We downgrade Sunny Optical to Neutral with new TP HK$131, as its share price has nearly reached our target price, which fully priced in rapid demand recovery after COVID-19 impact in 2Q20E. Sunny’s 29.5x FY20E P/E is also higher than its 5-year historical average of 25x P/E, which we think is fairly priced with a balanced risk/reward. Given potential order cuts on rising inventory and weak demand, we expect soft FY20E guidance in March and weak Feb-Mar shipment will lead to more earnings downgrade ahead. Our new FY20/21 EPS are 10%/3% below consensus. We recommend to stay on the sidelines in the near term.
- Earnings growth likely muted in 1H20E due to slower demand recovery. Although recent flagship model launches (Samsung S20, Xiaomi Mi 10) and strong Jan shipment reflect a clear positive trend of share gain and spec upgrade, we lowered Sunny’s HCM/HSL shipment growth to 8%/5% YoY in 1H20E (from prev. 30%/30% YoY) to reflect COVID-19 impact on both production and demand. Hence, coupled with HCM GPM pressure on low utilization (6.5% in 1H20E, vs 7.8% in 2H19), we expect revenue/net profit to grow 0.5%/1.1% YoY in 1H20E.
- Positive on quad/periscope-cam trend but higher ASP/margin pressure. We remain confident that Sunny Optical can continue HCM/HSL share gain and benefit from design upgrade, but we expect higher ASP pressure for quad/periscope-cam due to aggressive pricing of mid/low-end 5G phones (Redmi K30 RMB1,999). Our check suggested low-end periscope-cam to reach US$25-30 in 1Q20E while high-end spec will remain at US$60-70.
- Our FY20/21E EPS are 10%/3% below consensus. We revised down FY20E/21E revenue by 4%/2% and GPM by 1.1ppt/0.9ppt to reflect COVID-19 impact and HCM pricing pressure. Overall, we trimmed our FY20E/21E EPS by 11%/7%, which are 10%/3% below consensus.
- Fairly valued with limited upside potential; Downgrade to Hold. Our new SOTP-based TP of HK$136 is based on target multiples of 25x/30x/40x for CCM/HLS/VLS. Given current earnings uncertainties, Sunny’s valuation at 28x FY20E P/E is fair in our view, and we recommend investors to take profit ahead of soft FY20 guidance in March and weak Feb-Mar shipment announcement. In longer term, we continue to like Sunny as the beneficiary of multi/3D-cam and 5G/video-driven upgrade trend, but we think recent supply/demand uncertainties will put the stock under pressure in near term.
