Sunny Optical Is the Top Beneficiary of Android Recovery; FVE Revised to HKD 125

We cut our fair value estimate for Sunny Optical to HKD 125 from HKD 180 with a Morningstar Uncertainty Rating of Very High from High after refreshing our model following the company's profit warning announcement. We updated our previous forecasts published last August to reflect a later smartphone recovery and tamer growth in the automotive lens market. Despite the risks, the company is likely one of the key beneficiaries of an Android recovery, beginning in the second half of 2023, as camera specification upgrades resume. In addition, our valuation reflects the company’s strong position to capture the long-term automotive electrification trend and cost competitiveness to move up the smartphone lens value chain. We believe smartphone-related shipments should bottom out in the first half before experiencing a gradual recovery in the second half of 2023. Although demand for iPhones may disappoint in 2023, Sunny would likely ramp up Android shipments as COVID-19 infections in China wane and Chinese consumer spending recovers. Sunny should report its 2022 full-year results in the third week of March. Despite the profit warning, we expect management to guide toward an improving smartphone outlook while adjusting down its aggressive vehicle expectations.