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Sunny Optical (2382 HK)

WEEKLY INVESTMENT IDEAS - 20220627 Sunny Optical 2382 FCN
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In focus: R&D to stay ahead of competition, vehicle and VR segments to drive growth

Focus on operating efficiency and R&D on handset slowdown. Due to a deteriorating smartphone industry and new entrants in the lens and module markets, management expects the intensifying competition, despite trends and higher material costs to weigh on shipment volume and margins. Amid the industry downtrend, Sunny will focus on improving operational efficiency via: a) its proprietary technology development for automation and digitalization, and b) vertical integration. Sunny plans to expand its product coverage and R&D to camera actuators (VCM), as management believes the upcoming new handset optical products, such as 1-inch large image size modules, variable apertures, continuous zoom, and hybrid OIS, will have a high technical demand for actuators.

The vehicle business remains the bright spot. Management believes shipments in 1H22 should be slightly better than expected and expects full-year shipment growth to be similar to 2021’s level (21% YoY).

Shipments of extended reality (XR) related products are expected to grow at 35% CAGR from 2021-25 and are expected to reach 50m units by 2025. The number of lenses on new VR headsets is expected to grow from >2 from the current generation to >4 in the upcoming generation, to upwards of 10-12 by 2025 (the average number of lenses per headset can reach 7 by 2025). In terms of technology, management is seeing increased adoption of the pancake lens going forward, which should completely replace the Fresnel lens in the near future.

Valuation/Recommendation. Sunny trades at a reasonable 23x 2022F PE vs 24% EPS growth between 2022 and 2025.

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