After reaching a record high in 2021, Sunny Optical was unfortunately not spared from the sell-off across global markets. Despite the poor share price performance, we believe that Sunny Optical remains fundamentally sound and we still see a long runway of growth ahead for the company. In this article, we discuss Sunny Optical’s FY2021 results and the reasons why we remain fond of this company.
• Despite its poor share price performance, we believe that Sunny Optical remains fundamentally sound and we still see a long runway of growth ahead for the company.
• The trend of specifications downgrade in smartphones is likely to continue in 1H22, but may start to improve in 2H22 based on customer feedback.
• Sunny Optical will benefit from the strong growth in its vehicle-related shipments as more ADAS solutions are commercialised and adopted by car manufacturers.
• We believe there is a clear mismatch in fundamentals and valuations at this current share price level. We urge investors to set their sights on the company’s longer-term growth and take the opportunity to accumulate their positions in Sunny Optical.
• Based on a fair PE of 25X, our revised target price of HKD 190 still commands a tremendous upside potential of over 60%.
After reaching a record high in 2021, Sunny Optical (HKEX:2382) was unfortunately not spared from the sell-off across global markets. It has fallen by over -50% since its peak at about HKD 250, largely due to inflation fears and rising geopolitical tensions. The company has also missed its FY2021 targets as a result of the slower camera lens and modules shipments, leading to a further sell-off in the last couple of weeks.
Chart 1: Sunny Optical share price movements have been disappointing in the last couple of months
While we remain cautious of the broader economic growth outlook, we believe that Sunny Optical remains fundamentally sound and we still see a long runway of growth. It is also imperative for investors to know that the main reason Sunny Optical missed its shipment guidance was not due to company-specific reasons, but rather, weaker macroeconomic conditions.
In this article, we will be discussing Sunny Optical’s FY2021 results and the reasons why we remain fond of this company.
Missed FY2021 targets due to weaker macroeconomic conditions
Unlike its 1H21 results, Sunny Optical’s 2H21 results were disappointing. Its 2H21 revenue and net profit fell by -8% and -26% respectively from a year ago. Sunny Optical also missed its shipments targets for FY2021 as shown in the table below.
Table 1: Sunny Optical missed its FY2021 shipment targets
| Management guidance | Actual shipments | |
| Handset camera modules | 20% – 25% | 13.6% |
| Handset lens | 5% – 10% | -5.9% |
| Vehicle lens | 30% – 35% | 21.1% |
| Source: Sunny Optical’s FY2021 results, iFAST compilationsData as of 22 March 2022 |
Due to weaker demand in the global smartphone market, a downgrade in the specification of smartphones (also known as ‘de-spec’), and bottlenecks in the supply chain, both the shipment volume growth and the average selling price (ASP) of Sunny Optical’s handset lens sets came under pressure. While handset camera modules shipments may have grown by about 14% year-on-year (YoY), the fall in the ASP due to the downgraded specification and configuration of smartphone cameras dragged down revenue for this segment.
In terms of the vehicle lens sets business, the tight supply of chips has significantly affected global automobile sales, leading to slower-than-expected growth in FY2021. Nonetheless, Sunny Optical still registered a growth of 21.1% in its vehicle lens shipments.
From a full-year perspective, Sunny Optical’s revenue fell by -1.3%, while net profit managed to grow slightly by 2.3% YoY, mainly attributable to the increase in gross profit and a fall in income tax expense. Nonetheless, despite the unfavourable macroeconomic conditions, Sunny Optical highlighted that they continue to be the market leader in all three of its main business segments – handset lens, handset modules and vehicle lens.
Smartphone camera specification upgrades delayed, but not derailed
In our previous article, we shared that most smartphone manufacturers were focusing on rolling out 5G-enabled devices since one year ago, which generally use components that are more expensive compared to a non-5G device. This has resulted in fewer camera upgrades in 2021, putting pressure on the average selling price (ASP) of Sunny Optical’s handset camera lenses and modules.
(Related article: Sunny Optical: Long runway of growth in the coming years)
Looking ahead, Sunny Optical shared that the de-spec trend in smartphones is likely to continue in 1H22 given that many of the smartphone manufacturers are still struggling with the higher cost of semiconductor components amidst lukewarm demand for smartphones. However, based on customer feedback, the company believes that the trend may start to improve in 2H22. Sunny Optical also gave several examples of what smartphone manufacturers are looking at.
For instance, the management believes that the demand for better Optical Image Stabilisation (OIS) technology, which is a form of technology that is required to stabilise images, is expected to grow in the 5G era as more smartphones users will shoot and share more videos. Based on its FY2021 earnings presentation, the company has reached mass production status for both its gimbal stabilisation camera modules and dual OIS camera modules, both of which are considered advanced solutions for premium smartphone manufacturers.
As per Sunny Optical, the usage of larger CMOS image sensors in smartphones, which in turn, requires larger camera lenses and modules, is also a clear trend among smartphone manufacturers. In light of this, Sunny Optical already has several such solutions that are ready for client adoption.
Therefore, we believe it is evident that Sunny Optical is well-positioned to capture this growing demand. When smartphone manufacturers resume the camera upgrade cycle, Sunny Optical is bound to be one of the top beneficiaries.
At the same time, most major smartphone manufacturers are still pushing to equip their new smartphones with multi-camera technology as a form of upgrade, a trend that would further drive the demand for handset lenses and handset camera modules in the long run (Chart 2).
Chart 2: Rising number of cameras per smartphone is a key driver for Sunny Optical’s shipments
Given that higher-quality camera lenses and modules command a higher ASP, a combination of a higher ASP and higher shipment volumes will boost Sunny Optical’s overall gross profit margin and earnings.
For FY2022, Sunny Optical is guiding for a 5-10% growth in its handset lens business and a 10-15% growth in its handset modules business.
The vehicle-related business will be the major growth driver
Sunny Optical remains the market leader in the vehicle lens business segment, where its market share continues to expand to 34%. For FY2021, its overall vehicles-related business accounted for 7.9% of its total revenue, a 1.3 percentage point increase from a year ago (Chart 3).
Chart 3: Increasing proportion of revenue generated from autos-related
As mentioned in our previous article, Sunny Optical has been actively expanding partnerships with several global ADAS platforms to further drive its vehicle-related business. It has managed to secure several new project wins and also mentioned that many projects have commenced mass production.
Most cars on the road at this juncture are still equipped with only ADAS Level 1 or Level 2 solutions. Moving into 2022, several traditional car manufacturers, such as Mazda and BMW, have plans to introduce Level 3 ADAS solutions to their vehicles. As usual, Sunny Optical is already one step ahead. The company shared in its FY2021 earnings report that it has already obtained Level 3 to Level 4 based projects from various automobile manufacturers for its vehicle lens business segment.
In terms of its vehicle modules business, several projects in partnership with certain ADAS platforms, such as Mobileye and Horizon Robotics, have started mass production. On top of that, Sunny Optical has also continued to speed up its R&D and market promotion of its other emerging vehicle-related products, such as LiDAR, head-up display (HUD), smart headlamps etc. It has obtained over 20 projects concerning LiDAR, two of which have commenced mass production in FY2021.
Looking ahead, Sunny Optical will benefit from the strong growth in its vehicle-related shipments as more ADAS solutions are commercialised and adopted by car manufacturers (Chart 4). For FY2022, Sunny Optical is guiding for a 20-30% growth in its vehicle lens shipments.
Chart 4: Higher adoption of ADAS solutions will drive Sunny Optical’s vehicle-related business
Supply chain disruption is one of the biggest risks now
At this juncture, we believe further bottleneck in the global supply chain is one of the biggest risks faced by Sunny Optical.
For instance, if the shortage of auto chips continues to persist for an extended period, this will drag on automobile sales which will inevitably lead to slower shipment growth for Sunny Optical vehicle lens business. Sunny Optical’s handset lens and modules business is also subjected to any further bottlenecks issue in the global supply chain. In the 3Q21 report by IDC, it was shared that smartphone shipments were not only affected by component shortages but also other logistical challenges such as stricter testing and quarantining policies that delay transportation.
Therefore, if component shortages persist longer-than-expected and quarantine policies do not ease, we see downside risks to the shipment growth figures and hence the earnings of Sunny Optical.
Setting sights on longer-term growth
Going forward, the management acknowledged that the global economic recovery might still face difficulties and given the uncertainties, consumer demand may remain weak in the short term.
However, thanks to underlying secular trends, such as the growth in autonomous driving and the push towards a digital economy, they remain confident in the company’s future development. We believe the return of the multi-camera upgrade cycle will also be a key driver for Sunny Optical.
That said, we have adjusted the estimated 2023E EPS given the slower-than-expected shipments growth in Sunny Optical’s key products.
Nevertheless, given the sharp sell-off over the last two months, our revised target price of HKD 190 still commands a tremendous upside potential of over 60% (Table 2).
Table 2: Sunny Optical’s valuations
| Sunny Optical(HKEX:2382) | |
| Fair PE | 25X |
| 2023 earnings (HKD) | 7.6 |
| Target price (HKD) | 190 |
| Current share price (HKD) | 115.5 |
| Upside potential | 64.8% |
| Source: Bloomberg Finance L.P., iFAST estimationsData as of 7 April 2022 |
Table 3: Earnings growth table
| 2020 | 2021 | 2022E | 2023E | |
| PE ratio | 21.8 | 21.3 | 20.0 | 15.2 |
| Earnings growth | 22.2% | 2.4% | 6.2% | 32.0% |
| EPS (HKD) | 5.3 | 5.4 | 5.8 | 7.6 |
| Source: Bloomberg Finance L.P., iFAST estimationsData as of 7 April 2022 |
Overall, we believe there is a clear mismatch in fundamentals and valuations at this current share price level. We urge investors to set their sights on the company’s longer-term growth and take the opportunity to accumulate their positions in Sunny Optical.
Chart 5: Sunny Optical share price vs. EPS
