Sunny’s Smartphone Rout Likely Bottomed, EV and Metaverse Provide Cover; FVE Maintained at HKD 180

We retain our fair value estimate of HKD 180 for narrow-moat Sunny Optical, corresponding to 30.2 times price to our 2023 EPS estimate. This is as the worst of the smartphone demand rout seems to be behind us, but we remain cautious on 2022. We estimate the smartphone segment to recover over 2023 gradually instead of a more immediate bounce. Despite the cut in full-year guidance on smartphone camera parts being deeper than expected—due to competition in the low end from AAC Technologies and Q Technology—Sunny continues to gain market share from the iPhone lens incumbent, Largan Precision. Our more bullish 2023 and 2024 projections than PitchBook consensus are supported by our confidence in Sunny’s execution to seize long-term opportunities in smartphone and automotive camera upgrades and metaverse optics. Despite being undervalued, we think the share prices of smartphone lens makers would only converge to our fair value estimates in 2023 as improving monthly shipments further clear the fog around smartphone recovery.