Sunny Optical: Vehicle Outlook More Resilient, but Smartphones Continue To Fall Short

We have fine-tuned our earnings forecasts and maintained our fair value estimate for Sunny Optical 02382 at HKD 125. After attending the company’s investor day, we are more confident in growth opportunities in the vehicles sector, which will offset weaker-than-expected smartphone and extended reality headset shipments in the meantime. Over the longer term, we have better visibility that Sunny will maintain a significant market share, driven by increasing demand for cameras used for various sensing and vision applications in the automotive sector. We view Sunny’s shares as undervalued due to the continued malaise in smartphone shipments, but we believe momentum will bottom out, driven by the launch of Apple’s iPhone 15 and new Android models stimulating demand for replacement handsets later this year through 2024.

We believe nascent technologies that require sensors or cameras such as light detection and ranging, heads-up display, and smart lighting, will fuel Sunny’s vehicle sales growth in addition to existing applications. In fact, Sunny’s vehicle lens-set shipments in the first 5 months of 2023 were up 26% year on year, while China’s auto sales were up 11%, which we think is evidence of content growth per vehicle. In the longer term, we are encouraged by Sunny’s growing customer base (13 Tier 1 customers and 25 global original equipment manufacturers) and its involvement with major advanced driver-assist systems (suppliers such as Mobileye, Horizon Robotics, and Nvidia, which makes us more confident that Sunny will not miss out on growth opportunities. Based on robust monthly shipment numbers and a more optimistic outlook, we increased our 2023 vehicle lens-set shipment forecasts by 13% to 30% growth and raised our auto-related sales growth assumption by 5 percentage points to a 5-year CAGR of 35%. As a result, in 2027 we expect auto-related sales to account for 23% of Sunny’s total revenue and for it to hold about 20% of the vast global auto camera market by volume.