announced that it has agreed to receive RMB1.15 billion in investment for its optical components subsidiary from strategic investors, including a subsidiary of Chinese smartphone provider Xiaomi Corporation (Baa2 stable), a customer of AAC Technologies, in exchange for a 9.6% minority stake in the optical components subsidiary. The investment will improve the company's credit profile and demonstrates the fact that its customer is positive on the prospects of its optics business.
AAC Technologies' liquidity is excellent. Moody's expects that the company's cash holding of RMB5.1 billion as of 30 June 2020 and projected operating cash flow over the next 12 months will be sufficient to cover its short-term debt of RMB2.6 billion including lease liabilities, 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 at the end of 2019. 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 negative outlook could return to stable if the company (1) deleverages whilst improving its profitability meaningfully; (2) retains its market position in the acoustics and haptics markets; (3) improves its free cash flow generation on a sustained basis; and (4) continues its prudent financial management, with stable and low leverage and strong liquidity.
Credit metrics indicative of an outlook change to stable include EBITA margin reaching 15% or above and adjusted debt/EBITDA below 2.0x 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 EBITA margin fails to improve to 15%; or (3) its credit profile deteriorates, such that adjusted debt/EBITDA exceeds 2.0x or liquidity deteriorates.
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, radio frequency (RF)/mechanical and optical components markets.
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.
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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
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