China / Taiwan Information Technology 3 December 2019 Greater China Smartphones The more the merrier: multi-cameras are the next mega trend in smartphones (Part V) We forecast 562-798m triple-cam smartphone shipments in 2020-21, led by widening adoption in mid-range models from major brands Kylie Huang Solid spec upgrades within multi-cams to support ASP growth; further (886) 2 8758 6248 upside from likely acceleration of 3D sensing adoption from 2020E [email protected] Steven Tsai Largan and Sunny remain our top picks; share-price volatility on profit- (886) 2 8758 6245 taking and near-term inventory adjustment offers entry point [email protected] What's new: We have been highlighting our positive view on the Daiwa’s preferred picks in the smartphone supply chain smartphone camera supply chain, driven by the multi-cam trend (see The Mkt cap Company Ticker Daiwa rating more the merrier: multi-cameras are the next mega trend in smartphones: (USDbn) Parts I, II, III, and IV). In Part V of our series, we reiterate our positive Largan 3008 TT Buy (1) 19.9 Sunny 2382 HK Buy (1) 17.9 stance on the segment and revise up our triple-cam adoption forecasts for 2019-20E on faster-than-expected uptake in Android handsets. Sunny Source: Bloomberg, Daiwa Note: based on 2 December 2019 share prices (2382 HK, HKD128.1, Buy [1]) and Largan (3008 TT, TWD4,515, Buy [1]) remain our top picks for their strong positions in the optics space. What's the impact: Multi-cam trend intact: triple-cam to rise further in 2020-21E, with quad-cam or more to come. Following the accelerated adoption of dual-cam phones in 2017-18, we have been highlighting a likely boom in triple-cam devices in 2019 as camera functionality is now a key selling point. Driven by positive consumer feedback, in addition to the use of triple-cam systems in high-end models, we are seeing increasing adoption in mid-range models, especially from Huawei and Samsung. Quad-cam or above systems promise further imaging improvements. We now expect triple- cam smartphone shipments of 323m in 2019 (prior estimate: 180m), from 26m in 2018. And, on rising uptake in mid-range models, we forecast 562m triple-cam smartphone shipments in 2020E and 798m in 2021E, with the adoption rate increasing to 36-50% in 2020-21E, from 20% in 2019. Spec upgrades promising; 3D sensing penetration to accelerate. Our research suggests that Apple is likely adopt rear 3D sensing in its iPad Pro and new iPhones in 2020, which should spur adoption in Android devices and push up overall adoption to 17-25% in 2020-21E. We also look for solid spec upgrades, including higher megapixel counts (64MP/108MP), more lenses (7P/8P), periscope designs, retractable cams, and miniature designs, which together should support ASP upside for the supply chain, in addition to volume growth arising from the multi-cam trend, in our view. What we recommend: We are Neutral on Greater China Smartphones due to muted smartphone volume growth but positive on the camera supply chain given the above trends. Our top picks remain Largan, the leader in lens sets, and Sunny, the major camera module and lens set provider; we revise up our 2019-21E earnings forecasts for Sunny by 2-7% and our 12- month TP to HKD150 (from HKD137). We would see near-term price volatility driven by profit-taking following these stocks’ strong share-price performances YTD, as well as likely customers’ inventory adjustments, as further buying opportunities. Risks: better/weaker smartphone sales. How we differ: We are more upbeat than the market on the benefits arising from the multi-cam trend for our preferred names. See important disclosures, including any required research certifications, beginning on page 25 Greater China Smartphones: 3 December 2019 Table of contents Multi-cameras: the next mega trend for smartphones (Part V) ............................ 3 The more the merrier: multi-cam trend intact in 2020-21E .................................................. 3 Triple-cam adoption to rise further in 2020-21E .................................................................. 3 Promising spec upgrades with long-term upside potential from 3D sensing ....................... 7 Positive on the camera component supply chain – near-term volume risks offer good opportunity to accumulate .................................................................................................. 11 Risks to our view ................................................................................................................ 12 Appendix 1 .............................................................................................................. 14 Triple-cams: the major benefits ......................................................................................... 14 Triple-cams: technology challenges .................................................................................. 15 Appendix 2 .............................................................................................................. 16 Major technologies in 3D sensing ...................................................................................... 16 Appendix 3 .............................................................................................................. 17 Dilemma: imaging quality vs. form-factor design ............................................................... 17 Dual-cams as a solution to the dilemma ............................................................................ 17 Improved imaging quality ................................................................................................... 18 Company Section Sunny Optical Technology ................................................................................................. 19 2 Greater China Smartphones: 3 December 2019 Multi-cameras: the next mega trend for smartphones (Part V) The more the merrier: multi-cam trend intact in 2020-21E We remain positive on We have been highlighting the growing importance of camera functionality as a key selling the multi-cam trend, point for smartphones, and how the rise of multi-cams will benefit the smartphone camera driven by broadening supply chain (see The more the merrier: multi-cameras are the next mega trend in triple-cam adoption in smartphones: Parts I, II, III, and IV). In Part V of our series, we reiterate our positive smartphones stance on the multi-cam trend and revise up our shipment forecasts for triple-cam (triple- cam/quad-cam/or above) smartphones to 323m units in 2019 and 562m in 2020 (vs. our earlier expectations of 180-353m), given brands’ aggressive adoption in response to positive feedback from consumers. In total, we forecast the adoption rate for triple-cam to rise to 36-50% in 2020-21E, with total multi-cam (dual/triple or more) adoption seen increasing to 78% in 2020E and 86% in 2021E, from 64% in 2019E and 33% in 2018. Global triple-cam* penetration in smartphones Global multi-cam penetration in smartphones (mn units) (mn 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 2017 2018 2019E 2020E 2021E 2016 2017 2018 2019E 2020E 2021E Total smartphone Total multi-cam smartphone Penetration rate Total smartphone Total triple-cam smartphone Penetration rate Source: Companies, Daiwa Source: Companies, Daiwa Note: *including triple and above Triple-cam adoption to rise further in 2020-21E Following the acceleration in dual-cam adoption in 2017-18, we had expected 2019 to be the year in which triple-cam adoption rose significantly as smartphone producers sought to improve imaging quality through improved performance in low-light environments, wide- angle functionality, higher zoom performance, and augmented reality (AR) features (see Appendix 1). At the same time, device manufacturers have been working to resolve the apparent trade-off between improving image quality while meeting demand for thinner form factors (see Appendix 3). Driven by positive feedback from consumers, our industry research suggests that triple- cam adoption has likely exceeded our expectations, spurred by Android brands’ aggressive uptake. In addition to Huawei, a pioneer in triple-cam smartphones since 2018, Samsung has become a strong advocate of triple-cam. The Korean company started using triple-cam in its mid-to-high-end/flagship models in 1H19, and broadened adoption in its mid-range models in 2H19. Seeking to improve their competitiveness, Chinese brands such as Vivo and Xiaomi turned more aggressive on triple-cam in 2H19, with the feature finding its way into mid-range to high-end models such as Vivo’s Y/Z series and Xiaomi’s Redmi Note/K series. And, as we had expected, Apple released its first triple-cam smartphones this September (iPhone 11 Pro/iPhone 11 Pro Max). As a further differentiating factor, we are seeing brands add another one or two cams to their triple-cam designs in order to provide enhanced sharpness, macro details, or background blur. For example, Oppo’s Reno 2 sports a mono camera to capture sharper pictures, Huawei’s Honor 20 Pro features a depth camera to support the “bokeh” effect, Huawei’s Nova 5Z adds a macro camera for better macro functionality, and Xiaomi’s CC9 Pro gets one tele cam for higher optical zoom and one 3 Greater China Smartphones: 3 December 2019 macro cam for macro effects. Note: we include quad-cam or five-cam devices in our triple- cam smartphone forecasts. As a result of these developments, we now