Handset Components – Sustained Pricing And Margins Pressure Through 2022
We expect 1H22/2Q22 to remain difficult for the entire handset value chain, as demand
for smartphones continues to deteriorate especially in China and Europe, amid China’s
zero-COVID policies and the Russia-Ukraine war. The ensuing shipment cuts and
despec trend will be an ongoing threat to the supply chain’s pricing and profitability. As
such, we trim our ASP and margin assumptions across our handset component
coverage to reflect the gloomy sector outlook. Maintain UNDERWEIGHT.
WHAT’S NEW
• Handset value chain to report weak 1H22/2Q22 results. 2Q22 is expected to remain
difficult for the entire handset value chain, given China’s tight zero-COVID regulations and
the Russia-Ukraine conflict. Competition intensified due to a combination of lower enddemand, the entrance of new players; while profitability deteriorated due to the ongoing
despec trend and cost hikes. The 618 promotional event should have provided an
opportunity for inventory clearance, driving a meaningful sequential recovery in May-June (to
both wholesale/retail shipment), but according to Counterpoint Research, smartphone sales
still declined 10% yoy during the 618 event despite an extra 5-10% discount to MSRP and
higher promotional rebates vs 2021. As such, we believe the smartphone sector has yet to
reach an inflection point.
• Under our coverage, Q Tech has already provided guidance on Kunshan Q Tech’s (its
compact camera module business) 1H22/2Q22 results. Its 2Q22 core net profit is expected
to decline 86% yoy and 11% qoq to Rmb46m due to a combination of a 30% yoy and 5.4%
qoq revenue decline, and margin squeeze. We believe Q Tech was more severely impacted
by the industry downturn and COVID-19 lockdowns, as: a) the company is a pure Android
CCM play, and b) the company’s production bases are located in Kunshan where the
lockdown was more severe. Nevertheless, Q Tech’s results should serve as a baseline for
other companies.
• Sunny Optical’s performance will be better than Q Tech’s, thanks to its relatively more
stable handset lens set (HLS) business, exposure to Samsung’s high-end products, resilient
growth in the vehicle business, and robust expansion in the AR/VR business. We expect the
company’s net profit to decline 33% yoy and 22% hoh to Rmb1.8b, primarily due to declines
in HCM/HLS shipment and margin squeeze.
• AAC’s performance will be weighed down by its optics business. In 1Q22 before the
industry deteriorated further, AAC’s optics business was operating at 3.5% gross margin
(4.4% for HLS, and 2-3% for HCM), which is way below peers’ (ie HLS vs Sunny’s 39% in
2021, and HCM vs Sunny/Q Tech’s 13.7%/9.7% in 2021). Given the ongoing industry
downturn, we expect its optics business to continue to deteriorate, while its non-optics
business is also expected to remain depressed given mounting pricing pressure along the
entire smartphone supply chain. Overall, we expect 2Q22 earnings to fall 69% yoy and 42%
qoq to Rmb120m, primarily due to severe margin squeeze, as well as sluggish shipment.
ESSENTIALS
• Maintain UNDERWEIGHT and keep our global smartphone shipment forecast at 1,288m
units (-4.9% yoy). We are still expecting a recovery in demand by the end of this year, driven
by the release of pent-up demand and easing COVID-19 restrictions, but we are seeing
further downside risks as we still cannot find any evidence of a meaningful recovery in 2H22.
ACTION
• AAC (2018 HK/SELL/Target: HK$13.30). Currently, our top pick in our handset value chain
is the SELL call on AAC. We expect the company’s optics business to remain on the
downtrend throughout 2022 due to: a) immature technology, b) aggressive pricing, and c)
unfavourable competition landscape. For the non-handset business, we expect their
performances to trough in 2Q22, primarily thanks to the strong demand pull from Apple in
2H22, although pricing and margin pressure will be sustained throughout the year as we
believe upgrades on acoustics and haptics will remain muted amid the despec trend. We
lowered our margins assumption and cut our 2022-24 net profit estimates by 8.6%, 12.3%,
8.8% to Rmb972m, Rmb1,497m, Rmb1774m respectively. Maintain SELL and cut target
price to HK$13.30, based on lower earnings estimates and unchanged 13.7x 2022F PE.
• Q Technology (1478 HK/HOLD/Target: HK$5.60). Q Tech as a pure Android camera
module supplier will be exposed to both the Android despec trend, as well as the
intensifying competition in the handset camera module market, although the poor
performance in 2Q22 will likely mark the trough given the easing logistic disruptions. The
silver lining is that the contribution from the non-handset business (primarily from IoT
products) will likely reach >5%, surpassing our previous expectations of 4% (of top-line),
although this is likely due to the deterioration of the smartphone business. Also, Q Tech is
gradually gaining higher-end camera module products in the Samsung supply chain, which
should help marginally offset the deterioration in XOVH. As such, we further trim our ASP
and margins assumption for 2022-24, and our net profit is slashed by 24.1%, 30.4%, 18.1%
to Rmb461m, Rmb816m, Rmb1,191m respectively. We cut our target price to HK$5.60,
based on lower earnings estimates, and 12.0x 2022F PE. Downgrade to HOLD.
• Sunny Optical (2382 HK/BUY/Target: HK$142.00). Our BUY call on Sunny Optical is
based on the prosperous outlook of its vehicle business (vehicle lens sets, vehicle camera
modules etc), AR/VR headset business, its share gains in the Apple supply chain, as well as
its exposure to the high-end Android smartphones, which are seemingly less impacted by
the current industry downturn with resilient sales and stable specs (although upgrades are
scarce as well). That said, Sunny will inevitably be impacted by the industry downturn and
we expect pressure on both ASP and margins. As such, we trim down our ASP and margins
assumption, and reduce our net profit forecast by 5.7%/11.7%/6.4% to Rmb4,337m,
Rmb5,601m, Rmb6,988m respectively. Our target price of HK$142.00 is based on
unchanged 30.3x 2022F PE.
RISKS
• Upsides: a) Stronger-than-expected smartphone shipment recovery, and b) faster-than-expected spec upgrade cycle.
• Downsides: a) Sustained COVID-19 outbreak and further lockdowns, and b) worse-than-expected smartphone recovery.