Moving to high-end CCM and LiDAR
Aiming to expand market share in high-end CCMs in Apple; well positioned to benefit from LiDAR growth
Action: Initiating coverage at Buy, with a TP of HKD18.03, implying 65% upside
We initiate coverage of Cowell at Buy with a TP of HKD18.03, based on 13x 2024F EPS of USD0.177. Our target P/E of 13x is at the midrange of the company’s range of 7-16x since Luxvisions’ investment. Cowell has been Apple’s compact camera module (CCM) maker since 2009, mainly supplying iPhone front CCMs and iPad CCMs. After being acquired by Luxvisions, an affiliate company of Luxshare group (002475 CH, Buy), in 2020, Cowell accelerated its earnings growth through reforms and market share gains. We forecast Cowell’s earnings to record a 43% CAGR during 2021-24F, driven by: 1) iPhone front CCM upgrade to auto-focus (AF) since the launch of iPhone 14 series; 2) market share gains in iPhone front CCMs and iPad CCMs; 3) market share gains in iPhone rear CCM, starting with the new periscope telephoto CCM in 2H24F; and 4) rapid growth of LiDAR. The stock is trading at a 2024F P/E of 7.9x. However, the potential impact from Hon Hai’s Zhengzhou plant lockdown could be a near-term risk to iPhone Pro production.
Plenty of room for market share upside in the iPhone CCM market
We estimate the iPhone CCM market was ~USD16.4bn in 2021 (vs Cowell’s 2021 sales of USD799mn), and will record a 9% sales CAGR during 2021-24F. As Cowell’s current exposure is mostly to lower-value front CCM, we estimate its value market share in iPhone CCM will only be 3-5% in 2021-23F, increasing to 8% in 2024F (Fig. 13 ), when the company starts to penetrate into higher-value rear CCMs. We believe Apple will start to adopt periscope CCM for iPhone 15 Pro Max (1model) in 2H23F, with LG Innotek (011070 KS, Buy) as a sole source, and will extend the adoptionto the iPhone 16 Pro series (2 models) in 2H24F, with Cowell likely being introduced as a second source. We estimate the ASP for periscope CCM will be 4-5x higher than for front CCM, and Cowell can leverage Luxvisions’ experience in supplying periscope CCMs for Android flagship phones and Luxshare’s group synergy for Apple. After O-film’s exit from the Apple supply chain due to the US ban and Sharp’s gradual scale-down in iPhone CCM, we see the need for Apple to ramp up another rear CCM sourcein the mid-to-long run, in addition to LG Innotek / Hon Hai (Fig. 1 ). Cowell is also a major CCM maker for Apple’s MR (likely launch in 2Q23F).
Well positioned to benefit from LiDAR growth
Luxshare entered into a strategic cooperation with Robosense, world’s No.2 LiDAR provider by design wins as of 3Q21 (according to Yole), and we believe Cowell, as a key optical module maker within Luxshare group, will benefit from this strategic alliance. We forecast Cowell’s LiDAR-related revenue will grow from 3% of sales in 2022F, to 9%/12% in 2023F/24F.