Cowell e Holdings Inc ADD, TP HK$18.76, HK$11.74 close
We believe Cowell will be a key beneficiary of sustained camera upgrades in iPhones due to its expanding capacity and solid status in the Apple supply chain. We believe Cowell will continue to gain market share in the supply of camera modules for iPhones.
Sunny Optical Technology ADD, TP HK$115.80, HK$80.8 close
We believe Sunny Optical will a key beneficiary of rising demand for vehicle related lens and camera products due to its leading global market shares in these segments, rich product portfolio and
strong customer base. The company is also a major VR pancake module supplier for US Internet giants.
Will Semiconductor Ltd-A
ADD, TP Rmb131.20, Rmb80.1 close We believe Will Semiconductor will achieve over-20% FY21-24F revenue CAGR for its automotive CIS due to its sustained market share growth in the segment’s global supply chain, thanks to its industry-leading technology in ADADsensing CIS.
Sluggish spec upgrades and weak demand
- Downgrade China smartphone sector from Overweight to Neutral. We are Neutral as we expect a few positive factors to appear only in 2023F.
- We see current sector valuation of 14x 2023F P/E is not attractive due to the potential EPS cut amid weaker smartphone sales and poor spec upgrades.
- We like the Apple supply chain as we expect its 2022F shipment (+6% yoy) to outpace XOV’s (-16% yoy), and sustained iPhone camera upgrades.
- Automotive electronics and AR/VR and AIoT products set to become component makers’ key revenue and net profit drivers in 2023F and 2024F.
- Sunny Optical and Will Semiconductor are our sector top picks due to their robust earnings growth in automotive, AR/VR and AIoT segments.
Downgrade China smartphone sector from Overweight to Neutral
We downgrade China smartphone sector to reflect 1) cuts in our Xiaomi/Oppo/Vivo’s (XOV) smartphone shipment forecasts, 2) sluggish spec upgrades among China handset brands, 3) surging component and manufacturing costs, and 4) unfavourable macroeconomics headwind. We are Neutral as we expect a few positive factors to appear in 2023F, including: 1) fast-growing revenue from automotive electronics, AR/VR and AIoT segments, 2) XOV’s shipment recovery, and 3) new wave of high-end 5G phone replacement cycle in China. We will continue to monitor the sector to see when would China handset component makers’ GPM stabilise and their earnings resume growth; which we believe will likely happen in 2H2023F. Sector downside risks are prolonged Covid-19 impact in China, continual inflationary pressure, and higher in-components costs. Upside risks are stronger XOV shipments growth in 2023F and accelerating spec upgrades.
Sector valuation still not attractive at c.14x 2023F P/E
We think the sector’s c.14x 2023F P/E is not attractive compared with its trough valuation of 12x at 2019, on the back of the potential consensus earnings estimate cuts on weaker 2H22F smartphone sales and poor spec upgrades of recently-launched China-branded smartphone models. We cut our 2022F/23F sector EPS by 29%/23% to factor in revisions to our XOV shipment forecasts, lower GPM assumptions and weaker Rmb/US$.
Global smartphone market recovery likely from 2023F
We forecast Xiaomi/Oppo/Vivo’s smartphone shipments to fall 13%/17%/20% yoy in 2022F to 165m/113m/105m units as we expect only a moderate 9% hoh recovery in 2H22F due to the prolonged Covid-19 impact in China. We project global smartphone shipment to grow 5% in 2023F to 1.4bn units (-8% in 2022F) due to recovery of the China and EU markets.
Sluggish spec upgrades impacting component makers’ profitability
We believe China handset component markers are unlikely to see a recovery in revenue and profitability in 2H2022F given the weaker global smartphone shipments and sluggish spec upgrades of newly-launched high-end and flagship models, especially by XOV. Nevertheless, we believe Apple’s suppliers will benefit from sustained iPhone camera upgrades and resilient shipment growth in 2H22F (+6% yoy) and 2023F (+6% yoy). We like Cowell as the company should benefit from sustained iPhone camera spec upgrades.
Automotive and AR/VR products to be key growth drivers
Given the weakened handset customer orders in 2021 and 2022F, component markers are looking for new growth drivers from automotive electronics and AR/VR and AIoT products. Supported by their camera and display technologies and continuous R&D investments on innovative features, their non-handset revenue could accelerate to over 25% growth in FY23F and FY24F, thanks to the rapidly-growing smart electric vehicle (EV) market and metaverse technology, in our view.