AAC Technologies' first-half profit slightly missed expectations, but premiumisation and new businesses such as heat dissipation and AI edge devices support growth

Overview

The report assesses AAC Technologies' first-half 2026 results, the performance of each business segment, and its 2026–2028 growth trajectory. Although net profit slightly missed expectations due to higher operating expenses such as R&D, recurring earnings, gross margin, and the premium product mix all improved. UBS believes heat dissipation, AI edge devices, server liquid cooling, optical communications, and XR can sustain medium-term growth, and therefore maintains its Buy rating and HK$48.00 price target.

Core views

Net profit in the first half of 2026 was Rmb901mn, up 2.9% YoY and 6% and 11% below UBS forecasts and Visible Alpha consensus, respectively. The primary reason was not insufficient revenue, but that higher gross margin was offset by higher operating expenses. Recurring net profit during the period reached Rmb851mn, up 37.4% YoY, leading UBS to conclude that underlying operations had improved significantly. Revenue was Rmb14.5bn, down 21.6% from the second half of 2025 and up 8.9% YoY, in line with UBS forecasts. Gross margin increased 1.7 percentage points YoY to 22.4%, the highest first-half level since 2021, mainly driven by a product-mix shift toward premium products. By business segment, the company adjusted its segment reporting in the first half of 2026. Acoustics & ED revenue increased 14.2% YoY, with electromagnetic-drive revenue growing by more than 20%. The segment's gross margin increased 0.7 percentage points YoY, with the acoustics business itself contributing a 0.9-percentage-point improvement. The company guides for single-digit revenue growth for this segment in 2026 and a further increase in gross margin in the second half. Wearable products for an overseas large-model customer could enter mass production soon, with several million units expected in 2027 and content value exceeding US$30 per unit. Revenue from AI edge devices and gimbal modules could reach the low-single-digit billions of renminbi by 2027. PM & HD revenue increased 12.5% YoY to Rmb3.3bn, while gross margin improved 4 percentage points YoY to 23.1%. Within this, heat-dissipation revenue increased approximately 400% YoY to Rmb1.1bn, driven by what UBS believes was the introduction of vapour chambers in the iPhone. Meanwhile, smartphone metal-casing revenue declined 13.5% due to pressure on average selling prices. The company guides for more than 30% revenue growth for the segment in 2026, 100%–200% growth in heat-dissipation revenue, and a better gross margin in the second half than in the first half. Revenue from vapour chambers and active cooling could reach the mid-single-digit billions of renminbi in 2027, with increasing penetration in tablets and notebook computers providing further growth. In server liquid cooling, coolant distribution units and universal quick disconnects have entered mass production, while cold plates are undergoing qualification by a leading CPU customer; related revenue could reach approximately Rmb1bn in 2027. Optics revenue declined 22.7% YoY due to lower smartphone shipments, but premium products drove double-digit YoY growth in average selling prices, partially offsetting volume pressure. Gross margin was unchanged YoY at 10.2%, in line with UBS forecasts. The company expects gross margins for plastic and hybrid lenses to expand in 2026, but module revenue to decline by more than 20%, with gross margin below the 2025 level. AAC Technologies is also developing wafer-level glass products for optical communications and has submitted samples to leading overseas customers; UBS expects this business to generate several hundred million renminbi in revenue by 2028. Sensor & Semi revenue increased 41% YoY, with gross margin at 14.6%, 2.5 percentage points above UBS forecasts. The improvement came from share gains at major consumer-electronics customers, mass production of new voice-pickup accelerometers and MEMS speakers, and securing an overseas AI-glasses microphone project. The company also expects XR display modules to contribute several hundred million renminbi in revenue in 2027 and expand to two to three times the 2027 level in 2028. Auto Acoustics revenue increased 23.1% YoY, driven by customer expansion and strong exports, but gross margin declined 3.2 percentage points YoY due to competition, product mix, and raw-material costs. The company expects these pressures to ease in the second half of 2026. At the group level, the company guides for double-digit revenue growth in 2026 and gross margin that is broadly stable to higher. Although smartphone-related businesses face volume pressure, premiumisation is expected to keep their gross margins stable to improving. After incorporating the first-half results and increased R&D expenses for new products, UBS lowered its 2026 earnings forecast by 11%, broadly maintained its 2027 forecast, and raised its 2028 earnings forecast by 11% due to greater visibility into emerging-business growth. The specific diluted EPS revisions were as follows: 2026 was lowered 8% from Rmb2.37 to Rmb2.18, below the Rmb2.42 consensus; 2027 was raised 1% from Rmb2.75 to Rmb2.79, close to the Rmb2.83 consensus; and 2028 was raised 12% from Rmb3.30 to Rmb3.71, above the Rmb3.16 consensus. UBS forecasts revenue of Rmb35.454bn, Rmb42.205bn, and Rmb48.520bn for 2026–2028, respectively, and net profit of Rmb2.484bn, Rmb3.186bn, and Rmb4.229bn, respectively. UBS uses a DCF valuation to determine its price target and maintains its 12-month Buy rating and HK$48.00 price target. Based on the HK$39.12 share price on 20 August 2026, the report forecasts 22.7% share-price upside and a 1.0% dividend yield, for a total stock return of 23.7%. Relative to the assumed market return of 11.2%, forecast excess return is 12.5%. A separate short-term quantitative assessment assigns a score of 3 to each of the industry's structure, regulatory environment, recent operating trends, the next EPS revision relative to consensus, and earnings risk relative to UBS forecasts over the next six months. This indicates a broadly neutral short-term view and does not alter the report's Buy rating based on a 12-month horizon.

Analysis framework

UBS first compares first-half revenue, net profit, and gross margin with both its own forecasts and Visible Alpha consensus, and then attributes the profit variance to the combined effects of an improved product mix, higher gross margin, and increased operating expenses. It subsequently analyses changes in revenue, selling prices, volumes, and gross margins across the revised business segments and maps project milestones such as mass production, customer qualification, and increased penetration to potential revenue in 2027–2028. On this basis, the report adjusts its earnings forecasts for the next three years and derives a 12-month price target through a DCF valuation, while using a separate quantitative questionnaire to describe shorter-term risk and catalyst tendencies.

Methodology notes

• Valuation methodologyDCF valuation

  Discounted cash flow valuation

  This method discounts the company's expected future cash flows to their present value. The report explicitly uses it as the valuation basis for the HK$48.00 price target, but does not disclose the specific discount rate or terminal-value assumptions in the provided text.

• Industry/sector analysis frameworkPrice-volume decomposition

  Decomposition of volume, average selling price, and product mix

  The report separately examines shipment volumes, average selling prices, and the share of premium products. For example, it explains Optics revenue and gross-margin performance through lower smartphone shipments and double-digit price increases for premium optical products.

• Company fundamentals and financial framework

  Segment revenue and gross-margin analysis

  The report compares revenue growth and gross margins across Acoustics & ED, PM & HD, Optics, Sensor & Semi, and Auto Acoustics, attributing differences to product mix, competition, costs, customer share, and new-product mass production.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• AAC Technologies (2018.HK)

  The report believes the company will benefit from multiple growth drivers, including a premium product mix, increased heat-dissipation penetration, AI edge devices, server liquid cooling, optical communications, and XR.

  Strengths

  Recurring net profit increased 37.4% YoY, and gross margin reached its highest first-half level since 2021. The heat-dissipation and sensor businesses grew strongly, while multiple new products have entered mass production, been submitted as samples, or entered customer qualification.

  Weaknesses

  First-half net profit was below forecasts, with relatively high operating expenses such as R&D. Optics revenue declined, smartphone metal-casing prices were under pressure, and Auto Acoustics gross margin was affected by competition, product mix, and raw-material costs.

  Comparison

  The 2026 diluted EPS forecast of Rmb2.18 is below the Rmb2.42 consensus, the 2027 forecast of Rmb2.79 is close to the Rmb2.83 consensus, and the 2028 forecast of Rmb3.71 is above the Rmb3.16 consensus.

  Risks

  Valuation upside risks listed in the report include stronger-than-expected Chinese smartphone demand, a recovery in camera-upgrade trends for low-end and high-end smartphones, and reduced pricing pressure from major handset customers on components such as haptics and microphones.

Key data

• First-half 2026 net profitRmb901mnUp 2.9% YoY, 6% below UBS forecasts, and 11% below Visible Alpha consensus.
• First-half 2026 recurring net profitRmb851mnUp 37.4% YoY.
• First-half 2026 revenueRmb14.5bnDown 21.6% half-on-half and up 8.9% YoY, in line with UBS forecasts.
• First-half 2026 gross margin22.4%Up 1.7 percentage points YoY, the highest first-half level since 2021.
• PM & HD revenueRmb3.3bnUp 12.5% YoY; gross margin was 23.1%, an increase of 4 percentage points YoY.
• Heat-dissipation business revenueRmb1.1bnUp approximately 400% YoY, mainly driven by the introduction of vapour chambers.
• Sensor & Semi revenue growth+41% YoYGross margin was 14.6%, 2.5 percentage points above UBS forecasts.
• Auto Acoustics revenue growth+23.1% YoYGross margin declined 3.2 percentage points YoY.
• 2026–2028 diluted EPS forecastsRmb2.18 / Rmb2.79 / Rmb3.71Revised by -8%, +1%, and +12%, respectively, from previous forecasts.
• 12-month price targetHK$48.00Maintained unchanged, based on a DCF valuation.
• Forecast stock return23.7%Includes forecast share-price upside of 22.7% and a forecast dividend yield of 1.0%.
• Forecast excess return12.5%Relative to the assumed market return of 11.2%.

Impact & implications

The report believes the first-half profit shortfall mainly reflects higher operating expenses such as new-product R&D rather than deterioration in core revenue trends. Improvements in recurring profit and gross margin indicate that premiumisation has begun to deliver results. In the near term, smartphone volumes, declining optical-module sales, and Auto Acoustics margins remain sources of pressure. However, heat dissipation, AI wearables, server liquid cooling, sensors, optical communications, and XR are expected to gradually diversify revenue sources, reduce reliance on traditional smartphone components, and support UBS's higher 2028 earnings forecast.

Risks

• An explicitly identified upside risk in the report is stronger-than-expected Chinese smartphone demand.
• A recovery in camera-upgrade trends for low-end and high-end smartphones could lead to performance above the base-case scenario.
• Reduced pricing pressure from major smartphone customers on components such as haptics and microphones could provide additional upside.

What to watch

• Monitor whether the gross margins of Acoustics & ED and PM & HD improve in the second half of 2026 in line with company guidance.
• Monitor whether wearable products for an overseas large-model customer enter mass production and whether the scale of several million units can be achieved in 2027.
• Monitor the qualification progress of server liquid-cooling cold plates at a leading CPU customer and the revenue ramp-up following mass production of CDUs and UQDs.
• Monitor overseas customer sample-testing results for wafer-level glass products used in optical communications and whether projected 2028 revenue materialises.
• Monitor whether XR display modules contribute several hundred million renminbi in revenue in 2027 and expand two- to threefold in 2028.