Smartphone Recovery Earns Time for Electronics Suppliers to Tap Extended Reality and Auto Markets

Consumer electronics component suppliers Sunny Optical, AAC Technologies, and Luxshare Precision have reported first-half earnings beyond our expectations, but management’s comments are mixed for the next few quarters. We leave our fair value estimates for Sunny and Luxshare unchanged at HKD 60 and CNY 40 per share, respectively, and raise our valuation on AAC to HKD 31 from HKD 23. Sunny is our pick among the three as the narrow-moat firm has a track record of applying its intellectual property to different industries (like cars), and we see Sunny as best-positioned to profit from more powerful cameras equipped on midrange and premium phones. AAC and Luxshare are fairly valued, in our view, as smartphone recovery has been priced in, and growth in automotive segments is less visible than for Sunny.