Sunny Optical Earnings: Recovery in Smartphone Camera Lenses Is Overlooked; Shares Undervalued

Following the company’s sluggish first-half results, we have lowered our fair value estimate for Sunny Optical 02382 to HKD 107 from HKD 125 due to the slower recovery in smartphone shipments and worse-than-expected product mix. However, even after lowering our 2023 sales and EPS forecasts by 4.6% and 34.0%, respectively, we remain optimistic in the medium term that Sunny will benefit from the rebound of midrange smartphone sales and camera upgrades starting in 2024. We believe that Sunny’s shares are undervalued, as the market is still skeptical about the smartphone lens turnaround.

We think Sunny’s smartphone business is underappreciated, and we believe that most of the upside is driven by its lens business. In the medium term, we remain confident that demand for higher image and video quality fosters camera upgrades. By integrating high-quality handset lens sets with handset camera modules and voice coil motors, Sunny sells an attractive package to capitalize on more innovations in iPhone cameras and Huawei’s comeback. We model Sunny’s smartphone camera lens market share to recover to the mid-20s by 2027 from the low-20s currently and to experience modest pricing growth as Sunny brings premium and high-margin designs like periscope lenses and large sensor hybrid lenses to the mass market. In the short term, however, due to ongoing industry weakness, we have trimmed our 2023 smartphone-related revenue and gross profit by 6.8% and 32.3%, respectively, expecting a more tepid recovery toward the end of 2023.