Sunny Optical: Disappointing Profit Warning Issued, but Near-Term Outlook Improving

Sunny Optical announced a profit warning indicating that its first-half net profit will be 65% to 70% lower than the previous year, which we believe is due to the significant discounting of its average selling prices to clear inventory. While we are disappointed with the magnitude of the decline as vehicle-related shipments have increased and high-end smartphone shipments have been resilient, we see some positive signs as we look into the second half. There are growing indications, notably from MediaTek, Largan Precision, Win Semiconductors, and Q Tech, that the inventory correction in Android and upper-midrange smartphones is largely complete, and that orders from smartphone brands are starting to pick up. However, we reckon it would unlikely be enough to compensate for the first-half decline to achieve our 2023 earnings forecasts. We hold our fair value estimate for Sunny at HKD 125 for now and will update our estimates once it holds its semiannual earnings briefing in late August.