Sunny Optical Earnings: Disappointing Results Imply Intensifying Competition; Valuation Cut by 44%

We lowered our fair value estimate for Sunny Optical to HKD 60. Its disappointing profitability in the December quarter and sluggish 2024 guidance suggest that lower-end competitors, such as AAC Technologies in lenses and Q Technology in camera modules, are catching up. This led us to assume lower structural revenue growth and gross margins for its smartphone-related products. However, we believe Sunny’s share price decline of more than 20% after its results is an overreaction because smartphone revenue is becoming less important, and our long-term view on vehicle electrification and mass adoption of extended reality headsets remains intact. Hence, we continue to view the stock as undervalued.