Greater China Smartphones

China / Taiwan Information Technology 3 December 2019

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

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

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 forecast triple-cam smartphone shipments of 323m in 2019 (vs. our earlier expectation of 180m), up from 26m in 2018. Further out, given rising adoption in mid-range devices and expanded adoption in mid-range to low-end models, we forecast triple-cam smartphone shipments of 562m in 2020E and 798m in 2021E, with the adoption rate seen rising to 36-50% in 2020-21E, from 21% in 2019E and 2% in 2018.

Global triple-cam* penetration in smartphones (mn units) 1,800 100% 1,600 90% 1,400 80% 1,200 70% 60% 1,000 50% 800 40% 600 30% 400 20% 200 10% 0 0% 2016 2017 2018 2019E 2020E 2021E Total smartphone Total triple-cam smartphone Penetration rate

Source: Companies, Daiwa Note: *including triple cam and above

Triple-cam adoption among major brands We are positive on triple- Apple rolled out its first triple-cam design in September, with the new iPhone 11 Pro Max/ cam adoption in iPhone 11 Pro/ iPhone 11 sporting triple-/triple-/dual-cam designs (vs. dual-cam for iPhone smartphones in 2020- XS/XS Max, and single-cam for XR in 2H18), in line with our expectation (see The more 21E, backed by broader the merrier: multi-cameras are the next mega trend in smartphones [Part IV]), 14 adoption among brand November 2018). On the popularity of triple-cam designs, our research suggests that vendors Apple is likely to adopt triple-cam in 50% of new iPhones in 2H20, if not more. Overall, we forecast triple-cam adoption in iPhones to reach 40-65% in 2020E-21E, from 20% in 2019.

Samsung started to use triple-cam designs in its flagship models in 2019. The Galaxy S10+/S10/S10e were first out of the gate in February sporting triple-/triple-/dual-cam designs, upgraded from single/dual-cam designs for their predecessors (S9/S9+), followed by the Galaxy Note10+/10, both with triple-cam designs (the Note+ also comes with a rear time-of-flight [ToF] camera), compared with dual-cam designs for the Note9, in line with our expectations. Samsung has also become more aggressive in adopting triple-cam features in its mid-range models (Galaxy A series), such as the A50/A70 launched in 1H19 and A90 launched in 2H19. Our research suggests that Samsung is likely to adopt triple-cam features in all three of its Galaxy S11 models in 1Q20, compared with triple-/triple-/dual- cam designs for their forerunners (S10+/S10/S10e in 1Q19). We see Samsung as becoming another strong advocate of triple-cam designs, and forecast the company’s triple-cam smartphone shipments to reach 135-175m in 2020-21E, from 88m in 2019.

Huawei is a pioneer in triple-cam smartphones (the Huawei P20 Pro, released in March 2018, was the industry’s first triple-cam model in volume production), and has been the most supportive brand since then. In 2019, as we had expected, Huawei has not only used triple-cam designs in its flagship line-up but also in its mid-range to high-end models, as evidenced by the fact all of its flagships — P30/P30 Pro in March 2019 and Mate 30/Mate 30 Pro in September 2019, and its major mid-range to high-end models (Nova 4e, Honor 20 series, etc.) — now sport triple-cam designs. To further differentiate or enhance its camera features, Huawei has released quad-cam models, such as the Honor 20 Pro and Nova 5, which offer better depth or macro effects by adding an extra depth or macro camera to the triple-cam design. Our research suggests that Huawei is likely to further broaden its triple-cam adoption in mid-range and mid-range to low-end models in 2020-21.

Greater China Smartphones: 3 December 2019

In total, we forecast Huawei’s triple-cam smartphone shipments to reach 145-185m in 2020-21, from 95m in 2019.

We expect triple-cam Oppo launched its first triple-cam model, the Oppo Reno (10x hybrid zoom version) in smartphone shipments April, followed by its successor, the Reno 2, in September, which comes with a 48MP wide- to reach 562-798m in cam, 13MP telephoto-cam, 8MP ultra-wide-cam and 2MP depth-cam (vs. 48MP wide-cam, 2020-21E 13MP telephoto-cam, 8MP ultra-wide-cam for Reno [10x hybrid zoom version]). Looking ahead, we expect Oppo to expand the triple-cam design to mid-range models in 2020-21 from flagship/high-end models currently, and forecast Oppo’s triple-cam smartphone shipments to reach 46-70m for 2020-21E, respectively, from 25m in 2019.

Vivo released its first triple-cam model, the Vivo V15 Pro, in February, and then adopted triple-cam in its flagship models, X27/X27 Pro, in March 2019. In September, Vivo released another of its flagships, NEX 3, with a triple-cam design comprising a 64MP wide-cam, 13MP ultra-wide-cam, and 13MP telephoto-cam (vs. 12MP wide-cam and 5MP depth-cam set-up in its predecessor). In total, we forecast Vivo’s triple-cam shipments to reach 50- 66m for 2020-21E, respectively, from 30m in 2019.

Xiaomi launched the Mi 9 series this February, its first triple-cam model, and became more aggressive in adopting this design in 2H19, as evidenced by its release of more triple-cam models (Redmi K20, Mi 9T, and Mi 9 Pro). In November, Xiaomi unveiled its new flagship model, the Mi CC9 Pro (also known as Mi Note 10), which has a five-cam design and a main camera with 108MP. Our research suggests Xiaomi is likely to broaden its line-up of triple-cam mid-range smartphones in 2020; we forecast the company’s triple-cam shipments to reach 55-75m for 2020-21E, from 35m in 2019.

Global triple-cam* adoption by brand (mn units) 900 800 700 600 500 400 300 200 100 0 2016 2017 2018 2019E 2020E 2021E Apple Samsung Hauwei Xioami Oppo Vivo Others

Source: Companies, Daiwa Note: *including triple and above

Huawei: triple-cam design in Mate 30 Apple: triple-cam design in iPhone 11 Pro/Max

8MP telephoto; f/2.4; OIS

40MP wide; f/1.8 16MP ultra-wide; f/2.2

Source: Company, Daiwa Source: Company, Daiwa

Greater China Smartphones: 3 December 2019

Samsung: triple-cam design in Galaxy Note 10 Xiaomi: five-cam design in Mi CC9 Pro

5MP telephoto; f/2.0; 10x hybrid zoom

12MP telephoto (portrait); 16MP ultra-wide; f/2.2 f/2.0; 2x optical zoom 108MP wide; 12MP wide; f/1.5/2.4; f1.69; 7/8P lens sets OIS 20MP ultra-wide; f/2.2 12MP telephoto; f/2.1; OIS 2MP macro

Source: Company, Daiwa Source: Company, Daiwa

Major triple-cam* models in 2019 Apple Apple Huawei Huawei Samsung Samsung Xiaomi Model iPhone 11 Pro Max iPhone 11 Pro Mate 30 Pro Mate 30 Note 10+ Note 10 Mi CC9 Pro

Model Picture:

108MP+5MP+12MP Triple-cam 12MP+12MP+12MP 12MP+12MP+12MP 40MP+40MP+8MP 40MP+16MP+8MP 12MP+12MP+16MP 12MP+12MP+16MP +20MP+2MP -telephoto V V V V V V VV -wide V V V V V V V -ultra-wide V V V V V V V -macro V -mono -depth Second Camera: 12MP 12MP 32MP 24MP 10MP 10MP 32MP Launched Date: Sep-19 Sep-19 Sep-19 Sep-19 Aug-19 Aug-19 Nov-19 Price: USD1,099 USD999 CNY5,799 CNY3,999 USD1,099 USD949 CNY2,799

Huawei Vivo OPPO Vivo Huawei Oppo Realme Xiaomi Redmi Model Honor V30 S5 Reno 2 NEX 3 Enjoy 10 Plus Q Note 8

Model Picture:

48MP+8MP 48MP+13MP 48MP+8MP 48MP+8MP Triple-cam 40MP+8MP+8MP 64MP+13MP+13MP 48MP+8MP+2MP +2MP+5MP +8MP+2MP +2MP+2MP +2MP+2MP -telephoto V V V -wide V V V V V V V -ultra-wide V V V V V V V -macro V V V -mono V V -depth V V V Second Camera: 32MP+8MP 32MP 16MP 16MP 16MP 16MP 13MP Launched Date: Nov-19 Nov-19 Sep-19 Sep-19 Sep-19 Sep-19 Aug-19 Price: CNY3,299 CNY2,698 CNY2,999 CNY4,998 CNY1,499 CNY998 CNY999

Vivo Huawei Samsung Huawei Xiaomi Redmi Samsung Model Vivo iQOO Z5 Nova 5 Galaxy A50 Honor 20 K20 Pro Galaxy A70

Model Picture:

48MP+16MP 48MP+16MP Triple-cam 48MP+8MP+2MP 25MP+8MP+5MP 48MP+13MP+8MP 32MP+8MP+5MP 12MP+13MP+2MP +2MP+2MP +2MP+2MP -telephoto V -wide V V V V V V V -ultra-wide V V V V V V V -macro V V -mono -depth V V V V V V Second Camera: 32MP 32MP 25MP 32MP 20MP 32MP 12MP Launched Date: Jul-19 Jun-19 Jun-19 May-19 May-19 Mar-19 Mar-19 Price: CNY1,598 CNY2,799 USD350 CNY2,699 CNY2,499 CNY2,499 CNY2,998 Source: Companies, Daiwa Note: *including triple and above

Greater China Smartphones: 3 December 2019

Major triple-cam* models in 2019 (cont’d) Huawei Huawei Vivo Samsung Samsung Xiaomi Nokia Model P30 Pro P30 X27 Galaxy S10+ Galaxy S10 Mi 9 9 PureView

Model Picture:

Triple-cam 40MP+20MP+8MP 40MP+16MP+8MP 48MP+13MP+5MP 16MP+12MP+12MP 16MP+12MP+12MP 48MP+12MP+16MP 12MPx5 -telephoto V V V V V -wide V V V V V V VV -ultra-wide V V V V V -macro V -mono VVV -depth V Second Camera: 32MP 32MP 16MP 10MP+8MP 10MP 20MP 20MP Launched Date: Mar-19 Mar-19 Mar-19 Feb-19 Feb-19 Feb-19 Feb-19 Price: CNY5,488 CNY3,988 CNY3,198 USD999 USD899 CNY2,999 CNY5,499 Source: Companies, Daiwa Note: *including triple and above

Promising spec upgrades with long-term upside potential from 3D sensing The rise of multi-cams In addition to the triple-cam/quad-cam trend discussed above, our research suggests should not only provide Apple is likely to adopt rear 3D sensing for the iPad Pro and new iPhones in 2020, which volume-growth drivers, we estimate would drive the adoption rate of 3D sensing to 17-25% over 2020-21E from but also ASP upside on 11% for 2019E and 7% for 2018. On top of the volume upside driven by the multi-cam continuing spec trend, we expect ongoing spec upgrades for cameras, such as a higher MP count (main upgrades, which we camera upgraded to 64MP/108MP from 40MP or below earlier), more lenses (from 6P to expect to benefit 7P/8P), a periscope design for a higher optical zoom (from 2x/3x to 5x or more), and industry leaders Largan retractable cams/miniature cams to achieve a higher ratio of screen/phone form factor or and Sunny full-screen design. We view these favourable industry trends as providing not only volume growth but also ASP upside for the supply chain.

3D sensing: adoption set to rise over 2020-21E We have long highlighted our upbeat view on camera functions beyond imaging quality, and we believe that features such as AR and 3D will lead to further upside in the usage of cameras in smartphones. Apple is the pioneer and strong supporter of 3D sensing. After releasing its first smartphone with 3D sensing – the iPhone X – in September 2017, Apple included the feature in all new iPhones models in 2018 (iPhone XR/XS/XS Max) and in 2019 (iPhone 11/11 Pro/11 Max). It expanded the adoption to the iPad Pro series since October 2018. We have seen rising interest in 3D sensing from Android brands since 2018; however, due to the overall cost consideration and lack of a comprehensive ecosystem, 3D sensing adoption by Android brands remains low, at below 5% for 2019, on our estimates.

Looking to 2020, our research suggests Apple is likely to adopt rear 3D sensing by using ToF technology (see Appendix 2) for the iPad Pro in 1H20 and new iPhones in 2H20, which should trigger more interest among Android brands, in our view. We also believe the cost advantage of ToF technology, which is 20-30%-plus cheaper than that of structure light solutions, will boost the technology’s adoption. As such, we forecast 3D sensing adoption in smartphones to gradually start accelerating from 2020, and rise to 17-25% over 2020-21E, from 11% for 2019E and 7% for 2018. There could be further upside for the supply chain if Android brands turn more aggressive in adopting the feature after Apple releases more applications to enhance the overall ecosystem.

Greater China Smartphones: 3 December 2019

Global 3D sensing penetration in smartphones (mn units) 1,800 100% 1,600 90% 1,400 80% 1,200 70% 60% 1,000 50% 800 40% 600 30% 400 20% 200 10% 0 0% 2016 2017 2018 2019E 2020E 2021E Total smartphone Total 3D-sensing smartphone Penetration rate

Source: Daiwa forecasts

Major 3D sensing models in 2019 Model iPhone 11 Pro Max iPhone 11 Pro iPhone 11 Google Pixel 4XL Google Pixel 4 Huawei Mate 30 Pro

Model Picture:

Dimensions (mm): 158.0 x 77.8 x 8.1 144.0 x 71.4 x 8.1 150.9 x 75.7 x 8.3 160.4 x 75.1 x 8.2 147.1 x 68.8 x 8.2 158.1 x 73.1 x 8.8 Weight: 226g 188g 194g 193g 162g 198g ROM capacity: 64/256/512GB 64/256/512GB 64/128/256GB 64/128GB 64/128GB 128/256GB RAM capacity: 4GB 4GB 4GB 6GB 6GB 8GB Display Diagonal: 6.5” 5.8” 6.1" 6.3” 5.7'' 6.5" Display Resolution: 1242 x 2688 pixels 1125 x 2436 pixels 1792 x 828 pixels 1080 x 3040 pixels 1080 x 2280 pixels 1176 x 2400 pixels Pixel density: 458 ppi 458 ppi 326 ppi 537 ppi 444 ppi 409 ppi Camera resolution: 12MP+12MP+ 12MP 12MP+ 12MP+ 12MP 12MP+12MP 16MP+12.2MP 16MP+12.2MP 40MP+40MP+8MP 3D sensing: SL at front SL at front SL at front SL at front SL at front ToF at rear and front OIS: Dual OIS Dual OIS Yes Yes Yes Dual OIS Secondary Camera: 12MP 12MP 12MP 8MP 8MP 32MP Launched Date: Sep-19 Sep-19 Sep-19 Oct-19 Oct-19 Sep-19 Price: USD1,099 USD999 USD699 USD899 USD799 EUR1,099 Price in CNY/India CNY9,599 CNY8,699 CNY5,499 n.a n.a CNY5,799

Model Samsung Note 10+ Samsung A80 Lenovo Z6 Pro Huawei P30 Pro Samsung S10 5G LG G8 ThinQ

Model Picture:

Dimensions (mm): 162.3 x 77.2 x 7.9 165.2 x 76.5 x 9.3 157 x 74.6 x 8.7 158 x 73.4 x 8.4 162.6 x 77.1 x 7.94 157.9 x 71.8 x 8.4 Weight: 196g 193g 185g 192g 198g 167g ROM capacity: 256/512GB 128GB 128/256/512GB 128/256/512GB 512GB 128GB RAM capacity: 12GB 8GB 6/8/12GB 8GB 8GB 6GB Display Diagonal: 6.53" 6.7” 6.39” 6.47" 6.7" 6.1” Display Resolution: 1440 x 3040 pixels 1080 x 2400 pixels 1080 x 2340 pixels 1080 x 2340 pixels 3040x 1440 pixels 1440 x 3120 pixels Pixel density: 498 ppi 393 ppi 403 ppi 398 ppi 502 ppi 564 ppi Camera resolution: 12MP+12MP+16MP 48MP+8MP 48MP+16MP+8MP+2MP 40MP+20MP+8MP 12MP+12MP+16MP 12MP+16MP+12MP 3D sensing: ToF at rear ToF at rear ToF at rear ToF at rear ToF at rear and front ToF at front OIS: Dual OIS No Yes Yes Yes Dual OIS Secondary Camera: 10MP Pop-up rotating cam 32MP 32MP 10MP 8MP Launched Date: Aug-19 Apr-19 Apr-19 Mar-19 Mar-19 Feb-19 Price: USD1,099 EUR649 n.a EUR999 USD1,399 USD899 Price in CNY/India CNY7,999 CNY3,799 CNY2,899 CNY5,488 n.a n.a

Source: Companies, Daiwa

Promising spec upgrade trend We expect multi-cam On top of the rising multi-cam adoption trend in smartphones, we see ongoing spec and spec upgrade trends upgrades within multi-cam designs. We expect these trends to not only provide volume to not only provide growth drivers, but also add more value to the supply chain. volume growth drivers, but also value addition We have seen smartphone brands making efforts to differentiate their smartphones by to the supply chain upgrading their multi-cam designs such as through megapixel migration, more lenses, increasing the aperture ratio, adding wide-angle features, using periscope designs for higher optical zoom, retractable cams, and miniature designs. For example, Apple adopted a triple-cam design in its iPhone 11 Pro Max/11 Pro in 2H19 (from a dual-cam design in the

Greater China Smartphones: 3 December 2019

XS Max/XS in 2H18) with higher specs (telephoto lens with f/2.0 aperture for 11 Pro Max/11 Pro; vs. telephoto lens with f/2.4 aperture in the XS/XS Max). The iPhone 11 comes with a dual-cam design comprising a 12MP wide-cam and 12MP ultra-wide-cam, compared with a single wide-cam design and 12MP lens in the iPhone XR released in 2H18.

Our research suggests Looking ahead, our supply chain research indicates that for its new iPhones in 2H20, Apple Apple is likely to is likely to upgrade its main camera from a 6P design to 7P design to improve imaging upgrade the main quality. We also note that the Chinese brands are becoming more aggressive on camera in iPhones from megapixel migration. For example, the Honor 20 – Huawei’s major mid-to-high end model 6P to 7P – released in May 2019, is equipped with a set of cameras comprising 48MP + 16MP + 2MP + 2MP, compared with 24MP + 16MP for its predecessor – the Honor 10 – released in April 2018. Among flagship models, the Vivo NEX 3, released in September 2019, upgraded its main camera to 64MP (compared with 48MP for its previous flagship line-ups, the Vivo Reno 2 and X27 series released in August and March 2019, respectively). The Mi CC9 Pro, Xiaomi’s latest flagship model, further upgraded its camera to 108MP with a larger sensor of 1/1.33”, compared with 48MP with a 1/2” sensor for the Mi 9, released in February 2019. Looking into 2020, our industry research indicates rising adoption of 64MP/108MP lenses in high-end Android smartphones, and we see a good possibility of Samsung adopting 108MP in its flagship model – the Galaxy S11+ – in 1Q20.

Launched in March 2019, the Huawei P30 Pro is the industry’s first smartphone with periscope technology (or a so-called folded-lens design), which can achieve a 5x optical zoom (vs. up to 3x for a triple-cam or 2x for a dual-cam set-up). It was followed by the Oppo Reno (10x hybrid zoom), which was launched in April 2019. Despite high manufacturing costs, we note rising interest in the periscope design among top-tier Android brands, and hence we expect to see more flagship/high-end models sporting such designs in 1Q20. In particular, our industry research suggests Samsung is considering adopting a periscope design in the forthcoming Galaxy S11+ in 1Q20, which could encourage the broader adoption of periscope designs, in our view.

Some smartphone brands are also pushing innovative front-cam designs, such as retractable cams (eg, Oppo Reno 2, Vivo NEX 3, Huawei Y9, Xiaomi Redmi K20 Pro) and miniaturised heads (eg, Huawei P30/P30 Pro, Samsung Galaxy S10/Note 10 series, OPPO Reno Z, Vivo S1 Pro, and Xiaomi Mi 9) to facilitate full-screen designs. Our research suggests that more smartphone models with upgraded front cams are likely to be launched in 2020.

In our opinion, this spec upgrade trend bodes well for our positive theme for the supply chain, and we expect it to continue providing growth drivers for major beneficiaries, particularly Largan, the leader in high-end lenses, and Sunny Optical, the leader in camera modules and a major lens supplier to mid-range to high-end models.

Huawei: periscope design in the P30 Pro Vivo: retractable front cam/64MP main camera on the NEX 3

13MP telephoto; f/1.8; 2x optical zoom 16MP retractable front cam; 20MP ultra-wide; f/2.2 f/2.09

ToF camera

40MP wide; f/1.6; OIS 64MP 13MP telephoto; ultra-wide; 8MP periscope; f/2.48 f/2.2 f/3.4; OIS

Source: Company, Daiwa Source: Company, Daiwa

Greater China Smartphones: 3 December 2019

Alongside the existing upgrade trend for smartphones, we note some new innovative designs, such as under-display cameras, advanced folded-lenses, unibody lenses with embedded voice coil motors (VCM), and sensor shifts.

Innovative designs such Oppo and Xiaomi released their designs for under-display cameras in 2H19 but did not as under-display provide timetables for volume production. We believe developments in this regard will cameras and sensor depend on the readiness of the whole system (including camera modules, lenses, shifts should benefit the algorithms and displays). supply chain For advanced folded-lenses, the US Patent and Trademark Office (USPTO) revealed a patent filed by Apple in October 2019. According to the patent, with 2 prisms located between the lens sets and the image sensor, a folded lens design provides more flexibility for further upgrades in the camera lens without sacrificing additional space in a smartphone. For unibody lenses with embedded VCM, this approach could miniaturise the overall size of the lens form factor by combining the VCM with the lens set.

In May 2019, another patent filed by Apple shows the overall size of the lens form factor could decrease by integrating the VCM with the image sensor, which would pave the way for a future image-shifting feature in camera modules. The design features an image sensor carrier that is mounted on the VCM actuator base. And a plurality of optical image stabilisation coils is attached to the image sensor carrier in order to produce forces for moving the image sensor carrier in different directions. In addition to a smaller form factor, shifting the sensor allows a reduction of the moving mass, and therefore offers benefits for power consumption as compared with OIS “optics shift” designs.

If the above trends take off, we believe they would benefit the supply chain given the rising complexity of design, particularly for Largan and Sunny Optical, which we consider to be well-positioned by virtues of their industry-leading positions and technology know-how. However, we have not yet factored such upside into our forecasts for these stocks.

Oppo: under-display camera design Apple patent: advanced folded camera lens system

Source: Oppo Source: Apple; patent number:20190212632

Apple patent: optical image stabilisation with voice coil motor Apple patent: cross-sectional view of image sensor carrier with (VCM) for moving image sensor optical image stabilisation coils atop

Source: Apple; patent number:20190141248 Source: Apple; patent number:20190141248

Greater China Smartphones: 3 December 2019

Positive on the camera component supply chain – near- term volume risks offer good opportunity to accumulate We expect intact Our market research suggests these trends are not only on track but are running ahead of favourable trend of our expectations. Looking to 2020-21E, driven by positive feedback from customers and multi-cam adoption in widening triple-cam adoption in mid-range and mid-range to high-end models, we forecast smartphones, and are the triple-cam adoption rate to rise to 36-50% over 2020-21E, with the total multi-cam particularly positive on (dual/triple or more) adoption rate seen rising to 78% for 2020E and 86% for 2021E, from major beneficiaries: 63% for 2019E and 33% for 2018. Also, we expect the increasing penetration of 3D Largan and Sunny sensing to broaden the addressable market and provide upside for the supply chain. We view the multi-cam trend as not only providing volume upside but also ASP upside for the supply chain given the spec upgrades that go along with it.

We would see any near- In the Greater China smartphone supply chain, Sunny and Largan remain our top picks term price volatility under the multi-cam theme. In the near term, we see the possibility of increased share- driven by profit-taking price volatility due to potential profit-taking on the strong performances YTD (Sunny shares following these stocks’ up 84%; Largan’s up 40%) and likely inventory adjustments from China brands, as well as strong share-price volume risks from Huawei (see report, 25 October 2019). We would see any near-term performances YTD, as price volatility driven by profit-taking following these stocks’ strong share-price well as likely customers’ performances YTD, as well as likely customers’ inventory adjustments, as further inventory adjustments, heightening the buying opportunity. as further heightening the buying opportunity Sunny. We view Sunny as a major beneficiary of the multi-cam trends in smartphones and smart cars. On its strong position in camera lenses and camera modules, and benefits from promising spec upgrades in smartphones (multi-cam, megapixel migration, miniature, higher aperture, larger sensor, 7P/8P, periscope design), we forecast the company to deliver strong revenue growth of 19-35% YoY over 2019-21E. In addition, we expect Sunny to resume its YoY margin expansion from 2H19 on the back of improving yield/optimisation of production (HCM), a better product mix on spec upgrades (HLS/HCM), and scale benefits. Overall, on these favourable factors, we raise our 2019-21E earnings forecasts by 2-7% and now look for Sunny’s earnings to expand by 27-47% YoY over 2019- 21E, with its gross margin expanding to 19.4-21.7%, from 18.9% for 2018. Sunny remains one of our sector top picks, and we reaffirm our Buy (1) rating with a new 12-month target price of HKD150 (from HKD137), based on a PER of 28x on our 1-year-forward EPS forecast, compared with its past-3-year trading range of 10-53x. Key risk: weaker smartphone sales.

Largan stands to benefit from the increasing adoption of multi-cams and ongoing spec upgrades, given its leading position in the high-end lens market, in our view. On the favourable trends discussed in this report, we expect Largan to resume solid revenue and earnings growth from 2019 and forecast revenue/earnings growth of 19-20%/20-21% over 2019-21E. Our research also suggests Largan is likely to win lens orders for rear 3D sensing in the new iPhones in 2H20, which would lead to upside to our 2020-21E forecasts as we have not yet factored this prospect into our forecasts. Largan remains one of our sector top picks. We have a Buy (1) rating and 12-month target price of TWD5,520, based on a PER of 21x on our 1-year-forward EPS forecast, compared with its past-5-year trading range of 11-33x. Key risk: weaker smartphone sales.

Greater China Smartphones: 3 December 2019

Smartphone camera module supply chain

Source: Companies, Daiwa

3D sensing camera module supply chain

Source: Companies, Daiwa Note: based on structure light; for To F technology, normally without DOE components while other major supply chain vendors stay the same

Risks to our view Key upside/downside The primary upside/downside risks to our Neutral sector view are better/worse smartphone risks to our sector view sell-through due to macroeconomic uncertainties as a result of trade tensions, likely are better/weaker prolonged FX volatilities, and already-high penetration globally. smartphone sales The secondary upside/downside risks to our sector view are the faster/slower replacement cycle triggered by 5G demand. Despite a gradual kick off in 5G demand, we expect low- single-digit YoY smartphone volume growth in 2020.

Greater China Smartphones: 3 December 2019

Risks to the camera component sub-sector Key risk for the camera As we see it, the main risk to the camera subsector is potentially slower-than-expected component subsector is triple-cam or multi-cam adoption in smartphones. Although we believe multi-cam adoption slower-than-expected will speed up in the next few years driven by widening adoption of triple-cams, the demand multi-cam adoption in for enhanced image quality, rising penetration of triple-cams, and consumer feedback will smartphones be the key to the final adoption rate, in our view. Poor acceptance from consumers could lead to lower revenue growth for companies focused on camera components, impacting players like Largan and Sunny Optical.

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 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 low-to-mid 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: 3 December 2019

Appendix 1 Triple-cams: the major benefits The emergence of dual-cams in smartphones went some way to resolving the trade-off between image quality and form factor, supporting higher resolutions and more vibrant images compared with single-cam models while allowing for a thinner device than a single- cam smartphone (see Appendix 3). In our view, the triple-cam takes a further step in enhancing imaging quality on top of dual-cam design. The major benefits of triple-cams include a higher optical zoom (3x vs. up to 2x for dual-cams), broader angle, better image quality in low-light environments, enhancing functionality for AI features, such as detection and recognition for faces, objects and scenes and auto-adjustments of multiple parameters for best image output. Triple-cams can also provide AR and 3D features by leveraging 2 cameras in the design via the stereo system (see Appendix 2).

Benefits of a triple-cam design

3x optical zoom, 5x hybrid zoom and 10x digital zoom Wide shooting angle

Better image in low light environment AI features: automatic scene recognition

Source: Company, Daiwa

The structure of triple-cams and major types There are 3 major types of triple-cam design in smartphones: 1) low-light focus – mono camera + wide angle camera + telephoto camera, 2) a wide-angle focus – super-wide angle camera + wide angle camera + telephoto camera, and 3) super zoom – folded telephoto camera + wide angle camera + telephoto camera. In addition to these 3 types, there are various designs, such as wide angle + super-wide + depth, to provide the functionality that a particular smartphone vendor wishes to prioritise.

Low-light focus. In addition to a higher optical zoom (3x vs. 2x for dual-cams), this design can achieve better low-light performance by fusing outputs from its mono camera. The first triple-cam smartphone – Huawei’s P20 Pro (launched in March 2018) – uses this design.

Wide-angle focus. The super wide angle camera has a broader shooting angle and seamless capture mode for panorama shots, while at the same time being able to capture fine details of distant objects via its telephoto camera, in addition to having a higher optical zoom. LG’s V40 Think Q (September 2018) and Huawei’s Mate 20 series (released in October 2018) adopt this design.

Greater China Smartphones: 3 December 2019

Super zoom. By adopting a folded lens design in triple-cams, this design is able to deliver better image quality in low-light environments with a higher optical zoom (5x optical zoom) than the normal optical zoom focus in triple-cams. Our research suggests smartphone brands are working on this solution and we believe Huawei will release the first smartphone with a super zoom design in 2019.

Major triple-cam designs Low-light focus Wide-angle focus Super zoom

Telephoto Telephoto Wide Mono Wide Super wide Design

Optical zoom Good Good Excellent Shooting angle Average Good Average Low-light shooting Good Average Excellent Its mono camera enables better image qualities for Its super wide angle camera enables better user It has excellent low-light shooting as its folded lens design Others low-light environment shooting experience in panorama shooting in telephoto camera allows more lights into the senor

Source: Core Photonics, Daiwa

Triple-cams: technology challenges In order to achieve more features with enhanced functionality in cameras, smartphone brand vendors started to seek triple-cam designs. The addition of a third camera carries merit but also challenges in calibration, firmware/algorithm and power consumption.

Calibration: Cameras need to be carefully calibrated for the optical properties of a triple aperture system. The calibration consists of recovering camera parameters, location and orientation for external parameters, and focal lengths for internal parameters. In addition, numerous tests on any dynamic physical changes, such as temperature variances and drop tests, have to be carried out during the manufacturing process.

Firmware/algorithms: A triple-cam demands more complexity on the firmware side since the framework in a triple-cam system has to deal with each of the 3 cameras operating as an integrated one. In addition, algorithms have to provide reasonable processing run time while maintaining zero distortion of image quality from multiple inputs.

Power consumption: The complexities involved for algorithms and firmware, which require more processing power in power management, frame request and memory management, mean that the whole camera system (camera + processing platform) consumes a large amount of power.

Greater China Smartphones: 3 December 2019

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

Structured 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 an image by measuring the time it takes for an infrared beam to transmit to the object and reflect it back to the device. The time of flight device has more merits in short to long distance sensing, and hence is more suited to use in rear-cams on smartphones.

Stereo system: This approach originated from the concept of the human eye, where the device captures a scene with 2 cameras to illustrate the same object from different views and generates a stereo vision for the object. The stereo system has the most complicated design but can also create the 3D image with lowest power consumption given active illumination is not required for 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: 3 December 2019

Appendix 3 Dilemma: imaging quality vs. form-factor design Cameras are one of the key features that brand vendors have been upgrading in order to appeal to consumers. However, the nature of a smartphone’s form-factor design, in particular the thickness requirement, has made it a challenge to improve image quality. For instance, a larger CMOS sensor, bigger pixel size, or more lens components in a lens set should allow more light into a camera module to catch more details of a subject, resulting in better image quality. However, this has also meant 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. Due to 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), higher resolution requires 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 solved 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 by 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 than single-cam models, and are thinner as well.

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: 3 December 2019

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 the different characteristics of each camera. The major benefits of dual-cams include multiple focus/post-shot focus adjustments, a 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. 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

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 3 December 2019

(2382 HK) Sunny Optical Technology Sunny Optical Technology

Target price: HKD150.00 (from HKD137.00) Share price (2 Dec): HKD128.10 | Up/downside: +17.1%

Promising outlook in 2020 on intact favourable trends Kylie Huang (886) 2 8758 6248  Forecasting 47% EPS growth in 2020 on favourable multi-cam trends [email protected]  Solid margin uptrend on improving mix and spec upgrades Steven Tsai (886) 2 8758 6245  Reiterating Buy (1) and lifting TP to HKD150; still one of our top picks [email protected]

What's new: We continue to view Sunny as a major beneficiary of the Forecast revisions (%) rising adoption of multi-cams in smartphones and expect it to deliver strong Year to 31 Dec 19E 20E 21E earnings growth in 2020-21E on these favourable trends. We view any Revenue change 0.5 2.2 2.6 Net profit change 1.7 6.4 6.9 near-term share price volatility on profit-taking on its strong +84% YTD Core EPS (FD) change 1.7 6.4 6.9 share price performance and volume risks from likely customer inventory Source: Daiwa forecasts adjustments as opportunities for investors to further accumulate. We reiterate our Buy (1) call; Sunny remains one of our top sector picks. Share price performance

(HKD) (%) What's the impact: Well-positioned for the multi-cam trend. As 135 175 highlighted in the sector section of this report, we forecast triple-cam 116 151 98 128 adopted smartphone shipments to grow to 562-798m in 2020-21E from 79 104

323m in 2019 driven by the positive customer feedback and widening 60 80 adoption by all major brands, especially Huawei and Samsung. We view Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Sunny, a major camera module and lens supplier for Android smartphones, Sunny Opti (LHS) Relative to HSI (RHS) as well–positioned to benefit from this trend. 12-month range 61.40-133.70 Intact margin uptrend in 2019-21E on improving mix. We believe Sunny Market cap (USDbn) 17.90 is a beneficiary of the rising multi-cam trend, leading to volume growth and 3m avg daily turnover (USDm) 90.35 Shares outstanding (m) 1,094 ASP upside due to ongoing spec upgrades. Indeed, thanks to rising Major shareholder Sun Xu Ltd (35.5%) adoption of triple-cams, megapixel migration, 3D sensing, periscope design, 7P/8P, higher aperture ratio, and miniature design, we expect Financial summary (CNY) Sunny to deliver ASP growth of 5-10% for HCM and 8-14% YoY for HLS in Year to 31 Dec 19E 20E 21E 2020-21E. On the improving product mix, scale benefits, and improving Revenue (m) 34,962 43,138 51,460 production yield for advanced design in HCM, we forecast Sunny to resume Operating profit (m) 3,986 5,867 7,395 Net profit (m) 3,540 5,205 6,583 YoY gross margin expansion from 2H19. We expect its gross margin to Core EPS (fully-diluted) 3.235 4.757 6.016 expand to 19.4% in 2019E, 21.2% in 2020E and 21.7% in 2021E from EPS change (%) 41.9 47.1 26.5 18.9% in 2018, as well as 27-47% earnings growth in 2019-21E. Daiwa vs Cons. EPS (%) 3.2 9.9 10.6 PER (x) 35.6 24.2 19.2 Dividend yield (%) 0.6 0.7 1.0 Near-term volume risks manageable. We have previously highlighted DPS 0.660 0.809 1.189 that we see Huawei’s target of 250-260m smartphone volume for 2020 as PBR (x) 10.4 7.7 5.8 too aggressive and see 10-15% volume risk for the whole supply chain due EV/EBITDA (x) 25.9 16.7 12.9 ROE (%) 33.1 36.5 34.5 to the lack of GMS support (see report). We see this risk as an overhang Source: FactSet, Daiwa forecasts on near-term sentiment but see the impact as manageable due to Sunny’s market share gains in Samsung and its diversified customer profile (10- 15% profit exposure to Huawei).

What we recommend: We raise our 2019-21E EPS by 2-7% on a more optimistic revenue and margin outlook. We reaffirm our Buy (1) rating and raise our 12-month TP to HKD150 (from HKD137), still based on a 28x PER on our revised 2020E EPS. Key risk: the US-China trade war.

How we differ: Our 2020-21E EPS are 10-11% above consensus, likely as we are more upbeat on the long-term benefits from the multi-cam trend.

See important disclosures, including any required research certifications, beginning on page 25

Sunny Optical Technology (2382 HK): 3 December 2019

Financial summary Key assumptions Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Handset CCM shipment (m units) 187 228 270 325 423 510 598 680 Vehicle lens shipment (m units) 11 17 23 32 40 50 62 78 Handset lens shipment (m units) 75 302 379 608 951 1,283 1,577 1,846

Profit and loss (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Handset CCM Revenues 6,576 7,785 11,055 17,274 19,028 25,145 30,732 36,594 Vehicle Lens Revenues 421 651 935 1,348 1,660 2,232 2,846 3,629 Other Revenue 1,429 2,260 2,622 3,745 5,244 7,584 9,560 11,236 Total Revenue 8,426 10,696 14,612 22,366 25,932 34,962 43,138 51,460 Other income 0 0 0 0 0 0 0 0 COGS (7,137) (8,933) (11,932) (17,563) (21,019) (28,193) (33,993) (40,283) SG&A (320) (352) (485) (594) (644) (891) (1,049) (1,210) Other op.expenses (392) (502) (694) (1,168) (1,362) (1,892) (2,229) (2,572) Operating profit 577 909 1,501 3,041 2,907 3,986 5,867 7,395 Net-interest inc./(exp.) 36 23 30 32 16 (32) (40) (3) Assoc/forex/extraord./others 21 (70) (84) 245 (72) 70 90 90 Pre-tax profit 634 862 1,446 3,318 2,851 4,024 5,916 7,482 Tax (73) (99) (175) (404) (339) (483) (710) (898) Min. int./pref. div./others 5 (2) (1) (13) (22) (1) (1) (1) Net profit (reported) 566 762 1,271 2,902 2,491 3,540 5,205 6,583 Net profit (adjusted) 566 762 1,271 2,902 2,491 3,540 5,205 6,583 EPS (reported)(CNY) 0.529 0.709 1.176 2.668 2.279 3.235 4.757 6.016 EPS (adjusted)(CNY) 0.529 0.709 1.176 2.668 2.279 3.235 4.757 6.016 EPS (adjusted fully-diluted)(CNY) 0.529 0.709 1.176 2.668 2.279 3.235 4.757 6.016 DPS (CNY) 0.112 0.154 0.207 0.288 0.658 0.660 0.809 1.189 EBIT 577 909 1,501 3,041 2,907 3,986 5,867 7,395 EBITDA 792 1,155 1,817 3,532 3,683 4,886 7,448 9,401

Cash flow (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Profit before tax 634 862 1,446 3,318 2,851 4,024 5,916 7,482 Depreciation and amortisation 215 246 317 491 776 901 1,581 2,006 Tax paid (73) (99) (175) (404) (339) (483) (710) (898) Change in working capital (898) 609 (32) (990) (386) (934) (1,561) (1,100) Other operational CF items 0 0 0 0 0 0 0 0 Cash flow from operations (122) 1,618 1,556 2,415 2,902 3,507 5,226 7,490 Capex (465) (351) (969) (1,284) (2,713) (4,000) (2,500) (3,000) Net (acquisitions)/disposals (62) (64) 11 (64) (313) 0 0 0 Other investing CF items (178) (60) (58) (916) 257 0 0 0 Cash flow from investing (705) (475) (1,016) (2,263) (2,769) (4,000) (2,500) (3,000) Change in debt 56 167 234 880 4,519 0 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (120) (166) (223) (313) (719) (722) (885) (1,301) Other financing CF items (55) (2) 21 18 (3) 0 0 0 Cash flow from financing (120) (0) 32 585 3,797 (722) (885) (1,301) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash (947) 1,143 572 737 3,931 (1,215) 1,841 3,188 Free cash flow (587) 1,267 587 1,132 190 (493) 2,726 4,490 Source: FactSet, Daiwa forecasts

Sunny Optical Technology (2382 HK): 3 December 2019

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Cash & short-term investment 884 2,025 2,595 3,320 7,229 5,153 6,993 10,181 Inventory 896 897 2,828 2,622 3,074 4,208 5,230 6,294 Accounts receivable 2,388 3,003 3,716 5,666 6,231 8,429 10,400 12,407 Other current assets 36 93 178 28 234 70 86 103 Total current assets 4,204 6,017 9,318 11,635 16,768 17,860 22,710 28,985 Fixed assets 1,035 1,141 1,794 2,586 4,523 7,622 8,541 9,535 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 354 478 525 1,505 1,561 1,561 1,561 1,561 Total assets 5,594 7,636 11,637 15,726 22,852 27,044 32,812 40,081 Short-term debt 522 683 904 1,348 1,482 1,540 1,540 1,540 Accounts payable 1,744 2,914 5,573 6,183 7,064 9,269 10,710 12,692 Other current liabilities 31 142 181 175 131 159 166 172 Total current liabilities 2,297 3,739 6,658 7,705 8,677 10,968 12,416 14,403 Long-term debt 0 0 0 0 4,080 3,960 3,960 3,960 Other non-current liabilities 46 52 65 502 807 10 10 10 Total liabilities 2,343 3,791 6,723 8,207 13,564 14,938 16,386 18,373 Share capital 105 105 105 105 105 105 105 105 Reserves/R.E./others 3,145 3,740 4,808 7,414 9,183 12,000 16,321 21,603 Shareholders' equity 3,251 3,845 4,913 7,519 9,288 12,106 16,426 21,708 Minority interests 0 0 0 0 0 0 0 0 Total equity & liabilities 5,594 7,636 11,637 15,726 22,852 27,044 32,812 40,081 EV 125,766 124,787 124,437 124,157 124,462 126,475 124,635 121,447 Net debt/(cash) (362) (1,341) (1,691) (1,972) (1,666) 347 (1,493) (4,681) BVPS (CNY) 3.038 3.579 4.547 6.913 8.499 11.063 15.011 19.838

Key ratios (%) Year to 31 Dec 2014 2015 2016 2017 2018 2019E 2020E 2021E Sales (YoY) 45.0 26.9 36.6 53.1 15.9 34.8 23.4 19.3 EBITDA (YoY) 30.0 45.9 57.3 94.3 4.3 32.7 52.4 26.2 Operating profit (YoY) 24.9 57.6 65.0 102.6 (4.4) 37.1 47.2 26.0 Net profit (YoY) 28.5 34.5 66.8 128.3 (14.1) 42.1 47.1 26.5 Core EPS (fully-diluted) (YoY) 19.4 34.0 65.9 126.8 (14.6) 41.9 47.1 26.5 Gross-profit margin 15.3 16.5 18.3 21.5 18.9 19.4 21.2 21.7 EBITDA margin 9.4 10.8 12.4 15.8 14.2 14.0 17.3 18.3 Operating-profit margin 6.8 8.5 10.3 13.6 11.2 11.4 13.6 14.4 Net profit margin 6.7 7.1 8.7 13.0 9.6 10.1 12.1 12.8 ROAE 18.5 21.5 29.0 46.7 29.6 33.1 36.5 34.5 ROAA 11.0 11.5 13.2 21.2 12.9 14.2 17.4 18.1 ROCE 16.2 21.9 29.0 41.4 24.5 24.6 29.7 30.1 ROIC 23.2 29.9 46.1 60.9 38.9 34.9 37.7 40.7 Net debt to equity n.a. n.a. n.a. n.a. n.a. 2.9 n.a. n.a. Effective tax rate 11.5 11.5 12.1 12.2 11.9 12.0 12.0 12.0 Accounts receivable (days) 77.1 92.0 83.9 76.6 83.7 76.5 79.7 80.9 Current ratio (x) 1.8 1.6 1.4 1.5 1.9 1.6 1.8 2.0 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. 124.4 145.5 2,709.2 Net dividend payout 21.3 21.8 17.6 10.8 28.9 20.4 17.0 19.8 Free cash flow yield n.a. 1.0 0.5 0.9 0.2 n.a. 2.2 3.6 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): 3 December 2019

Global triple-cam* penetration in smartphones Global 3D sensing 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 triple-cam smartphone Total smartphone Total 3D-sensing smartphone

Penetration rate Penetration rate Source: Companies, Daiwa forecasts Source: Companies, Daiwa forecasts Note: *including triple and above

Sunny Optical: semi-annual and annual P&L statement 2019E 2020E 2019E 2020E 2021E

(CNYm) 1H 2HE 1HE 2HE

Net sales 15,575 19,387 18,618 24,520 34,962 43,138 51,460

Gross profit 2,864 3,905 3,742 5,403 6,769 9,145 11,177

Operating costs 1,215 1,568 1,443 1,836 2,783 3,278 3,782

Operating profit 1,649 2,336 2,300 3,567 3,986 5,867 7,395

Net income 1,431 2,109 1,999 3,206 3,540 5,205 6,583

EPS (CNY) 1.31 1.93 1.83 2.93 3.23 4.76 6.02

Operating ratios

Gross margin 18.4% 20.1% 20.1% 22.0% 19.4% 21.2% 21.7%

Operating margin 10.6% 12.1% 12.4% 14.5% 11.4% 13.6% 14.4%

Pre-tax margin 10.8% 12.1% 12.5% 14.6% 11.5% 13.7% 14.5%

Net margin 9.2% 10.9% 10.7% 13.1% 10.1% 12.1% 12.8%

YoY (%)

Net revenue 30% 39% 20% 26% 35% 23% 19%

Gross profit 23% 51% 31% 38% 38% 35% 22%

Operating income 10% 66% 39% 53% 37% 47% 26%

Net income 21% 61% 40% 52% 42% 47% 26%

HoH (%)

Net revenue 12% 24% -4% 32%

Gross profit 10% 36% -4% 44%

Operating income 17% 42% -2% 55%

Net income 9% 47% -5% 60%

Source: Company, Daiwa forecasts

Sunny Optical: 1-year-forward PER Sunny Optical: 1-year-forward PBR (HKD) (HKD) 250 250

200 200

150 150

100 100

50 50

0 0

Jun-13 Jun-12 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19

Jun-15 Jun-12 Jun-13 Jun-14 Jun-16 Jun-17 Jun-18 Jun-19

Dec-14 Dec-11 Dec-12 Dec-13 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Dec-14 Dec-11 Dec-12 Dec-13 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Sunny 16x 24x 32x 40x Sunny 4x 8x 12x 16x

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

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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; Machinery 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 Defence); Utilities; Steel Co-head of Asia Pacific Research Josh RHEE (82) 2 787 9124 [email protected] Craig CORK (852) 2848 4463 [email protected] Chemicals Regional Head of Asia Pacific Product Management JH LEE (82) 2 787 9838 [email protected] Paul M. KITNEY (852) 2848 4947 [email protected] Consumer/Retail – Cosmetics 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) SK KIM (82) 2 787 9173 [email protected] Kelvin LAU (852) 2848 4467 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Head of Automobiles; Transportation and Industrials (Hong Kong/China) Henny JUNG (82) 2 787 9182 [email protected] Fiona LIANG (852) 2532 4341 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap) Industrials (Hong Kong/China) Minjoo KANG (82) 2 787 9176 [email protected] Jay LU (852) 2848 4970 [email protected] Media Automobiles and Components (Hong Kong/China) Leon QI (852) 2532 4381 [email protected] TAIWAN Regional Head of Financials; Banking; Diversified financials; Insurance Rick HSU (886) 2 8758 6261 [email protected] (Hong Kong/China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Kevin JIANG (852) 2532 4383 [email protected] (Regional) Banking (China) Nora HOU (886) 2 8758 6249 [email protected] Anson CHAN (852) 2532 4350 [email protected] Banking; Diversified financials; Insurance; Strategy Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Adrian CHAN (852) 2848 4427 [email protected] IT/Technology Hardware (Automation & PC Hardware) Consumer (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] Jonathan HO (852) 2848 4056 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Andrew CHUNG (852) 2773 8529 [email protected] Small/Mid Cap Head of Gaming (Hong Kong/China) John CHOI (852) 2773 8730 [email protected] INDIA Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Carlton LAI (852) 2532 4349 [email protected] Head of India Research; Strategy; Banking/Finance Small/Mid Cap (Hong Kong/China) Saurabh MEHTA (91) 22 6622 1009 [email protected] Dennis IP (852) 2848 4068 [email protected] Capital Goods; Utilities Regional Head of Power, Utilities, Renewable and Environment (PURE); PURE (Hong Kong/China) SINGAPORE Anna LU (852) 2848 4465 [email protected] Ramakrishna MARUVADA (65) 6228 6742 [email protected] Power, Utilities, Renewable and Environment (PURE) – IPP, Wind & Nuclear (China) Head of Singapore Research; Telecommunications (China/ASEAN/India) Tony WU (852) 2848 4469 [email protected] David LUM (65) 6228 6740 [email protected] Power, Utilities, Renewable and Environment (PURE) – Utilities (Hong Kong), EV materials, Gas (China) Banking; Property and REITs Jonas KAN (852) 2848 4439 [email protected] Jame OSMAN (65) 6228 6744 [email protected] Head of Hong Kong and China Property Transportation – Road and Rail; Pharmaceuticals and Healthcare; Consumer Cynthia CHAN (852) 2773 8243 [email protected] Property (China) JAPAN Selwyn CHENG (852) 2773 8716 [email protected] Yukino YAMADA (81) 3 5555 7295 [email protected] Strategy (Regional)

Custom Products Group Jack CHAN (852) 2773 8731 [email protected] Custom Products Group

PHILIPPINES Renzo CANDANO (63) 2 737 3022 [email protected] Consumer Micaela ABAQUITA (63) 2 737 3021 [email protected] Property Gregg ILAG (63) 2 737 3023 [email protected] Utilities; Energy

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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* 69.11% Hold** 23.76% Sell*** 7.13% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 30 September 2019. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

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