FY25 in-line; auto/thermal/edge AI and margin recovery to drive earnings growth in 2026-27E

FY25 in-line;auto/thermal/edgeAI andmarginrecovery to driveearningsgrowth in 2026-27E Target PriceHK$55.27(Previous TPHK$60.55)Up/Downside71.5%Current PriceHK$32.22 AAC's FY25 revenue/net profit (+16%/+40% YoY) are broadly in-line withour/consensus estimates, driven by improving profitability in optics and robustgrowth in auto/thermal businesses, despiteweakerGPM dragged by acousticsmargin.During earnings call,mgmt. provideddetailedpositive2026 guidance,(16-17% YoY as in 2025, stable GPM),new growth drivers(thermal/auto/XR/AIhardware) andopportunityin AI serverthermal M&A, which should ease marketconcerns on2026growthoutlookamidsmartphone headwinds. We adjustedour estimates toreflectFY25 results,industryheadwinds andstronger thermal/optics/autobusiness. Our new SOTP-based TP of HK$55.27implies20.0xrolloverFY26E P/E.Near-term catalysts includeAI phone/glasseslaunch, ARoptical waveguides ramp-up and auto PSS order wins. China Technology Alex NG(852) 3900 0881alexng@cmbi.com.hk Hanqing LIlihanqing@cmbi.com.hk FY25 in-line; optics profitability and thermal the bright spots.AAC'sFY25 revenue grew 16.4% YoY to RMB 31.8bnandNP surged 39.8% YoYto RMB 2.51bn, whileGPMslightly missedat 22.1%(vs22.5%/22.8%our/consensus) due to acousticsproduct mix changes.In particular,thermalVC and sensor&semi delivered robust growth of400%/103% YoY, whileacoustics/auto/optics grew2%/16%/15%YoY. Inaddition,opticsbusinessshowed impressiveprofitability improvementto 11.5% (vs6.5% in 2024),backed bysharegainsin high-end lenses (7P/WLG/periscope/OIS). Stock Data 2026E outlook: Positiverevenueguidancewith auto/thermal as keydrivers.Mgmt. provided a solid set of guidance across business lines for2026E: 1)company: +16-17% YoY and stable GPM; 2) Acoustics: +5-10%YoY, better GPM, 3) optics: plastic lens flat shipment with 5-10% ASP hikeand module GPM 4-5%, 4) PM: +30% YoY, better GPM, 5) Auto PSS: +15-20% YoY, better GPM, 6) MEMS: +15-20% YoY, better GPM. Overall, webelieve AAC is well-positioned to capture emerging AI opportunities withedge AI,AR/VR glasses,AI server and robotics entering a long-terminnovation cycle. More growth drivers ahead; Maintain BUY.On top of near-term AI/foldable phone upgrade, we are positive onAAC'sacceleratedexpansioninto high-growth non-handset segments: 1)automotivewith 53.7% stake inHebei First Light; 2) AR waveguidewithacquisitionofDispelix, 3) AI serverliquid coolingwithacquiringJyundei.Our new SOTP-based TP of HK$55.27implies20.0x FY26E P/E.Maintain BUY. Source:FactSet 2025results review Earningsrevision Valuation Maintain BUY with new TP of HK$55.27 Our new TP of HK$55.27is based on SOTP to reflect business diversification with differentgrowth profiles and visibility. Our TP is based on weighted-average target P/E multiple of20.0x FY26E P/E, 11% below historical forward P/E mean of 22.5x,given near-termheadwinds on auto/smartphone industry. We assign20x/20x P/E to acoustics/MEMS, 20xP/E to PSS,20xP/E to ED & PM, and 20x P/E to optics(rollover from prior25x, 25x, 25x,28x2025 P/E)due to smartphone/auto industry uncertainties mentioned above.Near-termcatalysts include AI phone/glasses launch,AR optical waveguide ramp-up and auto PSSorder wins. Source: Bloomberg, CMBIGM estimates Source: Bloomberg, CMBIGM estimates Disclosures& Disclaimers Analyst CertificationThe research analyst who is primary responsible for the content of this research report,in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2)no part of hisor her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report.Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to thedate of issue of this report; (2) willdeal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the HongKong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies coveredin this report. CMBIGM RatingsBUY : Stock with potential return of over 15% over next 12 monthsHOLD: Stock with potential return of +15% to-10% over next 12 monthsSELL: Stock with potential loss of over 10% over next 12 monthsNOT RATED: Stock is not rated byCMBIGM :Industry expected to outperform the relevant broad market benchmark over next 12 months:Industry expected to perform in-line with the relevant broad market benchmark over next 12 months:Industry expected to underperform the relevant broad market benchmark over next 12 months Address: 45/F, Champion T