Greater China Smartphones

China / Taiwan Information Technology 6 December 2017

The more the merrier – multi-cameras are the next mega trend in smartphones (Part 3)

 We forecast 3D sensing smartphone shipments of 200-618m for 2018-20E (34m in 2017E), driving market upside for the supply chain Kylie Huang  Dual-cam adoption set to rise further in 2018-20E on a widening of (886) 2 8758 6248 adoption from high-end to mid-range models [email protected] Steven Yang  Sunny, AAC and Largan are our top picks under the theme; recent (886) 2 8758 6245 pullbacks due to the coming quiet season in 1Q18 present good [email protected] buying opportunities

 2. What's new: In Part 3 of our series of reports, we underline our upbeat view Key stock calls on the smartphone camera supply chain with the rise of the multi-cam trend, New Prev. driven by the boom in dual-cam adoption and emergence of 3D sensing in AAC Technologies (2018 HK) smartphones (see The more the merrier: multi-cameras are the next mega Rating Buy Buy Target 200.00 195.00 trend in smartphones [Part 2]). We introduce our forecasts for 3D-sensing Upside p 44% penetration and raise our 2017-18 dual-cam adoption forecasts based on Largan Precision (3008 TT) strong interest from brands. Sunny (2382 HK, HKD109.0, Buy [1]) and Rating Buy Buy Largan (3008 TT, TWD4,265, Buy [1]) remain our top picks, and we add AAC Target 5,800 6,680 (2018 HK, HKD138.9, Buy [1]) to our top picks list given its recent Upside p 36% breakthrough in optics. Sunny Optical Technology (2382 HK) Rating Buy Buy Target 165.00 160.00 What's the impact: 3D sensing – the next key driver. We remain positive on Upside p 51.4% the 3D sensing trend and expect 3D adoption in the iPhone X to trigger 3D Source: Daiwa forecasts sensing being adopted more widely in smartphones. Our research suggests top-tier brands like Huawei, Oppo, Vivo, Xiaomi and Samsung have a strong interest in 3D, and aim to release 3D sensing models in 2H18. Adoption in Android smartphones will likely only accelerate in 2019 after algorithm and design issues have been resolved, while we expect all the new iPhones in 2H18 to have this feature. In total, we forecast shipments of 3D-sensing- adopted smartphones to rise to 200/425/618m in 2018/19/20E, respectively, from 34m in 2017E and zero in 2016, providing an additional addressable market of USD2.1bn for lens vendors and USD13.5bn for module vendors, implying 65-70% upside to their 2016 market sizes

Dual-cam adoption to accelerate in 2018-20E. We see dual-cams as a key feature to attract consumers and expect dual-cam adoption to rise further in 2018-20E on the back of broader adoption from high-end to mid-ranged models. In total, we forecast dual-cam-adopted smartphone shipments of 502/690/856m in 2018/19/20E, from 268m in 2017E and 73m in 2016 (vs. 255m in 2017E and 420m in 2018E previously), with the adoption rate rising to 31-48% in 2018-20E.

What we recommend: We reiterate our Positive sector view and see the multi- cam trend benefiting the camera component supply chain, namely Largan, the leader in lens sets, Sunny, the major camera module and lens set provider, and AAC, for which we see lenses as a new driver. We view recent share-price pullbacks due to the coming quiet season in 1Q18, China inventory adjustments and muted iPhone sentiment (see iPhone X: production on track for a strong 4Q17 but could see a seasonal decline in 1Q18) as offering further buying opportunities. The key risk: weaker dual-cam/3D sensing adoption.

How we differ: We are more upbeat than the market on the benefits of spec upgrades for our preferred names.

See important disclosures, including any required research certifications, beginning on page 38

Greater China Smartphones: 6 December 2017

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg AAC Technologies 2018 HK 138.90 Buy Buy 200.00 195.00 2.6% 4.298 4.327 (0.7%) 6.116 5.966 2.5% Largan Precision 3008 TT 4,265 Buy Buy 5,800 6,680 (13.2%) 195.659 212.437 (7.9%) 287.385 331.595 (13.3%) Sunny Optical Technology 2382 HK 109.00 Buy Buy 165.00 160.00 3.1% 2.553 2.568 (0.6%) 3.803 3.709 2.5% Source: Bloomberg, Daiwa forecasts

Global dual-cam adoption in smartphones Global 3D sensing adoption in smartphones (m units) (m units) 2,000 100% 2,000 100% 90% 90% 80% 1,500 80% 70% 1,500 70% 60% 60% 1,000 50% 40% 1,000 50% 30% 40% 500 30% 20% 500 10% 20% 0 0% 10% 2016 2017E 2018E 2019E 2020E 0 0% Total smartphone Total dual-cam smartphone 2016 2017E 2018E 2019E 2020E Penetration rate Total smartphone Total 3D sensing smartphone Penetration rate Source: Daiwa forecasts and estimates Source: Daiwa forecasts and estimates

Global smartphone camera module market Global smartphone lens sets market (USDbn) (USDbn) 50 10 CAGR: 21.8% CAGR: 26.4% 40 8

6 30 4 20 2 10 0 0 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Single-cam (front+rear) Dual-cam Single-cam (front+rear) Dual-cam 3D Sensing 3D Sensing (Tx lens sets) 3D Sensing (Rx lens sets) Source: Daiwa forecasts and estimates Source: Daiwa forecasts and estimates *Note:Dual-cam markets as an incremental value to single-cam market

Smartphone 3D sensing camera module supply chain Transmitter module (Tx)

Laser diode Lens DOE IQE (IQE LN) WLO TSMC (2330 TT) VPEC (2455 TT) AMS (AMS SW) Xintec (3374 TT) Lumentum (LITE) Himax (HIMX US) VisEra (Private) Camera Modules Finisar (FNSR) AAC (2018 HK) Himax (HIMX US) AMS (AMS SW) Plastic/hybrid Holoeye (Private) Lite-On (2301 TT) II-VI (IIVI US) Largan (3008 TT) RPC (Private) Sunny Optical (2382 HK) WinSemi (3105 TT) Sunny (2382 HK) DCA (Private) SEMCO (009150 KS) Genius (3406 TT) LG Innotek (011070 KS) AAC (2018 HK) Primax (4915 TT) Cowell (1415 HK) O-Film (002456 CH) Truly (732 HK) Receiver module (Rx) Q-tech (1478 HK) Sharp (6753 JP) CMOS sensor Lens BP filter Hon Hai (2317 TT) STM (STM US) Largan (3008 TT) Viavi (VIAV US) Sony (6758 JP) Kantatsu (Private) Samsung(005930KS) Sunny Optical (2832 HK) OminiVision (Private) Genius (3406 TT) Aptina (Private) Glorytek (3428 TT) Infineon (IFX AG) Sekonix (005345 KS) Kolen (078650 KS) Diostech (085660 KS) SEMCO (009150 KS)

Source: Companies, Daiwa

Greater China Smartphones: 6 December 2017

Table of contents

Multi-cameras: the next mega trend for smartphones (Part 3) ...... 4 Rise of multi-cams suggests upside for the smartphone camera supply chain ...... 4 All eyes on 3D sensing – the next key drivers in multi-cams ...... 5 Dual-cam adoption to rise further in 2018-20E ...... 8 Spec upgrades in dual-cams...... 10 Positive on camera component supply chain – muted outlook for 1Q18 another opportunity to accumulate ...... 13 Risks to our view ...... 14 Appendix 1 ...... 15 Major technologies in 3D sensing ...... 15 Appendix 2 ...... 16 Overview of wafer level optics ...... 16 Appendix 3 ...... 18 The dilemma: image quality vs. form factor ...... 18 Dual-cams as a solution to the dilemma ...... 18 Improved imaging quality ...... 19

Company Section AAC Technologies ...... 21 Largan Precision ...... 26 Sunny Optical Technology ...... 31

Greater China Smartphones: 6 December 2017

Multi-cameras: the next mega trend for smartphones (Part 3) Rise of multi-cams suggests upside for the smartphone camera supply chain In addition to dual-cams, As we discussed in The more the merrier: multi-cameras are the next mega trend in we see adoption of 3D smartphones (Part 2), published on 6 March, we remain upbeat on the smartphone camera sensing as a key driver supply chain given the sound favourable industry trend of the rise of multi-cams. To recap: for the smartphone 1) we expect dual-cam adoption to accelerate in 2017-18E after it began to kick in from camera component 2016, and 2) we see dual-cams as just the beginning of the multi-cam era; we expect supply chain multi-cams/trio-cams to arrive soon, driven by new features such as the adoption of 3D sensing for augmented reality (AR)/biometric identification (ID).

As such, we forecast the Indeed, for dual-cams, given the strong demand from consumers looking for image quality global camera module enhancements, our research suggests smartphone brands are becoming more aggressive and lens sets markets to in adopting this feature. In addition to Apple, which increased its dual-cam adoption to 80% expand at CAGRs of of its new iPhones launched in 2H17 (vs. 36% in 2H16), and China brands, which have 21.8/26.4% for 2016-20, adopted dual-cams in their high-end models, Samsung released its first dual-cam respectively smartphone, the Galaxy Note 8, in September. Looking ahead, we expect dual-cam adoption to rise further in 2018-20E as dual-cams start to be adopted in mid-range models, from mostly high-end models currently. In total, we forecast shipments of dual-cam- adopted smartphones to rise to 502/690/856m in 2018/19/20E, respectively, from 268m in 2017E (vs. our earlier forecasts of 255m in 2017E and 420m in 2018E), based on our forecast for the adoption rate to rise to 48% in 2020E.

With respect to 3D sensing, we had been expecting the iPhone models launched in 2H17 to adopt the feature, in turn triggering broader adoption in smartphones. Indeed, Apple released the iPhone X – its first 3D sensing smartphone – in September 2017 and has received good feedback from consumers. We expect Apple to increase its 3D sensing adoption to 100% for its new iPhones launched in 2H18 (vs. only 1 model among 3 in 2H17). Our recent supply chain research suggests all the top-tier smartphone brands have been showing a strong interest in 3D sensing adoption since the iPhone X release. While it may take some time for these brands to resolve software/algorithm and design issues, we expect all the major brands, including Huawei, Oppo, Vivo, Xiaomi, and Samsung, to release their first 3D-sensing smartphones in 2H18, and accelerate adoption in the next few years. In total, we forecast shipments of 3D-sensing-adopted smartphones to increase to 200/425/618m in 2018/19/20E, from 34m in 2017E and zero in 2016.

Global dual-cam adoption in smartphones Global 3D sensing adoption in smartphones (m units) (m units) 2,000 100% 2,000 100% 90% 90% 80% 80% 1,500 1,500 70% 70% 60% 60% 1,000 50% 1,000 50% 40% 40% 30% 30% 500 500 20% 20% 10% 10% 0 0% 0 0% 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Total smartphone Total dual-cam smartphone Penetration rate Total smartphone Total 3D sensing smartphone Penetration rate Source: Daiwa forecasts and estimates Source: Daiwa forecasts and estimates

We expect the rising number of cameras used in smartphones, dual-cams and 3D sensing, to be important drivers of the addressable markets for smartphone lens set vendors and camera module suppliers. Thanks to the extra addressable market from the rise of multi- cams (dual-cam + 3D sensing), we estimate the camera module industry to enjoy a 21.8%

Greater China Smartphones: 6 December 2017

CAGR over 2016-20E (vs. only a 5.1% CAGR without multi-cams). For lens sets suppliers, we forecast the industry to see a 26.4% CAGR over 2016-20E (vs.8.8% CAGR without multi-cams).

Global smartphone camera module market Global smartphone lens sets market (USDbn) (USDbn) 50 10 CAGR: 21.8% CAGR: 26.4% 40 8

6 30 4 20 2 10 0 0 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Single-cam (front+rear) Dual-cam 3D Sensing (Tx lens sets) 3D Sensing (Rx lens sets) Single-cam (front+rear) Dual-cam 3D Sensing Source: Daiwa forecasts and estimates Source: Daiwa forecasts and estimates *Note:Dual-cam markets as incremental value to single-cam market

All eyes on 3D sensing – the next key drivers in multi- cams Since the iPhone X We remain optimistic on camera functions beyond capturing pictures/films and image release, Android brands quality enhancement, and believe new features (ie, AR/3D) will lead to an increase in have shown a keen usage of cameras in smartphones. In particular, as noted, we expect Apple’s adoption of interest in adopting 3D sensing in its new iPhones from 2H17 to drive adoption by other smartphone brands. multi-cam designs for 3D Apple released its first 3D sensing adopted smartphone – the iPhone X – in September sensing 2017. Leveraging its “TrueDepth” camera system, the iPhone X can power Face ID for payment and AR applications, such as Animoji and Clips (see All eyes on the iPhone X – all-new flagship, published on 13 September 2017).

Suppliers for 3D sensing in the iPhone X Infrared camera Dot projector Reads the dot pattern, captures an infrared image, then sends More than 30,000 invisible dots are projected onto the face to build the data to the A11 Bionic chip to confirm a match. unique facial map. Suppliers Suppliers CMOS sensor/RW:ST Micron (STM US)/Tong Hsing (6271 TT) Laser diode:Lumentum (LITE US), Winsemi (3105 TT) Lens set:Largan (3008 TT), Genius Optical (3406 TT) DOE:TSMC (2330 TT), Xintech (3374 TT),VisEra (Private) BP filter:Viavi (VIAV US) WLO:AMS (AMS SW) Assembly: Hon Hai (2317 TT), Sharp (6753 JP) Assembly: LG Innotek (011070 KS), Sharp (6753 JP) Flood illuminator Invisible infrared light helps identify the face even when it’s dark. Suppliers Laser diode:Finisar (US), Lumentum (LITE) WLO:Himax (HIMX US) Assembly: STM (STM US)

Source: Companies, Daiwa

Greater China Smartphones: 6 December 2017

Key features driven by 3D sensing in iPhone X

Mobile payment Animoji Clips

Source: Companies, Daiwa

On the strong interest The initial feedback on 3D sensing features in the iPhone X looks to have been favourable. among global brands, Our market research suggests the interest among smartphone brands to add a 3D sensing we forecast shipments feature in smartphones is surging, and all non-Apple smartphone brands have plans to of smartphones with 3D release their own 3D sensing smartphones in the near future. sensing to reach 200/425/618m for Looking into 2018, we expect Apple to adopt 3D sensing features in all its new iPhones in 2018/19/20E 2H18 (vs. in 38% in its new models in 2H17). For non-Apple smartphone vendors, despite their interest, it will likely take them some time to develop their algorithm/software capability and work-around solutions to avoid infringing on Apple’s patents in 3D sensing structure design. Thus, we expect the volume of 3D-sensing-adopted Android smartphones to remain small in 2018, but to accelerate in 2019-20 once these issues have been resolved. We expect major brands, including tier-1 China brands Huawei, Oppo, Vivo and Xiaomi, to release 3D sensing smartphones in 2H18. Our research also suggests Samsung is exploring adopting 3D sensing for its Galaxy Note 9 (likely in 2H18).

As such, we forecast 3D-sensing-adopted Android smartphone shipments of 41m in 2018, surging to 195-370m in 2019-20E. In total, we estimate 3D-sensing-adopted smartphone shipments to increase to 200/425/618m in 2018/19/20E, from 34m in 2017E and zero in 2016.

In addition, our research also shows Apple is looking at adopting dual 3D sensing features (not only front but also rear) in its iPhones to provide 360-degree AR features. We expect Apple to adopt dual 3D sensing from 2H19, which we estimate would in turn trigger non- Apple smartphone brands to adopt similar features from 2020. If the adoption of dual 3D sensing features by Apple occurs earlier than we estimate, there could be further upside to our forecasts.

Global 3D sensing adoption in smartphones Global 3D sensing smartphones by vendor (m units) (m units) 2,000 100% 1,000 90% 80% 800 1,500 70% 600 60% 1,000 50% 400 40% 30% 500 200 20% 10% 0 0 0% 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Apple (front) Apple (front + rear) Samsung (front) Total smartphone Total 3D sensing smartphone Penetration rate Samsung (front + rear) China& others (front) China& others (front + rear) Source: Daiwa forecasts and estimates Source: Daiwa forecasts and estimates

Greater China Smartphones: 6 December 2017

In our view, the rising trend of 3D sensing adoption would provide an extra driver for the smartphone camera component supply chain. Based on our estimates, the market size for 3D sensing camera modules will reach USD13.5bn in 2020, leading to the industry expanding at a 17.4% CAGR over 2016-20E (vs. only a 5.1% CAGR without multi-cams).

Global smartphone camera module market without multi-cams Global smartphone camera module market with 3D sensing (USDbn) (USDbn) 50 50

40 CAGR: 17.4% 40 CAGR: 5.1% 30 30 20 20 10

10 0 2016 2017E 2018E 2019E 2020E 0 Single-cam (front+rear) Apple (front) Apple (rear) 2016 2017E 2018E 2019E 2020E Samsung (front) Samsung (rear) China& others (front) Single-cam (front+rear) China& others (rear) Source: Daiwa forecasts and estimates Source: Daiwa forecasts and estimates

For lens vendors, the adoption of 3D sensing also brings new opportunities by adding a greater number of lenses into smartphones. For transmitter modules (Tx), wafer-level- optics (WLO) are used for the iPhone X but the industry is also studying different types of lenses, namely, hybrid lenses or plastic lenses. For receiver modules (Rx), plastic lens sets are used in the iPhone X and will likely remain the mainstream solution. In total, we expect the adoption of 3D sensing in smartphones to bring an addressable market of USD2.1bn, driving an industry CAGR of 20.7% over 2016-20E (vs. only an 8.8% CAGR without multi- cams).

Global smartphone lens sets market without multi-cams Global smartphone lens sets market with 3D sensing (USDbn) (USDbn) 6 6 CAGR: 20.7%

CAGR: 8.8% 4 4

2 2

0 0 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Single-cam (front+rear) Tx lens sets Rx lens sets Single-cam (front+rear) Source: Daiwa forecasts and esitmates Source: Daiwa forecasts and estimates

Smartphone 3D sensing camera module supply chain Transmitter module (Tx)

Laser diode Lens DOE IQE (IQE LN) WLO TSMC (2330 TT) VPEC (2455 TT) AMS (AMS SW) Xintec (3374 TT) Lumentum (LITE) Himax (HIMX US) VisEra (Private) Camera Modules Finisar (FNSR) AAC (2018 HK) Himax (HIMX US) AMS (AMS SW) Plastic/hybrid Holoeye (Private) Lite-On (2301 TT) II-VI (IIVI US) Largan (3008 TT) RPC (Private) Sunny Optical (2382 HK) WinSemi (3105 TT) Sunny (2382 HK) DCA (Private) SEMCO (009150 KS) Genius (3406 TT) LG Innotek (011070 KS) AAC (2018 HK) Primax (4915 TT) Cowell (1415 HK) O-Film (002456 CH) Truly (732 HK) Receiver module (Rx) Q-tech (1478 HK) Sharp (6753 JP) CMOS sensor Lens BP filter Hon Hai (2317 TT) STM (STM US) Largan (3008 TT) Viavi (VIAV US) Sony (6758 JP) Kantatsu (Private) Samsung (005930 KS) Sunny Optical (2832 HK) OminiVision (Private) Genius (3406 TT) Aptina (Private) Glorytek (3428 TT) Infineon (IFX AG) Sekonix (005345 KS) Kolen (078650 KS) Diostech (085660 KS) SEMCO (009150 KS)

Source: Companies, Daiwa

Greater China Smartphones: 6 December 2017

Dual-cam adoption to rise further in 2018-20E Thanks to broader As a result of strong demand from consumers for better image quality and to solve the adoption of dual-cams in dilemma of megapixel count versus the form factor design of smartphones (see Appendix mid-range models, we 3), the adoption trend of dual-cams in smartphones remains firmly intact. Apple, the market forecast dual-cam leader in dual-cam adoption, increased its dual-cam adoption to 80% in its new iPhones adopted smartphone launched in 2H17 (vs. 36% in 2H16), and we expect the dual-cam adoption trend to shipments of 502-856m continue in 2018-20E. China smartphone brands are showing strong interest in adopting for 2018-20, up from dual-cams, not only for their flagship models but also for the mid-tier segment. 268m in 2017E In addition to Huawei, a pioneer among its China peers in adopting dual-cams since 2016, other brands, such as Oppo, Vivo and Xiaomi, have been catching up rapidly in adopting dual-cam designs. Samsung also finally released its first dual-cam adopted smartphone, the Galaxy Note 8, in September 2017, and we expect its adoption of dual-cams to continue to rise in the next few years. In sum, we now forecast dual-cam-adopted smartphone shipments to rise to 502/690/856m in 2018/19/20E, from 268m in 2017E (vs. our previous forecasts for 255m for 2017E and 420m for 2018E), with the adoption rate rising to 31% in 2018E, 40% in 2019E, and 48% in 2020E, from 5% in 2016.

Global dual-cam penetration in smartphones (m units) 2,000 100% 90% 80% 1,500 70% 60% 1,000 50% 40% 30% 500 20% 10% 0 0% 2016 2017E 2018E 2019E 2020E Total smartphone Total dual-cam smartphone Penetration rate

Source: Daiwa forecast and esitmates

We view the rise of the dual-cam trend as a strong revenue growth driver for the smartphone camera components supply chain. We forecast the extra addressable market driven by dual-cams to reach USD8.2bn in 2020 for camera module vendors, driving an industry CAGR of 11.7% over 2016-20E (vs. only a 5.1% CAGR without dual-cams). For lens makers, we expect an extra addressable market of USD1.6bn in 2020, driving an industry CAGR of 16.9% over 2016-20E (vs. only an 8.8% CAGR without dual-cams).

Global smartphone camera module market without multi-cams Global smartphone camera module market with dual-cams (USDbn) (USDbn) 50 50 45 40 40 CAGR: 11.7% CAGR: 5.1% 35 30 30 25 20 20 15 10 10 5 0 0 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Single-cam (front+rear) Apple Samsung China& others Single-cam (front+rear) Source: Daiwa forecasts and esitmates Source: Daiwa forecasts *Note: The dual-cam market as an incremental value to the single-cam market

Greater China Smartphones: 6 December 2017

Global smartphone lens sets market without multi-cams Global smartphone lens sets market with dual-cams (USDbn) (USDbn) 6 6 CAGR: 16.9% CAGR: 8.8% 4 4

2 2

0 0 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Single-cam (front+rear) Single-cam (front+rear) Apple Samsung China& others

Source: Daiwa forecasts Source: Daiwa forecasts

Dual-cam adoption among the major global brands We expect the dual-cam Apple released 3 iPhones in September 2017, with 2 sporting dual-cams (the iPhone 8 adoption trend to Plus and iPhone X), in line with our earlier estimates. Given the positive feedback from continue among global consumers, we expect dual-cams to remain a key feature for the iPhone going forward. major smartphone Looking into 2018, we expect Apple to release 3 models in 2H18: a 5.8” AMOLED, 6.5” brands AMOLED and 6.1” TFT-LCD, of which we expect the 2 AMOLED models to adopt dual- cams. Our forecasts for dual-cam shipments could see upside if the 6.1” LCD model also adopts dual-cams in the end. In sum, we forecast the adoption rate of dual-cams in all iPhones to rise to 64% in 2018E from 46% in 2017E and 14% in 2016.

Samsung launched its flagship Galaxy Note 8 in September 2017, which is its very first model to incorporate a dual-cam design. In addition, Samsung also launched its mid-tier Galaxy C7 in October 2017, with a dual-camera on the front. Looking into 2018, we expect Samsung to adopt dual-cam in all its flagship models (Galaxy S series and Note series), in addition to mid-range models. We forecast the company’s dual-cam adopted smartphone shipments to reach 85-110m in 2018-19E, from 12m in 2017E and zero in 2016.

Huawei has continued to be aggressive in adopting a dual-cam design in 2017. Huawei has collectively launched 10-plus dual-cam models after the announcement of its first dual- cam models (P9 and P9 Plus) in April 2016. Our research suggests Huawei remains bullish on dual-cams and we forecast its dual-cam adopted smartphone shipments to reach 83- 98m in 2018-19E, from 54m in 2017E and 32m in 2016.

Oppo is a major player among the China brands, and according to Gartner1, was the No. 4 player globally with a unit market share of 7.7% in 3Q17 (up from 7.1% in 2Q17). The company has launched multiple models with a dual-cam design in 2017, including both flagship line-ups (R11 and R11s series) and mid-tier models (F3 series). We expect Oppo to accelerate its dual-cam adoption from 2018, and forecast its dual-cam adopted smartphone shipments to reach 56-73m in 2018-19E, from 32m in 2017E and zero in 2016.

Vivo is another promising brand in the China market and became a global top-5 smartphone maker in 3Q17 in unit sales. Vivo has launched multiple dual-cam models in 2017, ranging from high-end (X9 and X9s Plus) and mid-tier (V5 Plus). We estimate Vivo’s dual-cam adopted smartphone shipments to reach 50-63m in 2018-19E, from 36m in 2017E and 3m in 2016.

1 Source: Gartner “Market Share: Devices, All Countries, 3Q17 Update”, authors include Mikako Kitagawa, Anshul Gupta, Roberta Cozza, Ranjit Atwal, David Glenn, Kanae Maita, Meike Escherich, Annette Jump, Lillian Tay, Tuong Huy Nguyen, Bruno Lakehal, Tracy Tsai, Annette Zimmermann, CK Lu, Angie Wang, published on 16 November 2017.

Greater China Smartphones: 6 December 2017

Xiaomi has turned aggressive in deploying smartphones with dual-cam design, announcing 4 dual-cam models (Mi Note3, Mi A1, Mi 5X and Mi 6) in 2017 (compared with only 2 dual-cam models in 2016). We estimate dual-cam adopted smartphone shipments for Xiaomi to reach 28-47m in 2018, from 14m in 2017E and 4m in 2016.

Global dual-cam adoption in smartphones by brand (m units) 900 800 700 600 500 400 300 200 100 0 2016 2017E 2018E 2019E 2020E Apple Samsung Huawei Oppo Vivo Xioami Others Source: Daiwa estimates and forecasts

Spec upgrades in dual-cams The rise of dual-cams The rising dual-cam adoption trend will not only provide volume growth drivers but also add not only provides more value to the supply chain, in our view. We have seen the efforts of smartphone volume growth but also makers to differentiate their smartphones by upgrading their dual-cam designs, such as ASP upside on ongoing megapixel migration, higher aperture ratio, wide-angle lenses and inclusion of optical spec upgrades image stabilisation (OIS). Take Apple for example. Its flagship iPhone X has a dual 6P lens and dual OIS design (vs. 6P+5P; single OIS for iPhone 7 Plus released in 2H16). We also expect Apple to increase its adoption of dual 6P + dual OIS design for its new models in 2H18.

Meanwhile, China brands are starting to expand adoption to mid-range smartphones from high-end models with better specs. Huawei has been the most aggressive on this front. Take the Huawei Honor 9 (released in June 2017) as an example. This model has a dual- cam design with megapixels of 20MP+12MP, compared with 12MP+12MP in the Honor 8, released in July 2016. Huawei’s Nova 2 and Nova 2 Plus (released in June 2017), another of its line-up in the mid-tier segment, both have dual-cam functionality with a megapixel count of 12MP+8MP, from a single-cam design in its previous version (Nova and Nova Plus, released in October 2016). Oppo has been catching up fast and has pushed the megapixel to 20MP+16MP in the dual-cams for its flagship models, the R11 and R11s series (released in June and November 2017, respectively), with the specs improving significantly from a 16MP single-cam design in its predecessors, the R9s and R9s Plus, released in October 2016.

Industry leaders Largan In our opinion, the spec upgrade trend bodes well for our positive theme for the supply and Sunny, and chain, particularly for the leaders, namely, Largan, the leader in high-end lenses, and newcomer AAC stand to Sunny Optical, the leader in camera modules. AAC, the newcomer in smartphone lenses, benefit the most, in our also stands to benefit thanks to the addressable market expanding, in our view. view Beside the existing upgrade trend for smartphones, we see emerging adoption trends for folded-lens designs. According to our industry research, multiple vendors are developing technology for a periscope to deliver a folded-lens design in smartphones. This technology enables camera modules to achieve greater zoom-in capability and higher megapixels with a smaller space requirement, which results in a slimmer form factor and better camera for the smartphone. While adoption of the periscope approach is emerging, development progress depends on the build-up of the whole ecosystem (including camera modules, lens, algorithm and voice coil motor [VCM]). If this trend takes hold, we believe Largan, Sunny Optical and AAC would be well-positioned to benefit. However, we have not yet factored the possibility of such upside into our forecasts.

Greater China Smartphones: 6 December 2017

Oppo: dual-cam with folded lens design to offer 5x optical Apple patent: folded camera lens system zoom

Source: Oppo Source: Apple

Smartphone camera module supply chain

CMOS Sensor

Sony (6758 JP) Samsung (005930 KS) OminiVision (not listed) Aptina (not listed) Galaxy Core (not listed)

Camera Modules Lens Set Lite-On (2301 TT) O-Film (002456 CH) Sunny Optical (2382 HK) Truly (732 HK) Largan (3008 TT) SEMCO (009150 KS) Q-tech (1478 HK) Kantatsu (not listed) LG Innotek (011070 KS) Sharp (6753 JP) Sunny Optical (2832 HK) Hon Hai (2317 TT) Genius (3406 TT) Primax (4915 TT) Cowell (1415 HK) AAC (2018 HK) Glorytek (3428 TT) Sekonix (005345 KS) Kolen (078650 KS) Diostech (085660 KS) SEMCO (009150 KS)

VCM/OIS Alps (6770 JP) Mitsumi (6767 JP) TDK (6762 JP)

Source: Companies, Daiwa

Major dual-cam models in 4Q17 4Q17 Huawei Huawei Huawei Oppo Oppo Xiaomi Model Mate 10 Pro Mate 10 Mate 10 Lite R11s Plus R11s M6 Note

Model Picture:

Dimensions(mm): 154.2 x 74.5 x 7.9mm 150.5 x 77.8 x 8.2mm 156.2x 75 x 7.5mm 164.8x 80.2 x 7.3mm 155.1x 75.5 x 7.1mm 152 x 73.3 x 7.3 mm Weight: 178g 186g 164g 182g 153g 173g ROM capacity: 128/64GB 64GB 64GB 64GB 64GB 16/32/64GB RAM capacity: 6/4GB 4GB 4GB 4GB 4GB 3/4GB Display Diagonal: 6.0" 5.9" 5.9" 6.43" 6.01" 5.5" Display Resolution (pixels): 1080 x 2160 pixels 1440 x 2560 pixels 1080 x 2160 pixels 2160 x 1080pixels 2160 x 1080pixels 1080 x 1920 pixels Pixel density: 402ppi 499ppi 409ppi 376ppi 401ppi 401 ppi Camera resolution: 20MP+12MP 20MP+12MP 16MP+2MP 16MP+20MP 16MP+20MP 12MP+5MP OIS: yes yes no no no No Secondary Camera: 8MP 8MP 13MP+2MP 2MP 2MP 16MP Battery Capacity: 4000mAh 4000mAh 3340mAh 4000mAh 3200mAh 4000mAh Launched date Nov-17 Nov-17 Nov-17 Nov-17 Nov-17 Oct-17 Price-USD USD939 USD819 USD419 - - USD169 Price-CNY CNY6,299 CNY5,499 CNY2,799 CNY3,699 CNY2,999 CNY1,099

Source: Companies, Daiwa

Greater China Smartphones: 6 December 2017

Major dual-cam models in 3Q17 3Q17 Apple Apple Samsung Samsung Xiaomi Meizu Meizu Vivo Vivo Model iPhone X iPhone 8 Plus Galaxy Note 8 Galaxy C7 Mi Note3 Pro 7 Plus Pro 7 X9s Plus X9s

Model Picture:

Dimensions(mm): 143.6 x 70.9 x 7.7 158.4 x 78.1 x 7.5 162.5 x 74.8 x 8.6 152.4 x 74.7 x 7.9 152.6 x 74 x 7.6 157.3 x 77.2 x 7.3 147.6 x 70.7 x 7.3 162.6 x 78.9 x 7.3 152.6 x 74 x 7 Weight: 174g 202g 195g 180g 163g 170g 163g 183g 154g ROM capacity: 64/256GB 64/256GB 64/128/256GB 32GB 64/128GB 64/128GB 64/128GB 64GB 64GB RAM capacity: 3GB 3GB 6GB 4GB 6GB 6GB 4GB 4GB 4GB Display Diagonal: 5.8" 5.5" 6.3" 5.5" 5.5" 5.7" 5.2" 5.85" 5.5" Display Resolution 2436 x 1125 1920 x 1080 1440 x 2960 1080 x 1920 1080 x 1920 1440 x 2560 1080 x 1920 1080 x 1920 1080 x 1920 (pixels): Pixel density: 458ppi 401ppi 521 ppi 401ppi 401ppi 518 ppi 423 ppi 377 ppi 401 ppi Camera resolution: 12MP+12MP 12MP+12MP 12MP+12MP 13MP+5MP 12MP+12MP 12MP+12MP 12MP+12MP 16MP 16MP OIS: Dual OIS Yes yes No Yes No No No No Secondary 7MP 7MP 8MP 16MP 16MP 16MP 16MP 20MP+5MP 20MP+5MP Camera: Battery Capacity: Up to 10 days Up to 16 days 3300mAh 3000mAh 3500mAh 3500mAh 3000mAh 4015mAh 3320mAh Launched date Sep-17 Sep-17 Sep-17 Sep-17 Sep-17 Aug-17 Aug-17 Jul-17 Jul-17 Price-USD USD999 USD799 USD930 USD439 - - - - - Price-CNY CNY8,388 CY6,688 CNY5,850 CNY2,799 CNY2,499 CNY2,880 CN Y3,580 CNY2,998 CNY2,698

Source: Companies, Daiwa

Major dual-cam models in 2Q17 2Q17 Huawei Huawei Huawei Oppo Oppo ZTE Gionee Gionee Oppo Model Honor 9 Nova 2 Plus Nova 2 R11 Plus R11 nubia Z17 S10 S10B F3

Model Picture:

Dimensions(mm): 147.3 x 70.9 x 7.5 153.9 x 74.9 x 6.9 142.2 x 68.9 x 6.9 165.8 x 81.5 x 7.8 154.5 x 74.8 x 6.8 152.6 x 72.4 x 7.6 155 x 76.8 x 7.4 155 x 76 x 7.6 153.3 x 75.2 x 7.3 Weight: 155 g 169 g 143 g 188 g 150 g 173 g 178 g 176 g 153 g ROM capacity: 64/128GB 128GB 64GB 64GB 64GB 64/128GB 64GB 64GB 64GB RAM capacity: 4/6GB 4GB 4GB 6GB 4GB 6/8GB 4GB 4GB 4GB Display Diagonal: 5.15" 5.5" 5.0" 6.0" 5.5" 5.5" 5.5" 5.5" 5.5" Display Resolution 1080 x 1920 1080 x 1920 1080 x 1920 1080 x 1920 1080 x 1920 1080 x 1920 1080 x 1920 1080 x 1920 1080 x 1920 (pixels): Pixel density: 428 ppi 401 ppi 443 ppi 368 ppi 401 ppi 403 ppi 401 ppi 401 ppi 401 ppi Camera resolution: 20MP+12MP 12MP+8MP 12MP+8MP 20MP+16MP 20MP+16MP 12MP+23MP 16MP+8MP 13MP+5MP 13MP OIS: No No No No No No No No Yes Secondary 8MP 20MP 20MP 20MP 20MP 16MP 20MP 16MP 16MP + 8MP Camera: Battery Capacity: 3200 mAh 3340 mAh 2950 mAh 4000 mAh 3000 mAh 3200 mAh 3450 mAh 3700 mAh 3200 mAh Launched date Jun-17 Jun-17 Jun-17 Jun-17 Jun-17 Jun-17 Jun-17 Jun-17 May-17 Price-USD ------Price-CNY CNY2,299 CNY2,899 CNY2,499 CNY3,699 CNY2,999 CNY2,799 CNY2,599 CNY2,199 CNY2,099 Source: Companies, Daiwa

Greater China Smartphones: 6 December 2017

Major dual-cam models in 3Q16-1Q17 1Q17 4Q16 3Q16 Huawei Huawei Huawei LG Oppo Vivo Huawei Huawei Vivo Vivo Apple Model P10 Plus P10 Honor V9 G6 F3 Plus V5 Plus Honor Magic Mate 9 Xplay6 X9 Plus iPhone 7 Plus

Model Picture:

Dimensions (mm): 153.5 x 74.2 x 7 145.3 x 69.3 x 7 157 x 77.5 x 7 148.9 x 72x 7.9 164 x 81 x 7.4 152.6 x 74 x 7.3 146 x 69.9 x 7.8 157 x 78.9 x 7.9 154 x 73.6 x 8.4 162 x 79 x 7.5 158 x 8 x 7.3 Weight: 165 g 145 g 184 g 163 g 185 g 158.6 g 145 g 190 g 178 G 199 g 188 g ROM capacity: 64/128GB 32/64GB 64/128GB 32/64GB 64GB 64GB 64 GB 32 GB 128 GB 64 GB 32GB RAM capacity: 4/6GB 4GB 4/6GB 4GB 4GB 4GB 4 GB 4 GB 6 GB 6 GB 2 GB Display diagonal: 5.5" 5.1" 5.7" 5.7" 6.0" 5.5" 5.09" 5.9" 5.46" 5.88" 5.5" Display resolution 1440 x 2560 1080 x 1920 1440 x 2560 1440 x 2880 1080 x 1920 1080 x 1920 1440 x 2560 1080 x 1920 1440 x 2560 1080 x 1920 1920 x 1080 (pixels): Pixel density: 540 ppi 432 ppi 515 ppi 564 ppi 367 ppi 401 ppi 577 ppi 373 ppi 538 ppi 375 ppi 401 ppi Camera resolution: 20MP + 12MP 20MP + 12MP 12MP + 12MP 13MP + 13MP 16MP 16MP 12MP + 12MP 20MP + 12MP 12MP + 12MP 16MP 12MP + 12MP OIS: Yes Yes No Yes Yes No No Yes Yes No Yes Secondary camera: 8MP 8MP 8MP 5MP 16MP + 8MP 20MP + 8MP 8MP 8MP 16MP 20MP + 8MP 7MP Battery capacity: 3750 mAh 3200 mAh 4000 mAh 3300 mAh 4000 mAh 3160 mAh 2900 mAh 4000 mAh 4080 mAh 4000 mAh Up to 16 days Launched date Feb-17 Feb-17 Feb-17 Feb-17 Mar-17 Jan-17 Dec-16 Nov-16 Nov-16 Nov-16 Sep-16 Price-USD - - - USD750 ------USD669 Price-CNY CNY4,988 CNY3,488 CNY2,599 - CNY3,299 CNY2,899 CNY3,699 CNY3,399 CNY 4,498 CNY3,450 CNY5,588

Source: Companies, Daiwa

Positive on camera component supply chain – muted outlook for 1Q18 another opportunity to accumulate Booming adoption trend In our 2 previous reports in this series, we highlighted our positive view on the smartphone of dual-cams with the camera supply chain given the rising adoption of multi-cams (see Part 1 and Part 2). Our emergence of 3D recent market research suggests these trends are not only on track, but are ahead of our sensing in smartphones earlier expectation, as we discuss in this report. We expect increasing penetration of 3D to have positive impact sensing combined with the accelerating adoption of dual-cam in smartphones to broaden on our top picks: the addressable markets for the camera component supply chain. In the Greater China Largan, Sunny and AAC smartphone space, Largan and Sunny remain our top picks under this theme. We also add AAC into our top pick list given its recent breakthrough in optics (see Promising outlook with multi growth drivers, published in August 2017).

In the near term, we expect some share-price pullback due to profit-taking amid the quiet season in 1Q18, particularly after the strong share-price performance YTD. For the iPhone supply chain, we believe the street’s expectations for the iPhone X are too optimistic and we could see share prices in the supply chain come under near-term pressure as expectations are reset (see iPhone X: production on track for a strong 4Q17 but could see a seasonal decline in 1Q18, 28 November 2017). For the China smartphone brands, our research suggests lukewarm demand for some major brands (such as Oppo and Vivo) in 1Q18 on model transition. We believe this situation would provide a good opportunity for investors to accumulate our top picks, given what we see as the intact long-term favourable industry picture ahead and solid earnings growth.

Largan. We view Largan as well-positioned to benefit from the dual-cam adoption trend, driven by its broader adoption of dual cams in mid-range models, in addition to high-end models. As such, we forecast dual-cam-adopted smartphone shipments of 502/690/856m for 2018/19/20, respectively, from 268m in 2017E. We also see further upside for our earnings forecasts for 2019 and beyond for Largan from 3D sensing. We believe Largan is in talks with major customers regarding supplying them with Tx lenses in 2019, which would be a potential growth driver for Largan, in addition to its current Rx lens sets product. We reaffirm our Buy (1) rating on the stock with a new 12-month TP of TWD5,800 (from TWD6,680), now based on a PER of 20x (from 21x PER previously and vs. its past- 5-year range of 8-24x), applied to our revised 1-year forward EPS forecast, to reflect muted near term sentiment due to lukewarm iPhone demand and China smartphone inventory adjustments. We view the recent pullback in the share price due to the market resetting expectations for the iPhone X as presenting a further opportunity to accumulate.

Greater China Smartphones: 6 December 2017

Sunny Optical. In addition to its increasing dual-cam adoption and ongoing camera spec upgrades, Sunny Optical stands to be a major beneficiary of the rising adoption trend of multi-cams in smartphones, in our view. We forecast 3D-sensing-adopted smartphones to provide an additional market size of USD13.5bn for the camera module suppliers by 2020, and view Sunny as well-positioned to benefit from this trend on the back of its leading position in handset camera modules (HCM). We expect 3D sensing to contribute 4-12% of its revenue each year in 2018-19E. Accelerating dual-cam adoption should also provide strong growth drivers for Sunny in both HCM and handset lens sets. For vehicle lenses, we see Sunny maintaining its leading position and expect it to continue benefiting from the multi-cam trend in the automotive segment on rising demand for ADAS. We reaffirm our Buy (1) rating and raise our 12-month target price to HKD165 (from HKD160), on an unchanged PER of 36x, compared with its past-3-year trading range of 10-36x, applied to our revised 1-year-forward EPS forecast. We view recent share-price pullbacks due to China inventory adjustments in 4Q17-1Q18 for China brands (OPPO/Vivo) as a good opportunity to accumulate given Sunny is less impacted by this due to its strong relationship with Huawei.

AAC. We are positive on AAC and view it as well-placed to benefit from multi-cam adoption for 3D sensing in smartphones due to its recent breakthrough in optics. AAC has recently recorded a strong production yield for its lens products with major project wins from top-tier China brands in 2H17, and we believe the company is in talks with a Korea customer and likely to see more projects/client wins in 2018. In addition to the company’s intact revenue growth momentum from the acoustics and haptics business, we see further upside from 3D sensing, and a good possibility that its WLO or hybrid lens solution will tap into the demand for Tx lenses for 3D sensing from major smartphone customers in 2019 , which we have not yet factored into our forecasts. We reaffirm our Buy (1) rating and raise our 12-month target price to HKD200 (from HKD195), based on an unchanged PER of 27x, compared with its past-3-year trading range of 13-25x, applied to our revised 1-year-forward EPS forecast. We view recent share-price pullbacks due to market resetting expectations for iPhone X going into the quiet season and inventory adjustments for China brands as a good opportunity to accumulate.

Risks to our view The core risk is slower-than-expected dual-cam or multi-cam adoption in smartphones. Although we believe dual-cams design adoption will speed up significantly due to demand for enhanced image quality and rising adoption of multi-cams on the emergence of 3D sensing in the next few years, consumer feedback will be the key to the final adoption rate. Poor acceptance from consumers could lead to lower revenue growth for companies focused on camera components, impacting players like Largan, Sunny Optical and AAC.

A secondary risk is weaker-than-expected smartphone sell-through. The volatility and uncertainties arising from macroeconomic events, currency fluctuations, and high smartphone penetration in developed and developing countries could delay the smartphone replacement cycle or new purchases by consumers. This could result in weaker-than-expected smartphone sell-through and lead to slower-than expected revenue growth for the sector.

A third risk is an increase in price competition in the sector. After years of strong volume growth, smartphone market saturation points to single digit YoY volume growth in the next few years, based on our forecasts. Limited volume growth could contribute to higher price competition, ultimately leading to lower gross margins for companies within the sector.

Greater China Smartphones: 6 December 2017

Appendix 1 Major technologies in 3D sensing A 3D sensing sensor consists of 2 main parts: a receiver module (Rx) and a transmitter module (Tx), and is a semiconductor that can project and receive light emission to deliver sensing capability in a 3D dimension. Applications for 3D sensing in smartphones include augmented reality (AR), face recognition, gesture recognition, 3D scanning and mobile payments…etc. There are 3 approaches to drive 3D sensing: structured light, time of flight (ToF) and stereo system.

Structure light: By projecting infrared dots to form the pattern of the object, the device then measures the size of each dot, which represents the distance between the dot and the device (the larger the dot, the longer the distance), to create a stereo image. The structured light system specializes in a very short to mid distance in 3D sensing, which is ideal to be adopted on the front-cam of smartphones.

Time of Flight: The device measures the depth of image by measuring the time it takes for an infrared beam to transmit to the object and to reflect to the device. The time of flight device has more merits in short to long distance sensing, hence it is more suitable to be applied in the rear-cam on smartphones.

Stereo system: Originated from the conception of the human eyes, the device captures a scene with 2 cameras to illustrate the same object from different views and generate a stereo vision for the object. The stereo system has the most complicated design among these 3D sensing technologies but can also create a 3D image with the lowest power consumption given active illumination is not required in this technology.

Comparison between 3D sensing technologies Structured light ToF Stereo system

Design

Latency Medium Low Medium Low light performance Good Good Weak Bright light performance Medium Medium Good Range Short to mid Short to long Mid Scanning speed Medium Fast Medium Active illumination Yes Yes No Power consumption High Medium Low

Source: Companies, Daiwa

Greater China Smartphones: 6 December 2017

Appendix 2 Overview of wafer level optics Wafer level optics (WLO), or wafer level lens, are optical products manufactured using a semiconductor process on wafers. Compared with traditional lens sets, the benefits of WLO include miniaturisation, heat resistance, high level of integration and economies of scale. However, there are drawbacks including lower resolution due to its limitation in layer stacking and heavier weight as it applies glass as a substrate. The major global suppliers in WLO are AMS (Heptagon) and Himax. AAC is also tapping into WLO by adopting different processes via its investment in Kaleido, a private company based in Europe. Unlike the traditional method of WLO that uses epoxy as polymer, AAC uses moulding tools to grind both sides of an aspheric surface into wafers. According to AAC, its product achieves better overall performance than traditional WLO.

The manufacturing process of WLO includes several steps: a. Tiny micro droplets of polymer (epoxy) are dispensed onto a silicon wafer. b. The polymer IS embossed and cured on the wafer and UV light is used to harden it. c. The wafer is separated from the mould. d. The process (a, b and c) is then repeated on the other side of the wafer. e. The replicated wafers are then stacked. f. The stacked wafers are diced into individual micro optics structures.

WLO manufacturing process

Source: Heptagon, Daiwa

In addition, WLO products can be further integrated into modules (wafer level module, WLM), through mould injecting, shielding and assembling.

Greater China Smartphones: 6 December 2017

Wafer level process overview

Source: Heptagon, Daiwa

Greater China Smartphones: 6 December 2017

Appendix 3 The dilemma: image quality vs. form factor Cameras are one of the key features in a smartphone that brands have been focusing on and seek to upgrade in order to appeal to consumers. However, the nature of a smartphone’s form-factor design, in particular the thickness requirement, makes it a challenge to improve image quality. For instance, a larger CMOS sensor, bigger pixel size, or more lens components in a lens set allow more light into a camera module to catch more details of a subject, resulting in a better image quality. However, this also means a bulky camera module with a higher Z-height (the height of the camera module) due to the increased size or pieces of the optical components. Thus, there is always a trade-off between better image quality and a thinner form-factor design for a smartphone.

This dilemma became a more important issue with the migration of smartphone cameras to higher resolution. Given the space constraints in a smartphone, the image quality of 16MP+ camera modules could be worse than that of the phones with 8MP-12MP camera modules, because the pixel size becomes too small to ensure good light sensitivity. On the other hand, assuming other criteria stay the same (such as field of view, sensor size, the level of design difficulty, etc.), a higher resolution requires a longer focal length due to the smaller pixel size and results in a higher Z-height for the camera module.

The trade-off between light sensitivity and pixel size Smaller pixel size results in thicker camera modules Ѳ

16MP 12MP Ѳ

8MP

Source: Companies, Daiwa Source: Companies, Daiwa

Dual-cams as a solution to the dilemma The emergence of dual-cams solves this dilemma, in our view. Having a dual-cam in a smartphone means that it has 2 cameras on the back of the phone to take pictures/shoot film instead of just 1 camera, which is the design currently adopted in most smartphones. By incorporating 2 channels to collect picture details/light, phones with dual-cams can reduce the Z-height significantly and deliver a similar or even better performance than a single-cam. Dual-cam smartphones can offer higher resolution and better image quality compared with single-cam models, and are thinner than single-cams.

Dual-cam design can reduce the thickness of a camera module Dual-cam design can improve camera image quality, with a camera module that is as thick, or thin, as a single-camera module

8MP 8MP 8MP

8MP Height

1.5um - 1.5um 1.5um Height

4MP 4MP Z 1.5um - Z Z 2.0um 2.0um

8MP 13~16MP

Source: Companies, Daiwa Source: Companies, Daiwa Note: Z-height: the depth of a camera module Note: Z-height: the depth of a camera module

Greater China Smartphones: 6 December 2017

Improved imaging quality In addition to reducing the thickness/height of the camera module to create a thinner form factor for smartphones, dual-cams can improve image quality in different areas by leveraging different characteristics of each camera. The major benefits of dual-cams include multiple focus/post-shot focus adjustments, better image quality in low-light environments, improved resolution/pixel quality, optical zoom function, and 3D depth mapping based on different dual-cam designs.

The current dual-cam designs can be categorised into 4 major types: 1) identical type – high resolution (colour) + high resolution (colour), 2) twin type – high resolution (mono) + high resolution (colour), 3) twin type – telephoto camera + wide-angle camera, and 4) depth type – high resolution + low resolution. We note that each type plays an important role in improving image quality (see the table below).

Dual camera: multiple focus/post-shot focus adjustments Dual camera: improved resolution/pixel quality

Source: Corephotonics, Daiwa Source: Altek, Daiwa

Dual camera: optical zoom function Dual camera – 3D depth mapping

Source: Companies, Daiwa Source: Companies, Daiwa

Greater China Smartphones: 6 December 2017

Image quality and form factor comparisons – different types of dual-cams and single cams Dual-cam Structure Dual-cam Symmetric Single camera Asymmetric Resolution High + High High + High High + High High + Low

CMOS sensor Colour + Colour Colour + Mono Colour + Colour Colour + Colour Colour Telephoto Focal length Same Same Depends + Wide-Angle

Camera Module Structure

Thickness of camera module Thinner Thinner Thinner Thinner Thicker Optical zoom n.a n.a ★★★★★ ★ n.a Low-light image quality ★★★ ★★★★★ ★★★★ ★★ ★ Improved resolution/ Pixel quality ★★★ ★★★★★ ★★★★ ★★ ★ 3D depth mapping ★★★★★ ★★★★ ★★★★ ★★★ n.a Multiple focus ★★★ ★★★ ★★★★ ★★★★★ ★ / Post-photo adjustments

Source: Companies, Daiwa

China Information Technology 5 December 2017

(2018 HK) AAC Technologies AAC Technol ogies

Target price: HKD200.00 (from HKD195.00) Share price (6 Dec): HKD138.90 | Up/downside: +44.0%

Multi-cam benefits set to materialise in 2018-19 Kylie Huang (886) 2 8758 6248  Looks well placed to tap into multi-cam trend in smartphones [email protected]  Favourable trends intact; upside from 3D sensing could arrive in 2019 Steven Yang (886) 2 8758 6245  Reiterating Buy (1) with new TP of HKD200; remains a top pick [email protected]

What's new: We expect AAC to benefit from multi-cam adoption in Forecast revisions (%) smartphones, backed by its recent breakthrough in optics products. We reaffirm Year to 31 Dec 17E 18E 19E our Buy (1) rating on the stock and would view any share-price pullback due to Revenue change (0.7) 1.5 0.5 Net profit change (0.7) 2.5 0.8 the market resetting expectations for the iPhone X in the quiet season as a Core EPS (FD) change (0.7) 2.5 0.8 further opportunity to accumulate (see iPhone X: production on track for a strong Source: Daiwa forecasts 4Q17 but could see a seasonal decline in 1Q18, published 28 November). Share price performance What's the impact: Realising the benefits of multi-cams in smartphones. (HKD) (%) We hold a positive view of the smartphone camera component supply chain, 180 205 driven by rising multi-cam adoption. We forecast the number of dual-cam 150 174 smartphones to total 502-856m in 2018-20 (from 268m in 2017E), and look for 120 143 the number of smartphones with 3D sensing functionality to reach 200-618m for 90 111 60 80 2018-20 (vs. 34m in 2017E). As we see it, these trends will broaden the Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 addressable market for lens vendors and AAC stands to benefit due to the AAC Tech (LHS) Relative to HSI (RHS) breakthrough in its optics products. As highlighted in A rosy 2018 on favourable trends and new drivers, AAC looks to have seen strong production yields for its lens products, with major project wins from top-tier China brands in 2H17. 12-month range 66.60-179.20 Market cap (USDbn) 21.83 Moreover, we believe AAC is in talks with its Korea customer, raising the 3m avg daily turnover (USDm) 94.58 prospect of more project/client wins in 2018. In total, we forecast optics revenue Shares outstanding (m) 1,228 to contribute 7-12% of AAC’s 2018-19 revenue, up from just 1% in 2017E. Major shareholder Chun Yuan Wu Ingrid (21.4%)

Further upside from 3D sensing in 2019 and beyond. After years of Financial summary (CNY) development work, AAC has devised its own wafer level lens (WLO) products, Year to 31 Dec 17E 18E 19E which we understand have received good feedback from customers. We Revenue (m) 20,360 26,500 32,050 Operating profit (m) 5,904 8,414 10,384 believe there is a high possibility that AAC’s WLO or hybrid lens (WLO + Net profit (m) 5,278 7,511 9,350 plastic) solutions will find their way into major customers’ Tx lenses for the 3D Core EPS (fully-diluted) 4.298 6.116 7.614 sensing supply chain in 2019. If so, we think this could be a major earnings EPS change (%) 31.1 42.3 24.5 Daiwa vs Cons. EPS (%) (2.3) 4.3 4.8 driver for AAC in 2019 — one not yet factored into our forecasts. PER (x) 27.3 19.2 15.4 Dividend yield (%) 0.9 1.1 1.6 Multiple drivers for solid earnings growth. In addition to the promising outlook DPS 1.070 1.289 1.835 in optics, we see AAC’s major business, acoustics, riding on an ASP uptrend PBR (x) 7.9 6.0 4.6 EV/EBITDA (x) 20.3 14.1 10.8 backed by spec upgrades (ie, waterproofing, stereo sound). Meanwhile, we look ROE (%) 32.3 35.3 33.7 for its haptics products to see increasing adoption in Android smartphones. On Source: FactSet, Daiwa forecasts our forecasts, AAC’s EPS would expand by 25-42% in 2018-19E.

What we recommend: We lower our 2017E EPS by 1% but lift 2018-19E EPS by 1-3%, reflecting our more upbeat assumptions on optics and more cautious view on the iPhone X orders. We reiterate our Buy (1) rating and lift our 12-month TP to HKD200 (from HKD195), on an unchanged 27x PER (vs. a past-3-year range of 13-25x), applied to our revised 1-year-forward EPS. Key risk: weaker smartphone sell-through.

How we differ: Our 2018-19 EPS are 4-5% above the consensus due to our more upbeat view on the benefits to AAC of new drivers and spec upgrades.

See important disclosures, including any required research certifications, beginning on page 38

AAC Technologies (2018 HK): 5 December 2017

Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Receiver sales growth (% YoY) 49.0 30.3 21.6 (22.1) 69.0 3.9 20.6 16.6 Speaker box sales growth (% YoY) 91.4 79.0 (24.1) 13.9 27.9 32.6 31.5 20.6 Non-acoustic products sales growth (% 0.0 0.0 1,858.8 145.1 56.5 46.0 37.4 24.7 YoY)

Profit and loss (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Acoustic proudcts 5,826 7,602 6,857 7,182 8,494 10,065 12,451 14,523 Non-acoustic 0 93 1,812 4,442 6,951 10,146 13,939 17,376 Other Revenue 457 401 210 115 62 149 110 151 Total Revenue 6,283 8,096 8,879 11,739 15,507 20,360 26,500 32,050 Other income 0 0 0 0 0 0 0 0 COGS (3,509) (4,637) (5,201) (6,867) (9,064) (11,972) (15,291) (18,365) SG&A (464) (530) (537) (803) (763) (1,242) (1,398) (1,651) Other op.expenses (462) (553) (656) (859) (1,166) (1,242) (1,398) (1,651) Operating profit 1,849 2,376 2,485 3,210 4,514 5,904 8,414 10,384 Net-interest inc./(exp.) 4 6 10 (7) (33) (47) (30) (35) Assoc/forex/extraord./others 163 453 85 233 152 105 150 155 Pre-tax profit 2,016 2,835 2,581 3,435 4,633 5,962 8,534 10,505 Tax (259) (263) (270) (325) (609) (686) (1,024) (1,156) Min. int./pref. div./others 6 6 7 (3) n.a. n.a. n.a. n.a. Net profit (reported) 1,763 2,578 2,318 3,107 4,026 5,278 7,511 9,350 Net profit (adjusted) 1,763 2,578 2,318 3,107 4,026 5,278 7,511 9,350 EPS (reported)(CNY) 1.435 2.099 1.887 2.530 3.278 4.298 6.116 7.614 EPS (adjusted)(CNY) 1.435 2.099 1.887 2.530 3.278 4.298 6.116 7.614 EPS (adjusted fully-diluted)(CNY) 1.435 2.099 1.887 2.530 3.278 4.298 6.116 7.614 DPS (CNY) 0.360 0.574 0.603 0.857 0.765 1.070 1.289 1.835 EBIT 1,849 2,376 2,485 3,210 4,514 5,904 8,414 10,384 EBITDA 2,192 2,828 3,010 3,921 5,476 7,192 10,415 13,126

Cash flow (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 2,016 2,835 2,581 3,435 4,633 5,962 8,534 10,505 Depreciation and amortisation 343 452 525 711 962 1,287 2,001 2,742 Tax paid (259) (263) (270) (325) (609) (686) (1,024) (1,156) Change in working capital (521) (97) (890) (226) (353) (990) (3,050) (1,573) Other operational CF items 6 (21) 8 (1) 4 (0) (0) (0) Cash flow from operations 1,584 2,905 1,953 3,595 4,638 5,574 6,461 10,517 Capex (1,253) (782) (1,827) (2,493) (3,367) (5,300) (5,500) (3,000) Net (acquisitions)/disposals (60) 264 (12) 8 (11) 1 1 2 Other investing CF items (59) (464) (341) 62 (776) (68) (70) (72) Cash flow from investing (1,373) (981) (2,180) (2,424) (4,154) (5,367) (5,569) (3,070) Change in debt 172 (108) 447 390 2,285 409 90 (459) Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (442) (705) (740) (1,052) (940) (1,314) (1,583) (2,253) Other financing CF items (2) (71) (231) 113 (189) 0 0 0 Cash flow from financing (272) (884) (525) (550) 1,157 (905) (1,493) (2,712) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (60) 1,040 (752) 621 1,640 (698) (601) 4,735 Free cash flow 212 1,924 (227) 1,171 1,271 274 961 7,517 Source: FactSet, Daiwa forecasts

AAC Technologies (2018 HK): 5 December 2017

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 1,314 2,354 1,603 2,224 3,864 3,167 2,566 7,300 Inventory 958 832 1,267 1,718 2,623 2,993 4,247 5,101 Accounts receivable 2,329 2,581 3,850 4,196 6,156 7,252 9,801 11,854 Other current assets 6 36 30 43 186 244 318 384 Total current assets 4,607 5,802 6,750 8,181 12,829 13,656 16,932 24,640 Fixed assets 3,624 3,969 5,285 7,080 9,494 13,517 17,026 17,295 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 694 906 1,244 1,159 1,934 1,992 2,051 2,113 Total assets 8,926 10,677 13,279 16,420 24,257 29,164 36,010 44,048 Short-term debt 1,035 905 1,418 1,159 3,303 3,601 3,673 3,306 Accounts payable 1,575 1,617 2,388 2,919 5,346 5,904 6,703 8,050 Other current liabilities 141 157 195 248 476 452 482 534 Total current liabilities 2,751 2,679 4,001 4,326 9,125 9,958 10,858 11,890 Long-term debt 0 0 0 649 789 900 918 827 Other non-current liabilities 44 66 0 0 0 0 0 0 Total liabilities 2,796 2,745 4,001 4,975 9,915 10,858 11,776 12,717 Share capital 100 100 100 100 100 100 100 100 Reserves/R.E./others 6,030 7,832 9,178 11,346 14,243 18,206 24,134 31,231 Shareholders' equity 6,130 7,932 9,278 11,445 14,343 18,306 24,234 31,331 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 8,926 10,677 13,279 16,420 24,257 29,164 36,010 44,048 EV 144,063 142,892 144,157 143,926 144,570 145,676 146,367 141,174 Net debt/(cash) (279) (1,450) (185) (416) 228 1,335 2,026 (3,168) BVPS (CNY) 4.992 6.459 7.555 9.320 11.680 14.907 19.734 25.514

Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 54.8 28.9 9.7 32.2 32.1 31.3 30.2 20.9 EBITDA (YoY) 57.1 29.0 6.5 30.3 39.6 31.3 44.8 26.0 Operating profit (YoY) 62.8 28.5 4.6 29.2 40.6 30.8 42.5 23.4 Net profit (YoY) 70.1 46.2 (10.1) 34.1 29.6 31.1 42.3 24.5 Core EPS (fully-diluted) (YoY) 70.1 46.2 (10.1) 34.1 29.6 31.1 42.3 24.5 Gross-profit margin 44.2 42.7 41.4 41.5 41.5 41.2 42.3 42.7 EBITDA margin 34.9 34.9 33.9 33.4 35.3 35.3 39.3 41.0 Operating-profit margin 29.4 29.3 28.0 27.3 29.1 29.0 31.8 32.4 Net profit margin 28.1 31.8 26.1 26.5 26.0 25.9 28.3 29.2 ROAE 32.2 36.7 26.9 30.0 31.2 32.3 35.3 33.7 ROAA 22.5 26.3 19.3 20.9 19.8 19.8 23.0 23.4 ROCE 28.7 29.7 25.4 26.8 28.5 28.6 32.6 32.3 ROIC 31.7 34.9 28.6 28.9 30.6 30.5 32.3 34.0 Net debt to equity n.a. n.a. n.a. n.a. 1.6 7.3 8.4 n.a. Effective tax rate 12.8 9.3 10.5 9.5 13.1 11.5 12.0 11.0 Accounts receivable (days) 110.9 110.7 132.2 125.1 121.8 120.2 117.4 123.3 Current ratio (x) 1.7 2.2 1.7 1.9 1.4 1.4 1.6 2.1 Net interest cover (x) n.a. n.a. n.a. 431.1 137.5 124.8 278.6 299.8 Net dividend payout 25.1 27.4 31.9 33.9 23.3 24.9 21.1 24.1 Free cash flow yield 0.1 1.3 n.a. 0.8 0.9 0.2 0.7 5.2 Source: FactSet, Daiwa forecasts

Company profile

AAC Technologies designs and manufactures miniature acoustic components, including speakers, receivers, microphones and hands-free headsets, for use in mobile phones and other consumer handheld devices.

AAC Technologies (2018 HK): 5 December 2017

Global dual-cam and 3D sensing adoption in smartphones Global smartphone lens sets market (m units) (USDbn) 2,000 100% 10 90% 80% 1,500 8 70% 60% 6 1,000 50% 40% 4 30% 500 20% 2 10% 0 0% 0 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Total smartphone Total dual-cam smartphone Single-cam (front+rear) Dual-cam Total 3D sensing smartphone Dual-cam penetration rate 3D Sensing (Tx lens sets) 3D Sensing (Rx lens sets) 3D sensing penetration rate Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Global dual-cam adoption in smartphones by brand Global 3D sensing adoption in smartphones by brand (m units) (m units) 900 1,000 800 800 700 600 600 500 400 400 300 200 200 100 0 0 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Apple (front) Apple (front + rear) Samsung (front) Apple Samsung Huawei Oppo Vivo Xioami Others Samsung (front + rear) China& others (front) China& others (front + rear) Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

AAC: quarterly and annual P&L 2017 2018 2017E 2018E 2019E (CNYm) 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE Net sales 4,215 4,429 5,324 6,392 5,130 5,722 6,981 8,666 20,360 26,500 32,050 Gross profit 2,461 1,787 2,199 2,648 2,102 2,364 2,996 3,747 8,388 11,210 13,685 Operating costs 524 580 685 695 657 671 713 755 2,484 2,796 3,301 Operating profit 1,230 1,207 1,514 1,953 1,445 1,693 2,283 2,992 5,904 8,414 10,384 Pre-tax profit 1,226 1,215 1,499 2,022 1,475 1,723 2,313 3,022 5,962 8,534 10,505 Net profit 1,062 1,065 1,366 1,785 1,306 1,525 2,036 2,644 5,278 7,511 9,350 EPS (CNY) 0.86 0.87 1.12 1.46 1.07 1.25 1.67 2.16 4.30 6.12 7.61 Margins Gross margins 41.6% 40.4% 41.3% 41.4% 41.0% 41.3% 42.9% 43.2% 41.2% 42.3% 42.7% Operating margin 29.2% 27.3% 28.4% 30.6% 28.2% 29.6% 32.7% 34.5% 29.0% 31.8% 32.4% Pre-tax margin 29.1% 27.4% 28.2% 31.6% 28.8% 30.1% 33.1% 34.9% 29.3% 32.2% 32.8% Net margin 25.2% 24.0% 25.7% 27.9% 25.5% 26.7% 29.2% 30.5% 25.9% 28.3% 29.2% YoY (%) Net revenue 66% 47% 27% 11% 22% 29% 31% 36% 31% 30% 21% Gross profit 70% 42% 25% 11% 20% 32% 36% 42% 30% 34% 22% Operating income 90% 46% 25% 7% 18% 40% 51% 53% 31% 42% 23% Pre-tax income 85% 43% 19% 9% 20% 42% 54% 49% 29% 43% 23% Net income 72% 45% 24% 14% 23% 43% 49% 48% 31% 42% 24% QoQ (%) Net revenues -27% 5% 20% 20% -20% 12% 22% 24% Gross profit -27% 2% 23% 20% -21% 12% 27% 25% Operating income -33% -2% 25% 29% -26% 17% 35% 31% Pre-tax income -34% -1% 23% 35% -27% 17% 34% 31% Net income -32% 0% 28% 31% -27% 17% 33% 30%

Source: Company and Daiwa forecasts

AAC Technologies (2018 HK): 5 December 2017

AAC: 1-year-forward PER AAC: 1-year-forward PBR (HKD) (HKD) 200 200

150 150

100 100

50 50

0 0

Oct-08 Oct-10 Oct-12 Oct-14 Oct-16

Apr-09 Apr-11 Apr-13 Apr-15 Apr-17

Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17

Feb-08 Feb-10 Feb-12 Feb-14 Feb-16

Dec-07 Aug-08 Dec-09 Aug-10 Dec-11 Aug-12 Dec-13 Aug-14 Dec-15 Aug-16 Dec-17 share price 9x 16x 23x 28x share price 3x 5x 7x 9x

Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts

Taiwan Information Technology 5 December 2017

(3008 TT) Largan Precision Largan Precisi on

Target price: TWD5,800 (from TWD6,680) Share price (6 Dec): TWD4,265 | Up/downside: +36.0%

Favourable trends intact; pullback a buying opportunity Kylie Huang (886) 2 8758 6248  Forecasting 33-47% EPS growth for 2018-19 on multi-cam adoption [email protected]  We see further upside from 3D sensing Tx lenses in 2019 Steven Yang (886) 2 8758 6245  Reiterate Buy (1) call with new TP of TWD5,800, still one of our top picks [email protected]

What's new: We continue to view Largan as a major beneficiary of the Forecast revisions (%) rising adoption of multi-cams in smartphones. In our opinion, the recent Year to 31 Dec 17E 18E 19E Revenue change (5.8) (9.0) (4.4) pullback in share price due to the market resetting its expectations of Net profit change (7.9) (13.3) (5.4) iPhone X demand presents a sound opportunity to accumulate the shares Core EPS (FD) change (7.9) (13.3) (5.4) (see iPhone X: production on track for a strong 4Q17 but could see a Source: Daiwa forecasts seasonal decline in 1Q18). The stock remains one of our sector top picks. Share price performance What's the impact: Well positioned for dual-cam trend. With dual-cam (TWD) (%) adoption broadening from high-end to mid-range smartphones, we revise up 6,000 145 our forecasts of dual-cam adoption in smartphones to 502m in 2018 (420m 5,375 133 previously), 690m in 2019, and 856m in 2020. We estimate this outlook will 4,750 120 provide an extra addressable market for lens vendors of USD1.6bn in 2020 4,125 108 3,500 95 (vs. a market size of USD3.0bn in 2016). Also, we expect the spec-upgrade Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 trend among dual-cams (including higher megapixels, larger wide angle, and Largan (LHS) adoption of optical image stabilisation [OIS]) to continue in the coming years. Relative to TWSE Index (RHS) For example, we look for Apple’s next two dual-cam models (expected in 2H18) to sport dual 6P lens sets and dual OIS (vs. only one model in 2H17). 12-month range 3,550-6,000 Market cap (USDbn) 19.08 Given its status as market leader, Largan should see both volume and ASP 3m avg daily turnover (USDm) 83.83 upside from these trends, in our opinion. Shares outstanding (m) 134 Major shareholder Ch'en Shih Ch'ing (5.0%) 3D sensing: upside potential in 2019 and beyond. We expect smartphones with 3D sensing functionality to total 200-618m for 2018-20 Financial summary (TWD) (from 34m in 2017E). Being a major supplier of Rx lenses, Largan should Year to 31 Dec 17E 18E 19E be benefiting from this rise in adoption, in our view. Besides, our research Revenue (m) 53,500 73,450 92,950 Operating profit (m) 32,030 45,612 60,269 suggests that the company is in talks with major customers regarding Tx Net profit (m) 26,246 38,550 51,122 lenses for 2019. We estimate the market for Tx lenses to reach USD1.5bn Core EPS (fully-diluted) 195.659 287.385 381.108 in 2020, more than double the size of the Rx lens market (USD0.6bn). EPS change (%) 15.5 46.9 32.6 Thus, any project wins in Tx lenses would likely be earnings drivers for Daiwa vs Cons. EPS (%) (3.1) (2.9) 8.9 PER (x) 21.8 14.8 11.2 Largan in 2019-20E, which we have not factored into our estimates. Dividend yield (%) 1.4 1.6 2.4 DPS 59.3 68.5 100.6 Near term headwinds: Due to inventory adjustments by China customers PBR (x) 6.0 4.6 3.5 and lukewarm demand for iPhone X, we lower our 2017-19E EPS by 5-13% EV/EBITDA (x) 15.8 10.6 7.5 ROE (%) 30.5 35.1 35.7 to factor in our more cautious revenue and gross margin assumptions. Source: FactSet, Daiwa forecasts

What we recommend: We reaffirm our Buy (1) rating but revise down our 12-month TP to TWD5,800 (from TWD6,680), based on a 20x PER (21x PER previously, vs. its past-5-year range of 8-24x), applied to our revised 1-year forward EPS given muted near-term sentiment on iPhone demand. Key risk: weaker smartphone sell-through.

How we differ: Our 2019E EPS is 9% above the consensus estimate, likely as we are more upbeat on the benefits to Largan of spec upgrades for multi-cams. Our 17-18E EPS are 3% below consensus due to our more conservative view on iPhone X.

See important disclosures, including any required research certifications, beginning on page 38

Largan Precision (3008 TT): 5 December 2017

Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E

Mobile phone lens shipment ('000 units) 344,730 539,156 869,054 998,771 868,579 949,993 1,119,429 1,308,612

Blended ASP of handset lens (USD) 1.34 1.35 1.47 1.47 1.60 1.85 2.11 2.29 Gross margin of VCM assembly (%) 5.3 6.0 7.4 8.4 7.5 7.5 7.5 7.5

Profit and loss (TWDm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Mobile Phone Lens Revenues 13,647 21,615 38,140 45,970 44,061 52,750 73,093 92,732 VCM Aseembly Revenue 5,543 5,268 7,370 9,781 4,055 438 71 0 Other Revenue 882 550 301 118 236 312 286 218 Total Revenue 20,072 27,433 45,810 55,869 48,352 53,500 73,450 92,950 Other income 0 0 0 0 0 0 0 0 COGS (11,710) (14,472) (21,291) (23,812) (15,931) (16,655) (21,521) (25,171) SG&A (530) (887) (1,349) (1,817) (1,711) (1,828) (2,398) (2,851) Other op.expenses (1,034) (1,293) (2,103) (2,585) (2,796) (2,987) (3,918) (4,659) Operating profit 6,798 10,781 21,067 27,655 27,914 32,030 45,612 60,269 Net-interest inc./(exp.) 84 122 250 349 386 560 659 867 Assoc/forex/extraord./others (71) 598 1,646 1,156 (48) (505) 455 457 Pre-tax profit 6,811 11,501 22,963 29,160 28,251 32,085 46,727 61,593 Tax (1,234) (1,891) (3,525) (5,003) (5,518) (5,840) (8,177) (10,471) Min. int./pref. div./others 0 0 0 0 0 0 0 0 Net profit (reported) 5,578 9,610 19,438 24,157 22,733 26,246 38,550 51,122 Net profit (adjusted) 5,578 9,610 19,438 24,157 22,733 26,246 38,550 51,122 EPS (reported)(TWD) 41.581 71.640 144.909 180.084 169.472 195.659 287.385 381.108 EPS (adjusted)(TWD) 41.581 71.640 144.909 180.084 169.472 195.659 287.385 381.108 EPS (adjusted fully-diluted)(TWD) 41.581 71.640 144.909 180.084 169.472 195.659 287.385 381.108 DPS (TWD) 17.000 17.000 28.500 51.000 63.500 59.315 68.481 100.585 EBIT 6,798 10,781 21,067 27,655 27,914 32,030 45,612 60,269 EBITDA 8,005 12,229 22,728 29,495 27,914 32,030 45,612 60,270

Cash flow (TWDm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 6,811 11,501 22,963 29,160 28,251 32,085 46,727 61,593 Depreciation and amortisation 1,208 1,448 1,661 1,841 2,099 2,240 2,713 3,133 Tax paid (1,234) (1,891) (3,525) (5,003) (5,518) (5,840) (8,177) (10,471) Change in working capital (783) (363) (920) 7,411 (2,748) (4,920) (7,309) (5,695) Other operational CF items (2) 51 (32) 6 (14) (5) (5) (7) Cash flow from operations 6,000 10,746 20,147 33,414 22,069 23,562 33,949 48,553 Capex (2,865) (1,504) (5,568) (8,213) (2,204) (4,500) (4,000) (4,000) Net (acquisitions)/disposals (101) 9 194 (0) 28 (10) (10) (10) Other investing CF items (19) (1,593) (695) 125 (153) (1,107) 0 0 Cash flow from investing (2,985) (3,088) (6,069) (8,089) (2,329) (5,617) (4,010) (4,010) Change in debt (356) 12 108 (32) (102) 22 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (2,280) (2,280) (3,823) (6,841) (8,518) (7,957) (9,186) (13,492) Other financing CF items (43) 51 138 (127) 0 0 0 0 Cash flow from financing (2,679) (2,217) (3,577) (7,000) (8,620) (7,935) (9,186) (13,492) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 336 5,440 10,501 18,325 11,120 10,010 20,753 31,050 Free cash flow 3,136 9,242 14,579 25,201 19,865 19,062 29,949 44,553 Source: FactSet, Daiwa forecasts

Largan Precision (3008 TT): 5 December 2017

Financial summary continued … Balance sheet (TWDm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 11,604 17,045 27,546 45,871 56,231 66,241 86,994 118,044 Inventory 2,532 2,693 3,538 3,730 2,585 3,028 3,913 4,577 Accounts receivable 6,581 6,823 13,338 11,537 15,167 16,856 23,142 29,286 Other current assets 255 248 388 363 360 382 525 664 Total current assets 20,973 26,809 44,809 61,500 74,343 86,507 114,573 152,570 Fixed assets 9,731 9,800 13,722 20,115 20,247 22,506 23,794 24,661 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 485 2,004 2,523 2,372 2,485 3,607 3,622 3,639 Total assets 31,188 38,614 61,054 83,987 97,074 112,621 141,989 180,870 Short-term debt 93 83 190 157 38 100 100 100 Accounts payable 3,555 2,507 4,999 2,864 1,883 2,053 2,653 3,103 Other current liabilities 4,426 5,507 9,594 17,506 18,220 15,286 14,690 15,492 Total current liabilities 8,075 8,097 14,783 20,527 20,141 17,439 17,443 18,695 Long-term debt 0 0 0 0 0 0 0 0 Other non-current liabilities 49 71 72 73 91 50 50 50 Total liabilities 8,124 8,168 14,855 20,600 20,232 17,489 17,493 18,745 Share capital 1,341 1,341 1,341 1,341 1,341 1,341 1,341 1,341 Reserves/R.E./others 21,723 29,104 44,857 62,045 75,501 93,790 123,154 160,784 Shareholders' equity 23,064 30,445 46,198 63,386 76,843 95,132 124,496 162,125 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 31,188 38,614 61,054 83,987 97,074 112,621 141,989 180,870 EV 560,597 555,146 544,752 526,394 515,914 505,967 485,214 454,164 Net debt/(cash) (11,511) (16,962) (27,356) (45,713) (56,194) (66,141) (86,894) (117,944) BVPS (TWD) 171.943 226.965 344.402 472.538 572.852 709.196 928.101 1,208.625

Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 25.6 36.7 67.0 22.0 (13.5) 10.6 37.3 26.5 EBITDA (YoY) 25.6 52.8 85.9 29.8 (5.4) 14.7 42.4 32.1 Operating profit (YoY) 24.2 58.6 95.4 31.3 0.9 14.7 42.4 32.1 Net profit (YoY) 7.3 72.3 102.3 24.3 (5.9) 15.5 46.9 32.6 Core EPS (fully-diluted) (YoY) 7.3 72.3 102.3 24.3 (5.9) 15.5 46.9 32.6 Gross-profit margin 41.7 47.2 53.5 57.4 67.1 68.9 70.7 72.9 EBITDA margin 39.9 44.6 49.6 52.8 57.7 59.9 62.1 64.8 Operating-profit margin 33.9 39.3 46.0 49.5 57.7 59.9 62.1 64.8 Net profit margin 27.8 35.0 42.4 43.2 47.0 49.1 52.5 55.0 ROAE 26.0 35.9 50.7 44.1 32.4 30.5 35.1 35.7 ROAA 19.9 27.5 39.0 33.3 25.1 25.0 30.3 31.7 ROCE 31.3 40.2 54.8 50.3 39.8 37.2 41.5 42.0 ROIC 54.2 72.0 110.3 125.5 117.2 105.6 113.0 122.3 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 18.1 16.4 15.4 17.2 19.5 18.2 17.5 17.0 Accounts receivable (days) 91.7 89.2 80.3 81.3 100.8 109.2 99.4 102.9 Current ratio (x) 2.6 3.3 3.0 3.0 3.7 5.0 6.6 8.2 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 40.9 23.7 19.7 28.3 37.5 30.3 23.8 26.4 Free cash flow yield 0.5 1.6 2.5 4.4 3.5 3.3 5.2 7.8 Source: FactSet, Daiwa forecasts

Company profile

In Asia ex-Japan, Largan Precision is the leading lens manufacturer for mobile handsets. Nokia, Motorola, Sony Ericsson, Apple, HTC, and Blackberry are the company’s major customers. It currently has about a 28% share of the global handset-lens market.

Largan Precision (3008 TT): 5 December 2017

Largan: quarterly and annual P&L statements 2017 2018 2017E 2018E 2019E (TWDm) 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE Net sales 10,807 11,314 14,918 16,461 13,344 15,761 20,827 23,518 53,500 73,450 92,950 Gross profit 7,666 7,544 10,099 11,536 9,261 11,095 14,787 16,786 36,845 51,929 67,779 Operating costs 980 978 1,308 1,549 1,232 1,282 1,800 2,002 4,815 6,317 7,510 Operating profit 6,687 6,566 8,791 9,987 8,029 9,813 12,987 14,783 32,030 45,612 60,269 Pre-tax income 5,722 6,892 9,146 10,324 8,291 10,076 13,250 15,110 32,085 46,727 61,593 Net income 4,884 4,714 7,770 8,877 7,048 7,255 11,262 12,986 26,246 38,550 51,122 EPS (TWD) 36.4 35.1 57.9 66.2 52.5 54.1 84.0 96.8 195.7 287.4 381.1 Operating ratios Gross margin 70.9% 66.7% 67.7% 70.1% 69.4% 70.4% 71.0% 71.4% 68.9% 70.7% 72.9% Operating margin 61.9% 58.0% 58.9% 60.7% 60.2% 62.3% 62.4% 62.9% 59.9% 62.1% 64.8% Pre-tax margin 52.9% 60.9% 61.3% 62.7% 62.1% 63.9% 63.6% 64.3% 60.0% 63.6% 66.3% Net margin 45.2% 41.7% 52.1% 53.9% 52.8% 46.0% 54.1% 55.2% 49.1% 52.5% 55.0% YoY (%) Net revenue 31% 13% 4% 5% 23% 39% 40% 43% 11% 37% 27% Gross profit 55% 13% 4% 4% 21% 47% 46% 46% 14% 41% 31% Operating income 60% 13% 5% 4% 20% 49% 48% 48% 15% 42% 32% Net income 35% 28% 12% 5% 44% 54% 45% 46% 15% 47% 33% QoQ (%) Net revenue -31% 5% 32% 10% -19% 18% 32% 13% Gross profit -31% -2% 34% 14% -20% 20% 33% 14% Operating income -30% -2% 34% 14% -20% 22% 32% 14% Net income -42% -3% 65% 14% -21% 3% 55% 15%

Source: Company, Daiwa forecasts

Largan Precision (3008 TT): 5 December 2017

Largan: 1-year-forward PER Largan: 1-year-forward PBR (TWD) (TWD) 7,000 7,000 6,000 6,000 5,000 5,000 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000

0 0

Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Largan 6x 12x 18x 24x Largan 2x 4x 6x 8x

Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

China Information Technology 6 December 2017

(2382 HK) Sunny Optical Technology Sunny Optical T echnolog y

Target price: HKD165.00 (from HKD160.00) Share price (6 Dec): HKD109.00 | Up/downside: +51.4%

Major beneficiary of the coming 3D-sensing boom Kylie Huang (886) 2 8758 6248  3D-sensing benefits should arrive in 2H18 and accelerate in 2019 [email protected]  42-49% EPS growth in 2018-19E; pull-backs a buying opportunity Steven Yang (886) 2 8758 6245  Reiterating Buy (1) and lifting TP to HKD165; still one of our top picks [email protected]

What's new: We continue to view Sunny as a major beneficiary of the rising Forecast revisions (%) adoption of multi-cams in smartphones. In addition to accelerating dual-cam Year to 31 Dec 17E 18E 19E adoption and ongoing camera spec upgrades (see Robust outlook on plenty of Revenue change (0.2) 2.2 10.5 Net profit change (0.6) 2.5 7.7 drivers, favourable trends), we see Sunny as well placed to benefit from the Core EPS (FD) change (0.6) 2.5 7.7 emerging trend of 3D-sensing adoption. Sunny remains one of our top picks in Source: Daiwa forecasts the sector, and we recommend to accumulate the stock on any pull-backs in the near-term on profit-taking due to China smartphone inventory adjustments. Share price performance

What's the impact: Embracing the coming 3D-sensing boom in China. (HKD) (%) 150 310

We expect the number of smartphones with 3D-sensing functionality to expand 118 245 to 200-618m for 2018-20 (vs. 34m in 2017E), with a market size of USD13.5bn 85 180 for module vendors. In our view, Sunny is well placed to benefit from this trend 53 115 by virtue of its leading position in handset camera modules (HCM) for China 20 50 brands, its expertise in optical design and experience in 3D sensing modules, Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 and its cooperation with AMS (AMS SW, not rated). Our research suggests Sunny Opti (LHS) Relative to HSI (RHS)

China brands have a strong interest in adopting 3D sensing, and we forecast China smartphones with 3D-sensing functionality to expand to 30m in 2018, 12-month range 32.80-149.00 120m in 2019, and 225m in 2020 (vs. none in 2017) as software and design Market cap (USDbn) 15.02 issues are resolved over time. We believe Sunny is already in talks with top-tier 3m avg daily turnover (USDm) 136.75 China brands and targeting adoption of its 3D sensing technology in Shares outstanding (m) 1,077 smartphones from 3Q18. In sum, we forecast 3D sensing to deliver 4-12% of Major shareholder Sun Xu Ltd (35.5%) Sunny’s revenue for 2018-19, rising further in 2020 as adoption increases. Financial summary (CNY) Favourable trends intact: dual-cam in smartphones, multi-cam in cars. Year to 31 Dec 17E 18E 19E We raise our forecast of dual-cam adoption in smartphones to 31% of the total Revenue (m) 22,580 30,700 41,880 in 2018 (26% previously), and expect a further increase to 40-48% in 2019-20 Operating profit (m) 2,976 4,574 6,533 Net profit (m) 2,750 4,096 5,830 as adoption broadens to include mid-range phones. We believe this outlook will Core EPS (fully-diluted) 2.553 3.803 5.413 provide strong drivers for Sunny’s HCM and handset lens set businesses. As EPS change (%) 116.4 48.9 42.4 for vehicle lenses, we see Sunny’s leading position as solid and expect it to Daiwa vs Cons. EPS (%) 4.6 8.1 14.7 benefit from the multi-cam trend in cars given the rising adoption of ADAS. PER (x) 36.1 24.3 17.0 Dividend yield (%) 0.3 0.7 0.4 DPS 0.291 0.638 0.376 Solid earnings growth. Our research suggests some inventory adjustment PBR (x) 13.5 9.2 6.1 from China brands (Oppo/Vivo) in 4Q17-1Q18, but we see less impact on EV/EBITDA (x) 28.6 18.3 12.5 Sunny given its strong relationship with Huawei. We lift 2018-19E EPS by 3- ROE (%) 44.8 45.2 43.3 8% to factor in our new 3D sensing and dual-cam adoption assumptions, but Source: FactSet, Daiwa forecasts slightly trim 2017E EPS by 1% given our more cautious order expectations for China. We now forecast Sunny’s earnings to grow 42-49% YoY for 2018-19.

What we recommend: We reiterate our Buy (1) rating and raise our 12- month TP to HKD165 (from HKD160), on an unchanged 36x PER (vs. a past-3-year trading range of 10-36x), applied to our revised 1-year forward EPS. We believe Sunny shares will see a further rerating as the 3D sensing contribution starts to kick in. Key risk: higher pricing pressure.

How we differ: Our 2017-19E EPS are 5-15% above consensus due to our more upbeat view on the business benefits of multi-cams in smartphones.

See important disclosures, including any required research certifications, beginning on page 38

Sunny Optical Technology (2382 HK): 6 December 2017

Financial summary Key assumptions Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Handset CCM shipment (m units) 97 133 187 228 270 325 375 442 Vehicle lens shipment (m units) 0 8 11 17 23 32 45 63 Handset lens shipment (m units) 36 26 75 302 379 580 707 851

Profit and loss (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Handset CCM Revenues 2,307 4,157 6,576 7,785 11,055 17,319 23,912 33,205 Vehicle Lens Revenues 167 291 421 651 935 1,404 2,024 2,916 Other Revenue 1,510 1,365 1,429 2,260 2,622 3,858 4,764 5,759 Total Revenue 3,984 5,813 8,426 10,696 14,612 22,580 30,700 41,880 Other income 0 0 0 0 0 0 0 0 COGS (3,243) (4,846) (7,137) (8,933) (11,932) (17,748) (23,700) (32,206) SG&A (214) (254) (320) (352) (485) (650) (849) (1,099) Other op.expenses (163) (251) (392) (502) (694) (1,206) (1,576) (2,042) Operating profit 363 462 577 909 1,501 2,976 4,574 6,533 Net-interest inc./(exp.) (3) (7) (14) (16) (16) (24) (24) (24) Assoc/forex/extraord./others 37 49 71 (31) (38) 182 80 80 Pre-tax profit 397 504 634 862 1,446 3,134 4,630 6,589 Tax (58) (64) (73) (99) (175) (382) (532) (758) Min. int./pref. div./others 7 (0) 5 (2) (1) (2) (2) (1) Net profit (reported) 346 440 566 762 1,271 2,750 4,096 5,830 Net profit (adjusted) 346 440 566 762 1,271 2,750 4,096 5,830 EPS (reported)(CNY) 0.360 0.443 0.529 0.709 1.180 2.553 3.803 5.413 EPS (adjusted)(CNY) 0.360 0.443 0.529 0.709 1.180 2.553 3.803 5.413 EPS (adjusted fully-diluted)(CNY) 0.360 0.443 0.529 0.709 1.180 2.553 3.803 5.413 DPS (CNY) 0.071 0.102 0.112 0.154 0.207 0.291 0.638 0.376 EBIT 363 462 577 909 1,501 2,976 4,574 6,533 EBITDA 472 609 792 1,155 1,817 3,419 5,220 7,287

Cash flow (CNYm) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Profit before tax 397 504 634 862 1,446 3,134 4,630 6,589 Depreciation and amortisation 109 147 215 246 317 443 645 753 Tax paid (58) (64) (73) (99) (175) (382) (532) (758) Change in working capital (169) 55 (898) 609 (32) (1,361) (922) (1,220) Other operational CF items 7 (0) 5 (2) (1) (2) (2) 0 Cash flow from operations 286 643 (117) 1,616 1,555 1,831 3,819 5,364 Capex (265) (286) (465) (351) (969) (1,500) (800) (800) Net (acquisitions)/disposals 13 1 (62) (64) 11 0 0 0 Other investing CF items (38) (26) (178) (60) (58) 10 0 0 Cash flow from investing (291) (311) (705) (475) (1,016) (1,490) (800) (800) Change in debt 34 392 56 167 234 11 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (69) (101) (120) (166) (223) (313) (687) (405) Other financing CF items (27) 589 (55) (2) 21 0 0 0 Cash flow from financing (61) 879 (120) (0) 32 (303) (687) (405) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (66) 1,211 (942) 1,141 571 39 2,331 4,159 Free cash flow 20 357 (582) 1,265 586 331 3,019 4,564 Source: FactSet, Daiwa forecasts

Sunny Optical Technology (2382 HK): 6 December 2017

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Cash & short-term investment 614 1,826 884 2,025 2,595 2,635 4,966 9,124 Inventory 748 768 896 897 2,828 2,535 3,386 4,601 Accounts receivable 901 1,172 2,388 3,003 3,716 4,640 6,308 8,605 Other current assets 4 1 36 93 178 205 256 322 Total current assets 2,267 3,766 4,204 6,017 9,318 10,015 14,916 22,653 Fixed assets 646 785 1,035 1,141 1,794 2,851 3,005 3,052 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 89 114 354 478 525 515 515 515 Total assets 3,002 4,665 5,594 7,636 11,637 13,380 18,436 26,219 Short-term debt 103 489 522 683 904 922 922 922 Accounts payable 939 1,257 1,744 2,914 5,573 4,862 6,493 8,823 Other current liabilities 11 36 31 142 181 188 205 233 Total current liabilities 1,052 1,782 2,297 3,739 6,658 5,972 7,619 9,978 Long-term debt 0 18 36 33 31 49 49 49 Other non-current liabilities 18 6 11 19 34 10 10 10 Total liabilities 1,070 1,805 2,343 3,791 6,723 6,031 7,678 10,036 Share capital 98 105 105 105 105 105 105 105 Reserves/R.E./others 1,834 2,755 3,145 3,740 4,808 7,245 10,653 16,078 Shareholders' equity 1,932 2,860 3,251 3,845 4,913 7,350 10,758 16,183 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 3,002 4,665 5,594 7,636 11,637 13,380 18,436 26,219 EV 98,830 98,023 99,015 98,034 97,682 97,678 95,346 91,188 Net debt/(cash) (512) (1,319) (327) (1,309) (1,660) (1,665) (3,996) (8,154) BVPS (CNY) 2.007 2.876 3.038 3.579 4.562 6.824 9.989 15.026

Key ratios (%) Year to 31 Dec 2012 2013 2014 2015 2016 2017E 2018E 2019E Sales (YoY) 59.5 45.9 45.0 26.9 36.6 54.5 36.0 36.4 EBITDA (YoY) 58.1 29.1 30.0 45.9 57.3 88.1 52.7 39.6 Operating profit (YoY) 73.0 27.1 24.9 57.6 65.0 98.3 53.7 42.8 Net profit (YoY) 60.8 27.2 28.5 34.5 66.8 116.4 48.9 42.4 Core EPS (fully-diluted) (YoY) 61.3 23.1 19.4 34.0 66.4 116.4 48.9 42.4 Gross-profit margin 18.6 16.6 15.3 16.5 18.3 21.4 22.8 23.1 EBITDA margin 11.8 10.5 9.4 10.8 12.4 15.1 17.0 17.4 Operating-profit margin 9.1 7.9 6.8 8.5 10.3 13.2 14.9 15.6 Net profit margin 8.7 7.6 6.7 7.1 8.7 12.2 13.3 13.9 ROAE 19.2 18.4 18.5 21.5 29.0 44.8 45.2 43.3 ROAA 12.9 11.5 11.0 11.5 13.2 22.0 25.7 26.1 ROCE 19.1 17.1 16.1 21.7 28.8 42.0 45.6 45.2 ROIC 24.8 27.3 22.9 29.5 45.6 58.5 65.0 78.2 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 14.7 12.6 11.5 11.5 12.1 12.2 11.5 11.5 Accounts receivable (days) 70.0 65.1 77.1 92.0 83.9 67.5 65.1 65.0 Current ratio (x) 2.2 2.1 1.8 1.6 1.4 1.7 2.0 2.3 Net interest cover (x) 115.7 70.0 41.3 56.8 92.7 125.0 188.6 269.4 Net dividend payout 19.8 22.9 21.3 21.8 17.6 11.4 16.8 6.9 Free cash flow yield 0.0 0.4 n.a. 1.3 0.6 0.3 3.0 4.6 Source: FactSet, Daiwa forecasts

Company profile

Founded in 1984, Sunny Optical is the leading optical component manufacturer in the China technology supply chain. It develops and provides optical-related products with various applications, including instruments, components and opto-electronic modules. The company's major customers include leading China smartphone brand name makers Huawei, Lenovo and OPPO.

Sunny Optical Technology (2382 HK): 6 December 2017

Global dual-cam adoption in smartphones Global 3D sensing adoption in smartphones (m units) (m units) 2,000 100% 2,000 100% 90% 90% 80% 80% 1,500 1,500 70% 70% 60% 60% 1,000 50% 1,000 50% 40% 40% 30% 30% 500 500 20% 20% 10% 10% 0 0% 0 0% 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Total smartphone Total dual-cam smartphone Total smartphone Total 3D sensing smartphone Penetration rate (RHS) Penetration rate (RHS) Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Global smartphone camera module market Global smartphone lens sets market (USDbn) (USDbn) 50 10

40 8

30 6

4 20

2 10 0 0 2016 2017E 2018E 2019E 2020E 2016 2017E 2018E 2019E 2020E Single-cam (front+rear) Dual-cam Single-cam (front+rear) Dual-cam 3D Sensing 3D Sensing (Tx lens sets) 3D Sensing (Rx lens sets) Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Sunny Optical: semi-annual and annual P&L statement 2017 2018 2017E 2018E 2019E (CNYm) 1H 2HE 1HE 2HE

Net sales 10,032 12,548 13,043 17,657 22,580 30,700 41,880

COGS 7,962 9,786 10,137 13,564 17,748 23,700 32,206

Gross profit 2,070 2,762 2,906 4,094 4,832 7,000 9,674

Operating costs 822 1,034 1,116 1,310 1,856 2,425 3,141

Operating profit 1,248 1,728 1,790 2,784 2,976 4,574 6,533

Pre-tax income 1398 1734 1820 2808 3,132 4,628 6,588

Net income 1159 1591 1620 2476 2,750 4,096 5,830

EPS (CNY) 1.08 1.48 1.50 2.30 2.55 3.80 5.41

Operating ratios

Gross margin 20.6% 22.0% 22.3% 23.2% 21.4% 22.8% 23.1%

Operating margin 12.4% 13.8% 13.7% 15.8% 13.2% 14.9% 15.6%

Pre-tax margin 13.9% 13.8% 14.0% 15.9% 13.9% 15.1% 15.7%

Net margin 11.6% 12.7% 12.4% 14.0% 12.2% 13.3% 13.9%

YoY (%)

Net revenue 70% 44% 30% 41% 55% 36% 36%

Gross profit 109% 63% 40% 48% 80% 45% 38%

Operating income 148% 73% 43% 61% 98% 54% 43%

Pre-tax income 153% 94% 30% 62% 117% 48% 42%

Net income 149% 97% 40% 56% 116% 49% 42%

HoH (%)

Net revenue 15% 25% 4% 35%

Gross profit 22% 33% 5% 41%

Operating income 25% 39% 4% 56%

Pre-tax income 57% 24% 5% 54%

Net income 44% 37% 2% 53%

Source: Company, Daiwa forecasts

Sunny Optical Technology (2382 HK): 6 December 2017

Sunny Optical: 1-year-forward PER Sunny Optical: 1-year-forward PBR (HKD) (HKD) 200 200

150 150

100 100

50 50

0 0

Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Sunny 4x 8x 12x 16x Sunny 18x 26x 34x 42x Source: Bloomberg, Daiwa forecasts Source: Bloomberg, Daiwa forecasts

Greater China Smartphones: 6 December 2017

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Steel Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Machinery) Co-head of Asia Pacific Research Iris PARK (82) 2 787 9165 [email protected] Craig CORK (852) 2848 4463 [email protected] Consumer/Retail Regional Head of Asia Pacific Product Management SK KIM (82) 2 787 9173 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Strategist for Asia Pacific; Strategy (Regional) Thomas Y KWON (82) 2 787 9181 [email protected] Kevin LAI (852) 2848 4926 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Chief Economist for Asia ex-Japan; Macro Economics (Regional) Olivia XIA (852) 2773 8736 [email protected] TAIWAN Macro Economics (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Head of Automobiles; Transportation and Industrial (Hong Kong/China) (Regional) Leon QI (852) 2532 4381 [email protected] Nora HOU (886) 2 8758 6249 [email protected] Regional Head of Financials; Banking; Diversified financials; Insurance Banking; Diversified financials; Insurance (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Yan LI (852) 2773 8822 [email protected] IT/Technology Hardware (PC Hardware) Banking (China) Kylie HUANG (886) 2 8758 6248 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Adrian CHAN (852) 2848 4427 [email protected] Small/Mid Cap Consumer (Hong Kong/China) Jamie SOO (852) 2773 8529 [email protected] INDIA Gaming and Leisure (Hong Kong/China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] John CHOI (852) 2773 8730 [email protected] Head of India Research; Strategy; Banking/Finance Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Saurabh MEHTA (91) 22 6622 1009 [email protected] Alex LIU (852) 2848 4976 [email protected] Capital Goods; Utilities Internet (Hong Kong/China) Carlton LAI (852) 2532 4349 [email protected] SINGAPORE Small/Mid Cap (Hong Kong/China) Ramakrishna MARUVADA (65) 6499 6543 [email protected] Dennis IP (852) 2848 4068 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong David LUM (65) 6329 2102 [email protected] Kong/China) Banking; Property and REITs Jonas KAN (852) 2848 4439 [email protected] Royston TAN (65) 6321 3086 [email protected] Head of Hong Kong and China Property Oil and Gas; Capital Goods Cynthia CHAN (852) 2773 8243 [email protected] Jame OSMAN (65) 6321 3092 [email protected] Property (China) Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer (Singapore) Thomas HO (852) 2773 8716 [email protected]

Custom Products Group JAPAN

Yukino YAMADA (81) 3 5555 7295 [email protected] PHILIPPINES Strategy (Regional) Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg Ilag (63) 2 737 3023 [email protected] Utilities; Energy

Greater China Smartphones: 6 December 2017

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Important Disclosures and Disclaimer

This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Daiwa Securities Group Inc., its subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore, investors should be aware that a conflict of interest may exist. The following are additional disclosures.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Acushnet Holdings Corp (GOLF US), No Va Land Investment Group Corporation (NVL VN), PT Totalindo Eka Persada Tbk (TOPS IJ), PT Integra Indocabinet Tbk (WOOD IJ) and PT Buyung Putera Sembada (HOKI IJ). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

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Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

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India This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates, may have received compensation for any products other than Investment Banking (as disclosed)or brokerage services from the subject company in this report or from any third party during the past 12 months. Daiwa India and its associates may have debt holdings in the subject company. For information on ownership of equity, please visit BlueMatrix disclosure Link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report. Associates of Daiwa India, registered with Indian regulators, include Daiwa Capital Markets Singapore Limited and Daiwa Portfolio Advisory (India) Private Limited.

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Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. TNS, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital

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Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited and indirectly by Daiwa Capital Markets America Inc. (DCMA), a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This report is not an offer to sell or the solicitation of any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed in this report may not be eligible for sale in some jurisdictions. Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT: https://daiwa3.bluematrix.com/sellside/Disclosures.action

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 65.9% Hold** 20.1% Sell*** 14.0% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2017. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association