【Company Research】Sunny Optical (2382 HK) - Look beyond ongoing volatility; Upgrade to BUY on 2H recovery

We upgrade Sunny Optical to BUY (from Hold) as Sunny is well positioned to gain share amid recent industry downturn and regain growth sooner than peers during 2H20-1H21E demand recovery, driven by Samsung/Xiaomi restocking in 3Q20E and Apple-led cam upgrade cycle in 4Q20E. Overall, we remain positive on Sunny’s industry leadership and strong pipeline across all segments. Our new SOTP-based TP of HK$148 implies 25.2x FY21E P/E as we rollover to FY21E.

  • Conservative tone as expected; Spec upgrade to re-accelerate in 2021.  During Investor Day on 24 Jun, mgmt. guided conservative FY20E outlook as anticipated, given 1) COVID-19 impact, 2) Huawei restriction, 3) de-spec on 5G models, and 4) VLS order delays. While monthly shipment will remain volatile in 3Q20E, we expect demand recovery is on track as Xiaomi/ Samsung will start restocking in 3Q20E, offsetting Huawei share loss impact. In addition, following high-end weakness and 5G BOM cost pressure in FY20E, we expect cam upgrade cycle will re-accelerate in FY21E driven by Apple 5G iPhone with tri-cam/LiDAR 3D sensing and lower 5G cost pressure in 2021. We estimate HCM/HLS ASP to decline 7%/1.2% YoY to Rmb 4.7/4.98 in FY20E and rebound 14%/6% YoY to Rmb44.2/50.3 in FY21E.

  • HCM/HLS: R&D to enhance leadership and boost share gain. We remain positive on Sunny’s share gain across all segments, as it continues to invest into new packaging/processing technology (MOB II, MOC II, PAA, SV-AOI, WLT-mini, OLA, AMA) and achieved technology breakthroughs (hybrid lens) to strengthen market leadership. We are positive on mgmt.’s priority on efficiency and automation upgrade rather than capacity expansion in FY20E.

  • VLS: LiDAR, HUD, smart headlights emerge as potential huge market. Backed by extensive experience as global No.1 auto lens supplier, Sunny expect to enter a new phase LiDAR business and HUD market, which are estimated to grow 64% and 20% CAGR in next 5 years, according to TSR. Sunny started to supply LiDAR to global LiDAR/Tier-1 clients and HUD products to Lincoln, global first OEM adopting HUD with DLP technology.

  • Leadership remains intact; Upgrade to BUY on 2H recovery. We believe FY20E weakness is largely priced in given sluggish share price performance YTD. We recommend to look beyond the trough and accumulate the stock for smartphone demand recovery and multi/3D-cam and 5G/video-driven upgrade trend in 2021. We lowered FY20-22E EPS by 1-6% mainly to reflect COVID-19, and our new SOTP-based TP of HK148 implies 25.2x FY21 P/E.
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