We trimmed our FY20/21E EPS by 3%/8% to reflect Sunny’s conservative FY20E guidance, lower order visibility and slower upgrade pace amid COVID-19 outbreak. We believe the Company will benefit from video-cam/3D sensing trend in 5G era and rising adoption of ADAS in long term, but we think Sunny’s 23.2x FY20E P/E is fair valuation with a balanced risk/reward. Our new FY20/21 EPS are 9%/7% below consensus. Maintain HOLD and lowered our SOTP-based TP to HK$115.
- 2H19 beat on higher ASP/margins. Sunny posted a strong 2H19 revenue /net profit growth of 60%/95% YoY, which are 5%/22% above our estimates and 10%/23% above consensus. The beat was due to better HCM/HLS ASP (+18%/13% YoY) and rapid GPM recovery to 21.9% in 2H19 (vs 19.6% our est.). By segment, optical components (auto/handset lens) grew 50% YoY and optoelectronic segment (HCM) grew 64% YoY in 2H19. We believe better ASP/margin was a result of better product mix, improving landscape on O-Film weakness and better yield with automation upgrade.
- Conservative guidance on order uncertainty and slower upgrade pace. With no HCM/HLS capacity expansion plan in FY20E, mgmt. guided FY20E CAPEX of RMB3bn mainly for automation and new Vietnam/India plants. Sunny also targeted 15%/10%/20% YoY growth for HCM/HLS/VLS, which is below our estimates of 17%/24%/25% YoY. Despite limited production disruption from COVID-19, Sunny expected order visibility will remain low in near term since prolonged COVID-19 outbreak will lead to overseas demand weakness and potential slower spec upgrade. We also expect potential order cuts in April if China demand cannot improve rapidly in 2Q20E.
- Positive secular trend of imaging/video/3D sensing upgrade in 5G era. We remain confident that Sunny Optical can continue HCM/HSL share gain and benefit from camera upgrade and opportunities in autonomous driving. However, we think project launch delays, potential order cuts and weaker consumer spending due to COVID-19 will remain overhangs for the stock.
- Fair valuation with limited upside; Maintain Hold. Our new SOTP-based TP of HK$115 is based on lowered target multiples of 20x/28x/30x for CCM/HLS/VLS (vs prev. 25x/30x/40x). Given outlook uncertainties ahead, Sunny’s valuation at 23.2x FY20E P/E is fair in our view, and we recommend investors to stay on the sidelines until higher visibility of demand recovery. 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 order uncertainties will put the stock under pressure in near term.
