Auto, Apple potential long-term drivers, up to Buy
SP weakness gradually priced in following significant stock correction YTD; auto, Apple are likely growth drivers
Action: Auto, Apple potential growth drivers, upgrade to Buy but cut TP to HKD101
Sunny’s stock price is -70% YTD (vs the Hang Seng Index of -34%), mainly from: 1) investors’ ‘de-risking’ from macro uncertainties; 2) weak smartphone (SP) demand likely a drag on profitability; and 3) market concerns over inflation dragging on the global economy. Following Sunny’s correction YTD, we think the risk reward is becoming more favorable owing to: 1) its 1-year forward P/E valuation has reached 20x, at the historical lower range of 15-50x since 2017; and 2) auto and Apple are potential long-term growth drivers. Thus, we lift Sunny to Buy, but cut our TP to HKD101, based on 22x 2024F EPS of HKD4.6 (previously 25x), assuming the auto-related business could be as significant as the super performance (SP) lens business, with some market-shares gain in Apple’s lens business. However, due to weak market demand, we expect 2H22F earnings to decline by 62% y-y, and thus investors should be aware of the potential profit warning in early 2023F.
Auto business, if only considering lens, could be as big as SP lens in the long term
Sunny has multiple auto-related business (e.g., lens, module, Lidar, HUD, and headlamps). If we only consider its vehicle lens market, we believe it could be as big as the SP lens market, as the ASP of Sunny’s vehicle lens is about 10x that of its SP lens, while global vehicle lens shipments are likely around one-tenth of SP lens shipments in the longer term, considering 80m automobile shipments p.a. with 8 cameras per car, vs 1.4bn SP shipments every year with 4 cameras per SP. By contrast, Sunny has indicated sales from its auto camera module in 2022F could reach CNY1bn, up from CNY400mn in 2021, with higher GPM than the SP business. Moreover, Lidar, HUD, and smart headlamps could account for mid-teen digit percentage sales of Sunny’s auto business in 2022F, which carry high dollar content per unit of CNY800 and above. However, progress is pending on customers’ adoption and thus may face uncertainties.
Market share gains in Apple’s SP lens business progressing
Sunny started to supply to Apple in 2H21, including lenses for iPad, iPhone 13 Pro and Pro Max models. We estimate Sunny’s market share to increase from 0-5% in 2H21 to 5-10% in 2H22F for the iPhone 14 Pro and Pro Max models. We project Sunny’s market share to rise further to 10-15% in 2H23F for the iPhone 15 models, with new business opportunities supplying for ToF lens. Hence, we estimate Sunny’s handset lens shipments from Apple will comprise 10-15% of total lens shipments in 2023F, up from 5-10% in 2022F.