9 March 2017 EQUITIES Sunny Optical (2382 HK) ELECTRICAL EQUIPMENT Hold: Strong February shipments mostly priced-in Hong Kong Jan-Feb handset camera module and vehicle lens shipments HOLD tracking slightly ahead But growth momentum has started to slow down TARGET PRICE (HKD) PREVIOUS TARGET (HKD) 55.00 Maintain Hold with TP of HKD55 SHARE PRICE (HKD) UPSIDE/DOWNSIDE Strong February handset camera module and vehicle lens shipments. Sunny 51.60 +6.6% Optical reported February shipment data for its three major product lines (handset (as of 09 Mar 2017) camera modules (HCM), handset camera lens (HCL), and vehicle lens) today after MARKET DATA market close. February HCM shipments were 29.4m (down 8% MoM but up 144% Market cap (HKDm) 56,605 Free float 55% YoY) on fewer working days in February. January and February total shipments were Market cap (USDm) 7,286 BBG 2382 HK 3m ADTV (USDm) 38 RIC 2382.HK 61.2mn (up 121% YoY). This accounted for17%/19% of our (up 34% YoY) and consensus (up 20% YoY) 2017 shipment estimates, tracking ahead, thanks to FINANCIALS AND RATIOS (CNY) Year to 12/2015a 12/2016e 12/2017e 12/2018e continuous market share gains from its peers. February handset camera lens (HCL) HSBC EPS 0.70 1.16 1.67 2.11 shipments came in at 41.4m (down 4% MoM, up 98% YoY). January to February HSBC EPS (prev) - - - - Change (%) - - - - accumulated HCL shipments were 84.3mn (up 93% YoY), in-line with what we are Consensus EPS 0.69 1.12 1.62 2.14 expecting in terms of the full year, or 17%/17% of our 2017 shipment forecasts (up PE (x) 65.3 39.7 27.6 21.7 Dividend yield (%) 0.3 0.5 0.7 0.9 31% YoY) and consensus (up 28% YoY), respectively. February vehicle lens EV/EBITDA (x) 43.5 27.2 19.1 15.3 shipments were 2.4m units (down 10% MoM but up 59% YoY). This is 18%/17% of ROE (%) 21.5 28.9 32.3 31.7 our (up 30% YoY)/ consensus (up 33% YoY) forecasts; tracking slightly ahead. 52-WEEK PRICE (HKD) Muted China smartphone shipment outlook with limited contribution of 3D 60.00 sensing cameras. We expect Sunny Optical’s shipment growth momentum to slow 36.00 down in 2Q17 due to model transition of major China smartphone OEMs (e.g. 12.00 Huawei, OPPO, Vivo, etc) and slowing down smartphone replacement demand in tier 03/16 09/16 03/17 Target price: 55.00 High: 54.15 Low: 17.64 Current: 51.60 3-5 cities. According to Bloomberg news on February 22th, Apple is likely to adopt 3D sensing cameras in its upcoming flagship model in 2H17. However, due to the Source: Thomson Reuters IBES, HSBC estimates complexity both in software and hardware, we don’t expect the Android camp to widely equip this feature in their phone until 2018, at the earliest. Joyce Chen* Analyst Valuation and risks. Our HKD55 TP is based on 26x 2017-2018 average EPS, HSBC Securities (Taiwan) Corporation Limited [email protected] which is the blended average PE derived from our peer group analysis. We continue +8862 6631 2862 to like Sunny Optical for its extensive optical product line and market share gain Bruce Lu* story. However, after outperforming HSI by over 40% YTD, we believe the company Analyst HSBC Securities (Taiwan) Corporation Limited is trading near its fair value. Its handset camera lens business trades at 25-30x 2017- [email protected] 18e PE versus Largan (3008 TT, CP TWD4,485, Buy), at 15-20x. +8862 6631 2861 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations Disclosures & Disclaimer Issuer of report: HSBC Securities (Taiwan) Corporation Limited This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at: https://www.research.hsbc.com EQUITIES ● ELECTRICAL EQUIPMENT 9 March 2017 Financials & valuation: Sunny Optical Hold Financial statements Valuation data Year to 12/2015a 12/2016e 12/2017e 12/2018e Year to 12/2015a 12/2016e 12/2017e 12/2018e Profit & loss summary (CNYm) EV/sales 4.6 3.2 2.0 1.5 Revenue 10,696 15,435 23,893 30,814 EV/EBITDA 43.5 27.2 19.1 15.3 EBITDA 1,126 1,816 2,549 3,089 EV/IC 24.4 13.6 11.2 9.4 Depreciation & amortisation -246 -337 -479 -462 PE* 65.3 39.7 27.6 21.7 Operating profit/EBIT 880 1,479 2,070 2,626 PB 13.0 10.3 7.9 6.1 Net interest -16 -17 -20 -24 FCF yield (%) 2.6 -0.2 1.7 2.6 PBT 862 1,451 2,050 2,602 Dividend yield (%) 0.3 0.5 0.7 0.9 Taxation -99 -195 -240 -304 * Based on HSBC EPS (diluted) Net profit 762 1,256 1,810 2,298 HSBC net profit 762 1,256 1,810 2,298 Cash flow summary (CNYm) Issuer information Cash flow from operations 1,701 986 1,523 2,010 Share price (HKD) 51.60 Free float 55% Capex -283 -850 -400 -400 Target price (HKD) 55.00 Sector Electrical Equipment Cash flow from investment -1,932 -748 -400 -400 Reuters (Equity) 2382.HK Country Hong Kong Dividends -171 -228 -345 -450 Bloomberg (Equity) 2382 HK Analyst Joyce Chen Change in net debt -865 385 -781 -1,162 Market cap (USDm) 7,286 Contact +8862 6631 2862 FCF equity 1,304 -77 864 1,281 Balance sheet summary (CNYm) Intangible fixed assets 113 142 142 142 Price relative Tangible fixed assets 892 1,755 1,676 1,614 Current assets 6,017 9,497 13,875 18,448 Cash & others 1,911 1,591 2,601 3,874 54.40 54.40 Total assets 7,636 11,793 16,092 20,603 Operating liabilities 3,108 6,161 8,764 11,314 44.40 44.40 Gross debt 683 748 977 1,088 34.40 34.40 Net debt -1,228 -843 -1,624 -2,786 Shareholders' funds 3,831 4,867 6,334 8,184 24.40 24.40 Invested capital 2,003 3,641 4,328 5,016 14.40 14.40 4.40 4.40 Ratio, growth and per share analysis 2015 2016 2017 Sunny Optical Rel to HANG SENG INDEX Year to 12/2015a 12/2016e 12/2017e 12/2018e Y-o-y % change Source: HSBC Revenue 26.9 44.3 54.8 29.0 Note: Priced at close of 09 Mar 2017 EBITDA 30.7 61.3 40.3 21.2 Operating profit 36.0 68.0 40.0 26.9 PBT 36.0 68.3 41.2 26.9 HSBC EPS 34.1 64.5 44.1 26.9 Ratios (%) Revenue/IC (x) 4.8 5.5 6.0 6.6 ROIC 35.1 45.3 45.9 49.6 ROE 21.5 28.9 32.3 31.7 ROA 11.5 12.9 13.0 12.5 EBITDA margin 10.5 11.8 10.7 10.0 Operating profit margin 8.2 9.6 8.7 8.5 EBITDA/net interest (x) 70.4 105.5 130.4 128.6 Net debt/equity -32.1 -17.3 -25.6 -34.0 Net debt/EBITDA (x) -1.1 -0.5 -0.6 -0.9 Per share data (CNY) EPS Rep (diluted) 0.70 1.16 1.67 2.11 HSBC EPS (diluted) 0.70 1.16 1.67 2.11 DPS 0.16 0.21 0.32 0.41 Book value 3.54 4.48 5.83 7.53 2 EQUITIES ● ELECTRICAL EQUIPMENT 9 March 2017 Valuation and risks. Our TP of HKD55 is based on 26x of 2017-2018 average, which is the blended average PE derived from our peer group analysis (see table below). Our target multiple of 26x assumes that Sunny Optical’s handset camera module segment trades at 20x (a premium to peers’ 10-15x due to technology leadership), the vehicle camera lens segment trades at 30x (a premium to global ADAS plays’ average PE on market share leadership), and the handset camera lens business trades at 25x, versus 15-20x for Largan due to the impact of SZ-HK Connect and the scarcity of listed handset lens stocks in SZ and HK stock markets. Our target price implies 7% upside; we thus maintain our Hold rating on the stock based on the muted near-term outlook. We continue to like Sunny Optical for its extensive optical product line and market share gain story. However, after outperforming HSI by over 40% YTD, we believe the company is trading near its fair value. Its handset camera lens business trades at 25-30x 2017-18e PE versus Largan (3008 TT, CP TWD4,485, Buy), at 15-20x. We believe Sunny Optical is fairly valued even considering the valuation premium resulting from the SZ-HK Connect. Sunny Optical: February shipment data HSBC Achieved Cons. Achieved (mn units) Feb-17 MoM YoY Jan-Feb 17 YoY 2017e YoY % 2017e YoY % HCM 29.4 -8% 144% 61.2 121% 360.6 34% 17% 323.8 20% 19% HCL 41.4 -4% 98% 84.3 93% 496.3 31% 17% 500.6 32% 17% Vehicle lens 2.4 -10% 59% 5.2 34% 29.3 30% 18% 30.0 33% 17% Source: Company data, HSBC estimates, Bloomberg consensus Sunny Optical: HCL shipment trend Sunny Optical: HCM shipment trend (mn units) (mn units) 600% 60.0 200% 35.0 Shipment YoY Shipment YoY 500% 30.0 50.0 150% 400% 25.0 40.0 100% 300% 20.0 30.0 50% 200% 15.0 0% Jun-12 Feb-10 Sep-10 Apr-11 Nov-11 Jan-13 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 20.0 Jul-09 100% 10.0 -50% 10.0 5.0 0% Jan-00 Jan-00 Jan-00 Jan-00 Jan-00 Feb-00 Feb-00 Feb-00 Feb-00 Mar-00 Mar-00 Mar-00 Mar-00 Apr-00 -100% - -100% - Source: Company data Source: Company data 3 EQUITIES ● ELECTRICAL EQUIPMENT 9 March 2017 Sunny Optical: Vehicle lens shipment trend (mn units) 140% 3 Shipment YoY 120% 2.5 100% 2 80% 60% 1.5 40% 1 20% 0.5 0% Apr-14 Oct-14 Apr-15 Jan-14 Jul-14 Jan-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 -20% 0 Source: Company data Sunny Optical: Sum of parts valuation table Average 2017-18 net profit (CNY) PE(x) Mkt cap (HKDm) Handset camera module 924 20 20,582 Handset camera lens 639 25 17,799 Vehicle lens 306 30 10,210 Others 185 20 4,128 Total 2,054 26 52,719 Source: HSBC estimates Sunny Optical: 12M forward PE band Sunny Optical: 12M forward PB trend 70 80 60 Share price (TWD) 70 Share price (TWD) 25x 8x 50 60 20x 6x 40 50 40 30 15x 4x 30 20 10x 20 2x 10 10 0 0 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-07 Jun-14 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-15 Jun-16 Jun-17 Jun-18 Jun-08 Source: Company data, HSBC estimates Source: Company data, HSBC estimates 4 EQUITIES ● ELECTRICAL EQUIPMENT 9 March 2017 Sunny Optical: Semi-annual earnings forecasts (CNYm) ___ Fiscal 2015 ____ ___ Fiscal 2016 ____ ___ Fiscal 2017 ____ Fiscal