Sunny Optical’s Better Apple Outlook Offsets Tamer Vehicle Lens Growth

We held our fair value estimate for Sunny Optical 02382 at HKD 125 following the company’s mixed 2022 second-half results as stronger Apple-related growth offset weaker-than-expected 2023 vehicle and metaverse-related guidance. Increasing involvement in Apple’s supply chain should be a boon for Sunny in shipment volume and pricing. Its shares still appear undervalued as Apple, vehicles, and the metaverse remain the most significant growth drivers, in addition to the recovery in demand for Chinese smartphones.

We raised our 2023 smartphone-related revenue and gross profit forecasts by 7.7% and 4.2%, respectively, due to better-than-expected average selling prices from improving product mix. Mass adoption of periscope lenses, led by iPhones and then by Android devices, should alleviate competitive pressure from budding lens competitor AAC Technologies, which does not offer such lenses. In modules, we see little downside to profitability as main competitor Q Technology has stated that improving profitability will be its key focus. We forecast 2023 gross margins for handset lens sets and handset camera modules to remain flat from 2022 at 20%-25% and 5%-8%, respectively, which aligns with Sunny’s guidance due to the lower utilization in the first half. We expect gross margins to recover in subsequent years as utilization returns to normal levels. While smartphone shipments and camera count are maturing, we expect growth to be driven more by pricing rather than volume due to camera upgrades. For instance, we think periscope lens designs are coming to 2023 top-of-the-line iPhone models, which Sunny and Largan should supply, and should also be a tailwind for ASPs. Apple-related capital expenditure is budgeted at just over 20% of the firmwide 2023 figure of CNY 3.5 billion.