Sunny reported a mixed set of Sep shipment with handset lens (HLS) reaching record-high of 145mn (+44% YoY/+9% MoM) but handset camera module (HCM) slowdown to +1% YoY/-14% MoM. We believe the weakness was largely due to model transition and inventory destocking ahead of 5G ramp. We think investors may take profit in near term but we recommend to accumulate following the correction, as Sunny remains the major beneficiary of multi-cam, 3D sensing and 5G/video-driven upgrade in FY20-21E. Reiterate BUY with TP of HK$140.
- HCM slowdown implies destocking ahead of 5G model ramp. Sunny reported HCM shipment of 48.4mn (+1% YoY/ -13% MoM), compared to growth of 22% YoY/16% MoM in Aug. We believe weaker-than-expected shipment was driven by 1) seasonal weakness after strong order pull-in in Jul/Aug (+82%/22% MoM), similar to 2017-18 (Fig 1), and 2) channel inventory correction ahead of 5G transition. Our latest check suggested global sell-in remains stronger than sell-through due to Huawei incident, and thus inventory woes may continue until 5G demand pick-up in year end.
- Multi-cam/ 3D sensing adoption well on track. Despite near-term volume volatility, global tri-cam/quad-cam (w/ ToF) is still at early stage with 23%/8% adoption in Aug (vs 21%/4% in Jul), mainly driven by Samsung and Huawei. In particular, Samsung and Huawei are the only major brands adopting quad-cam YTD (25% and 9% in Aug). As the major HCM/HLS supplier for Huawei/Samsung, we expect Sunny to continue to benefit from multi-cam and 3D sensing trend ahead. Note that Sunny’s HCM peer, Q-tech delivered solid Sept shipment (53% YoY/ 17% MoM), while Sunny’s HLS peer, Largan, reported strong Sept revenue (+20% YoY/+2% MoM) and guided positively with flattish MoM in Oct and slight decline in Nov.
- China 5G rollout major upcoming catalyst; Reiterate BUY. Pre-registration for 5G service in China reached 10mn+ as of 9 Oct, confirming strong consumer demand in China, and upcoming 5G service launch in late Oct will serve as major catalyst, in our view. Our SOTP-based TP of HK$140 is based on target multiples of 22x/30x/35 for CCM/HLS/VLS. Implied FY20E P/E of 27.5x is 18% above 5-yr avg. P/E but 26% below 1-sd plus avg. P/E, which is justified for product upcycle in our view. We expect GPM recovery, multi-cam adoption, and ASP hike to drive 47%/53% YoY sales/NP growth in 2H19E. Sunny remains our sector top pick, given clear upgrade trend and strong earnings visibility.
