Largan’s FVE Trimmed to TWD 2,700 on Tepid 2022 Outlook, Long-Term View on Lenses Upgrade Unaffected

We trim our fair value estimate on Largan Precision to TWD 2,700 per share on a weaker outlook for smartphone shipment, but we remain less pessimistic than the market. Although we reduced our revenue and operating income estimates for the next two years due to short-term demand headwinds, the company should still possess steady sales from high-end smartphone and vehicle lenses in later years. We think Largan can maintain its gross margin of 60% and accelerate its average selling price, or ASP, growth in Android lenses as it remains the leader in cutting-edge technology, ready to capture the specification upgrade recovery. An unexciting 2022 earnings outlook has led Largan to trade at 15.0 times market price to our 2022 EPS estimate, lower than Sunny’s 26.4 times. It is also lower than its three-year historical average P/E of 19.8 times. After the fourth-quarter earnings, the post-earnings pullback in market price provides a much more attractive entry point to capitalize on our long-term thesis for the company as a value stock. We believe Largan should trade at 19.4 times price to our 2022 earnings estimate due to the solid margin outlook, and its stable and high cash flows while sitting on a large cash pile, 31% of its current share price.