Luxshare Profits Underwhelm Expectations; We Prefer Sunny Optical Amid Industry and Macro Risks

We maintain our fair value estimate on Luxshare Precision at CNY 35.50 for now after the company released unaudited net profit for the December 2021 quarter and net profit guidance for the March 2022 quarter. We view the current spew of bad news has driven Luxshare down 30% year to date, but shares are still uncompelling as its recent numbers suggest its margin dilution can be worse than we thought earlier. Luxshare is not alone, with fellow smartphone component suppliers like Sunny Optical and AAC Technologies joining the share price rout. Relative to our fair value estimates and year-to-date share price movements, we like Sunny Optical (fair value estimate HKD 236) the most as it remains the best long-term play to take advantage of both smartphone content growth (via cameras) and proliferation of automotive optical systems.