We hosted an investor call with Sunny Optical this week, and key discussions included 1) CCM/lens margin in 2H19E, 2) outlook on multi-cam /3D sensing (esp. ToF), 3) Samsung spec/shipment upside, and 4) auto camera module progress. We believe Sunny’s technology leadership in CCM/auto lens and product offerings upgrade will continue to drive sustainable earnings growth. Sunny remains our sector top pick, given clear upgrade trend and strong earnings visibility. Reiterate Buy with TP HK$114.
- CCM: GPM rebound and Samsung/ToF to take off in 2H19. Mgmt. stated that major GPM challenges in 1H19 have been resolved in 2Q19, as production line upgrade and periscope-cam yield have been improving since May. In addition, 3D sensing module are picking up rapidly, and mgmt. expects most flagship models will adopt both front/rear-facing ToF in 2H19 for face recognition, depth data, AR applications and 3D modelling. Given Samsung’s accelerated multi-cam upgrade (70% in FY19E, vs 28% in FY18), Sunny focuses on supplying dual-cam (no-split order) and mid/high-end CCM to Samsung, which will boost ASP/shipment growth in 2H19E.
- HLS: Stronger leadership in China; Apple order still distant. Sunny is stepping up R&D efforts to strengthen handset lens leadership in China, and expects no major change in competitive environment in foreseeable future. Mgmt. stated that Apple remains Sunny’s strategic target client, but do not expect breakthrough in collaboration in near term.
- 5G Outlook: functional/design upgrade and broader applications. Backed by strong consumer demand for functional upgrade (large aperture, optical zooming, video lens), design changes (full-screen, under-display) and more applications (biological recognition, 3D sensing), mgmt. expressed strong confidence on CCM/HLS prospects in next few years. In particular, Sunny believes 5G adoption will boost smartphone replacement demand, and potential 5G applications (AR, robot, smart retail) will increase camera demand for display, recognition, positioning and detection.
- Reiterate BUY with TP HK$114. We expect margin recovery, multi-cam adoption, and continued HLS ASP hike to boost revenue/net profit growth of 44%/51% YoY in 2H19E. Our SOTP-based TP of HK$114 implies 23.6x FY20E P/E. Upcoming catalysts include Mate 30 launch, share gain in Samsung, ToF adoption and strong monthly shipment.
