Sunny Optical | 2382.HK

Rating BUY Maintain Fundamentals stays intact Target Price HKD 20 4.70 From: HK$148.36 Current price HKD 177.20 Upside:+15.5%

FY20 result mixed as revenue missed on de-spec, while GM beat Result Takeaway and other income help drove bottom line.

Sunny handed in a set of mixed FY20 result, with revenue and net income 1 April 2021 arrived at RMB38,001mn/4,871mn (+0.4%/+22.1% Yoy), while GM came in at 22.9% (+2.4ppts Yoy and beat consensus GM by 2.9ppt), thanks to Hayman Chiu GM further picked up in 2H20 for HLS and HCM. Sunny’s revenue [email protected] 12%/10.7% below CIRL/Bloomberg consensus estimates due to de-spec headwinds and decline in ’s order in 2H20. We attributed the (852) 2235 7677 bottom line beat to i) GM upside surprise, ii) RMB215mn investment gains and iii) RMB225mn net FX gains due to RMB appreciation (vs. RMB119mn Trading data loss in FY19) 52-Week Range (HK$) 241.8/101.1

HCM GM further picked up in 2H20 on improved production yield; 3 Mth Avg Daily Vol (m) 7.73 FY21E CAPEX for mainly for Vietnam and India plant setup, HLS No of Shares (m) 1,096.85 and HCM capacity expansion and automation Market Cap (HK$m) 194,361.8 Major Shareholders (%) Wang Wenjian Sunny’s HCM GM reached 12.6% in FY20 (+ 3.3ppts Yoy vs. 11.1% in (38.6%) 1H20) as Sunny has successfully moved up the learning curve, and Auditors Deloitte production yield enhancement from automation. In FY20, Sunny shipped Result Due 1H21E: Aug 2021 ~61mn (+94% Yoy) periscope modules and large image size (> 1/1.7”) modules, and took up 10.3% of total HCM shipment (vs. 5.8% in FY19) Company description

Sunny’s optical components’ GM dropped 240 bps Yoy to 42.8%, due to Founded in 1984, Sunny Optical (SO) is a leading high-end HLS demand slow down. In FY20, Sunny shipped ~378mn 6P+ integrated optical products manufacturer mainly lens (+20.3% Yoy) and accounted for 24.7% of total HLS shipment (vs for digital camera and handset. The company 21%/23%/24.6% in 1H19/FY19/1H20), management expects 6P+ lens dominates in China handset market with ~50% contribution to increase in FY21. market share. It focuses heavily on domestic OEMs (Huawei, Vivo, , ), with Sunny’s FY20 CAPEX came in at ~RMB2.8bn and expect FY21E CAPEX customers in Korea (Samsung) and Japan (Sony, ~RMB 3.0bn, which would be allocated to i) ~RMB1,000mn/RMB800mn for HLS and HCM (with capacity each currently at 160kk/month and Panasonic and Nikon). 75kk/month, would increase to 180kk/month and 100kk/month); ii) RMB200mn for expanding VLS capacity by 25% to 7.5kk/month and Price chart iii) RMB 1,000mn for new production site construction in Vietnam and HK$ India to shorten production lead time for Samsung and Chinese 250.0

OEMs. Sunny aims at global No.1 HCM supplier in 2021. Due to recent 200.0 weakness from other core players such as O-film, Genius and Kantatsu, 150.0 we are confident that Sunny would be able to capture their market share, hence become the largest global supplier in all business fronts. 100.0 50.0

FY21E shipment guidance divert with HLS guidance prudent; 0.0

Jul-18 Jul-19 Jul-20

Oct-18 Oct-19 Oct-20

Apr-18 Jan-19 Apr-19 Jan-20 Apr-20 Expect more balanced client mix ahead Jan-21

Management FY21E shipment guidance looked divert to us, as they expect Sources: Bloomberg, CIRL VLS and HCM shipment volume each would grow 20-25% (which was higher than our previous estimates at 15%), while HLS guidance was slightly behind our forecast as Sunny targets 15-20% shipment growth.

We view Sunny’s HLS shipment as prudent given the recent semi supply shortage would alleviate and potential order win from Apple (iPad/iPhone) will drive both volume and ASP, hence would continue to be Sunny’s catalyst in FY21E. Meanwhile, Sunny’s client mix became more balanced as top 2 customers each accounted for 26.5%/23.4% of total revenue (vs. 38.7%/11.2%), we believe these two clients are Huawei and Xiaomi.

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Revised up FY21E-22E EPS, Maintain BUY and continue to be our preferred pick in the sector

Despite lower sales forecast, we revised up Sunny’s FY21E/22E EPS estimates by 4.1%/6.9%, due higher GM assumption driven by smartphone spec upgrade, as well as VLS contribution gradually increase (currently 6% of total revenue). US-China trade tensions, slower spec migration in 1H21 and peers’ near term competition would continue to post a drag on share price, we believe Sunny’s leadership in HLS and HCM remains intact. Sunny would still benefit from smartphone upgrade cycle in 5G era, and they are still diversifying away from smartphones and remains one of our preferred pick in the sector. Sunny’s FY21E 28.6x PE looks undemanding to us (~ 3 -year average), as we expect Sunny’s EPS to grow 20.0% CAGR in FY20-22E and they have a clear mid-term product roadmap, we maintain Sunny’s rating at BUY with new TP at HK$204.70, which implies FY21E 33x PE (~1 s.d above Sunny’s 3-year average).

Exhibit 1: Sunny Optical’s shipment volume & sales

Source: Company data, CIRL

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Exhibit 2: Financial statement

Source : Company data, CIRL estimates

Exhibit 6: Sunny Optical’s 12 month forward P/E Ratio Exhibit 1:

Pork

products

sold in

supermark et counters

Source: Bloomberg, CIRL

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Exhibit 7: Peer valuation comparison

Source: Bloomberg, CIRL (As of Apr 1 morning sesión close)

Risk Factors

Downside risks include: 1) Upstream component supply shock ; 2) Further slowdown in PRC customers’ smartphone shipment ;3) Slower than expected multi-lens/HCM adoption in Android camp; 4) 3D sensing products’ shipment/ sales disappoints, 5) pricing pressure arising from overseas players and domestic peers and 6) RMB depreciation

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Rating Policy

Rating Definition Buy Outperform HSI by 15% Stock Rating Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Sector Rating Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10%

Analysts List

Hayman Chiu Research Director (852) 2235 7677 [email protected] Lewis Pang Associate Director (852) 2235 7847 [email protected] Edith Li Senior Research Analyst (852)2235 7515 [email protected] Farica Li Research Analyst (852) 2235 7617 [email protected]

Analyst Certification

I, Hayman Chiu hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note.

Disclaimer

This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others.

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