Summary. Sunny delivered a strong 1H19 revenue/net profit growth of 30%/21% YoY. Net profit is largely in-line, while revenue is 8%/14% above our/ consensus estimates due to higher lens ASP/margin despite lower CCM GPM. We raised our SOTP-based TP to HK$114 (22% upside), as we lifted our FY19-21E EPS by 7-21% to reflect higher guidance, product mix and margin upside. Sunny is our sector top pick, given clear upgrade trend and strong earnings visibility.
- Strong HLS ASP/margin despite weak CCM GPM. We are surprised by Sunny's strong CCM/HLS ASP of RMB5.2/ RMB46.8 (-8%/14% YoY), which are 13%/15% above our estimates, thanks to faster spec upgrade and better product mix. Despite CCM GPM reaching historical low at 5.9% in 1H19 due to low yield of periscope-cam and production line upgrade, mgmt. expected CCM GPM to rebound significantly in 2H19 driven by higher yield, improved automation and better competitive landscape.
- FY19E guidance raised on CAPEX/shipment/capacity. lifted CAPEX guidance by 33% to RMB4bn (from RMB3bn) with RMB2bn/ 1bn/1bn for HLS/HCM/new factory. In addition, Sunny raised FY19E HLS shipment guidance to 30% YoY (from 25-30% YoY), while maintaining guidance for CCM (20-25% YoY) and VLS (25% YoY). As for capacity, HLS/ CCM monthly capacity guidance is raised to 150kk/75kk (from 140kk/65kk).
- Strong pipeline in auto-cam module, ADAS, Lidar. In addition to strong VLS momentum, Sunny started to mass produce HD surrounding-view vehicle-cam module and completed R&D of 8MP front-view vehicle camera module for ADAS. Mgmt. believes it will allow Sunny to capture Lv3-4 ADAS opportunity in 2020-22E, given regulatory requirement in US, EU and Japan.
- R&D breakthrough in CCM/HLS to drive growth. Sunny completed R&D in 64MP large image size (1/1.7?? and ultra-macro shooting (3cm) handset lens, and mass produced ultra-wide angle, ultra-miniaturized head, 7P ultra-large aperture handset lens. For CCM, R&D on OLA production line and IOM semi packaging are completed, which will drive margin recovery in 2H19E.
- Reiterate BUY; Raised TP to HK$114 (22% upside). Given strong 1H19 results, higher guidance and margin upside, we raised our FY19-21E EPS by 7%/15%21%, and our SOTP-based TP is lifted to HK$114 (from HK$100.7). We think the stock will be further re-rated in near term given positive results, share gain in Huawei/Samsung, and strong 3Q19 shipment.
