Friday, January 25, 2008
A Comparision Between 2 Headphone Makers
Today I want to write down some comparison between AAC (2018) and Fujikon (927) which I did earlier this month. I won't repeat the basic investment theme as that's been unchanged, and readers can always go back to my previous post on industrials one year ago for that.
AAC manufactures mostly headphones 'inside' a mobile phone, in other words mini speakers. These mini speakers also find application in computers and appliances. I assume that's not generating a lot of turnover now (because no segmental breakdown is disclosed) but AAC is trying to diversify out of the mobile phones so future sales should increase.
Apparently AAC is very good at making these mini headphones as it has kept its net margin at over 30% for the last 4 years (03-06). 07 margin has come down to 26%, still very respectable for an industrial. This high margin reflects the strong growth in the mobile phone market and the higher technology content of AAC's product (i.e. fewer competitors), and of course the migration of manufacturing to the low-cost China (this last one has become such a cliche, although true, that I won't repeat in my future posts).
Profits have been growing nicely from $138m in 2003 to $570m in 2006. It's 4 times in 3 years! So AAC was trading between 15x-20x p/e for most of 2007 even the attention wasn't on export companies. There's a lawsuit about IP right which might have dampened the share price, but since that was settled last month I didn't look into the details.
The share price weakness was actually the result of weak 07 interim figures (AAC adopts quarterly reporting), in which profit declined by half in 1st half of 07. Q3 reporting showed substantial improvement but YOY profit was still down 25%. The slowdown was caused by weak order of its major customer Motorola. AAC may have foreseen this already for some time and it started shipping to Nokia in the Q3 (after the lengthy certification process). The business seems to be well run by its Singaporean management.
Judging from the strong Q3 turnaround, I expect full year result to be around $500m (assuming AAC makes similar profit in Q4 as in Q3), slightly down from $570m of 06. It could be lower if Motorola orders decreased further in Q4. 07 p/e is about 18-20x p/e, about fair but definitely not cheap.
The business is sizable. Financial position is healthy as AAC is in net cash position. Customer base has gotten stronger with Nokia, though I prefer AAC to be less reliant on the mobile phone market. The U.S. economy slowdown may continue to affect Motorola and hence AAC. AAC is trading at a 'growth' premium which one has to keep a keen eye on.
AAC manufactures mostly headphones 'inside' a mobile phone, in other words mini speakers. These mini speakers also find application in computers and appliances. I assume that's not generating a lot of turnover now (because no segmental breakdown is disclosed) but AAC is trying to diversify out of the mobile phones so future sales should increase.
Apparently AAC is very good at making these mini headphones as it has kept its net margin at over 30% for the last 4 years (03-06). 07 margin has come down to 26%, still very respectable for an industrial. This high margin reflects the strong growth in the mobile phone market and the higher technology content of AAC's product (i.e. fewer competitors), and of course the migration of manufacturing to the low-cost China (this last one has become such a cliche, although true, that I won't repeat in my future posts).
Profits have been growing nicely from $138m in 2003 to $570m in 2006. It's 4 times in 3 years! So AAC was trading between 15x-20x p/e for most of 2007 even the attention wasn't on export companies. There's a lawsuit about IP right which might have dampened the share price, but since that was settled last month I didn't look into the details.
The share price weakness was actually the result of weak 07 interim figures (AAC adopts quarterly reporting), in which profit declined by half in 1st half of 07. Q3 reporting showed substantial improvement but YOY profit was still down 25%. The slowdown was caused by weak order of its major customer Motorola. AAC may have foreseen this already for some time and it started shipping to Nokia in the Q3 (after the lengthy certification process). The business seems to be well run by its Singaporean management.
Judging from the strong Q3 turnaround, I expect full year result to be around $500m (assuming AAC makes similar profit in Q4 as in Q3), slightly down from $570m of 06. It could be lower if Motorola orders decreased further in Q4. 07 p/e is about 18-20x p/e, about fair but definitely not cheap.
The business is sizable. Financial position is healthy as AAC is in net cash position. Customer base has gotten stronger with Nokia, though I prefer AAC to be less reliant on the mobile phone market. The U.S. economy slowdown may continue to affect Motorola and hence AAC. AAC is trading at a 'growth' premium which one has to keep a keen eye on.
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