We hosted an investor call with Sunny’s mgmt. recently, and investor questions mainly focus on 1) near-term COVID-19 impact, 2) clients’ project pipeline, 3) 5G smartphone demand and 4) camera upgrade trend. Overall, we remain positive on Sunny’s industry leadership and strong product pipeline across all segments. We maintain Hold mainly due to demand uncertainty from COVID-19. Our SOTP-based TP of HK$115 implies 25.4x FY20E P/E.
- FY20E guidance: HLS/HCM +10%/+15% YoY shipment with stable ASP. In view to recent COVID-19 headwinds, Sunny’s conservative guidance on HLS/HCM shipment growth is prudent in our view. Mgmt indicated that 1) production now returned to normal operations, 2) client order is recovering, and 3) supply of raw materials is stable. While some investors expressed concerns about Sunny’s weaker HLS guidance (+10%) compared to HCM (+15%), mgmt. explained that 1) HCM is a more fragmented market where Sunny can accelerate share gain during industry downturn, 2) Samsung’s HCM share allocation will further increase in FY20E, and 3) new factory in India will start shipment for OVM in FY20E.
- Industry leadership to strengthen amid industry consolidation. Sunny is confident to continue share gain in HLS/HCM markets in FY20E given solid product pipeline and diversified client base. Mgmt. estimated Sunny’s share in global HLS/HCM market reached 27%/13% only in FY19, implying significant upside for further share gain. Mgmt. expected efficiency and automation upgrade rather than capacity expansion will be their priority in FY20E. While we see potential order cuts in April if China demand cannot improve rapidly in 2Q20E, we remain positive on Sunny’s capability to ride through the demand shock in near term.
- 5G smartphones to drive next stage of camera upgrade. We expected slower handset camera upgrade due to delayed 5G flagship ramp in 1H20E, but Sunny remains the key beneficiary of spec upgrade in imaging/video/3D cameras in next 3-5 years. Mgmt. expected China’s recent policy push for 5G network deployment will drive 5G phone adoption in 2H20E.
- Industry trend remains intact; Maintain Hold on valuation. In longer term, we like Sunny for multi/3D-cam and 5G/video-driven upgrade trend, but COVID-19 impact on potential order cuts and weaker consumer spending will remain overhang for the stock in near term. Hence, we think Sunny’s valuation at 22.9x FY20E P/E is fair, in-line with historical average.
