Largan Earnings: Periscope Yield Woes Are a Speed Bump, but Demand for Smartphones Is Recovering

We hold our fair value estimate for Largan Precision 3008 at TWD 2,500 as demand for smartphone lenses is improving as expected on the back of a solid reception for the Apple iPhone 15 series, which features the most significant camera upgrades in 3 years. Although September-quarter profitability disappointed us as the new periscope lens sets faced teething problems, Largan should improve its manufacturing yield in the coming quarters. Looking to 2024, we believe that camera upgrades will stimulate smartphone replacement demand and benefit the incumbent lens suppliers including Largan, especially with the reemergence of Huawei, which differentiates itself with its superior camera performance. Largan’s shares are currently fairly valued in our view and further upside may require a greater commitment to supply fast-growing verticals such as automobiles.

Solid revenue growth of 1.1% year over year and 66.3% sequentially was driven by the higher price of the periscope lens set in the iPhone 15 Pro Max. On the other hand, Largan’s gross profit margin was 42.6%, down 6.7 percentage points from the June quarter due to the lower yield rate on periscope lens sets for iPhones. As we mentioned in our previous note, Largan mainly outsources prisms for its periscope lens sets for iPhones, so the margin impact of lower yield became greater than the typical new design introduction. We expect Largan to gradually switch prism and glass lenses to in-house production over the next two years and improve its yield rate. As a result, we cut our 2023 gross margin assumption by 5.8 percentage points to 46%, but leave our post-2024 assumptions largely unchanged at 52.4% and should expand further to 57.2% in 2027.