Industry headwinds weigh on margins
A lukewarm set of 1H18 results. SunnyOp’s 1H18 headlines came in behind our estimates, with revenue increasing 19.4% YoY on decent shipment volume. Gross margin came in at 19.4%, down 1.2ppt from 1H17, due to margin squeeze across its main business lines. As such, attributable profit picked up marginally by 1.8% YoY in 1H18, partially dragged by RMB201mn FX loss.
CCM margin pressure to persist in FY18E and FY19E. As we have flagged before, SunnyOp booked a CCM gross margin squeeze of 3.3ppt (from 12.7% in 1H17) in 1H18 in the face of an increasingly competitive industry due to 1) CCM industry overcapacity and ’price war’, 2) higher component prices (CMOS sensor, lens, VCM, etc.) due to industry-wide shortage, and 3) the emerging triple cam business unlikely to make up for the GPM squeeze in dual cam. Looking ahead, we believe SunnyOp would be able to expand its market share in the low-end to mid-range Android camp (including Samsung in FY19E), which bodes well for its shipment outlook but likely to weigh on ASP and GPM during FY18-FY19.
HLS to benefit from the trendy triple cam. SunnyOp’s HLS business growth is well-on track (shipment grew by 53.6% YoY during 1H18) and management guided further capacity expansion to 120KK/month by end-18 (from 100KK in Aug-18). Thanks to its rising penetration into Android flagships and continuous improvement in product mix, the HLS segment is likely to see an uptrend in both ASP and GPM in 2H18.
Automotive business to drive long-term growth. Boasting an industry-leading position in VLS, SunnyOp is also set to begin mass vehicle camera module (‘VCM’) shipments to a tier-1 customer, which bodes well for its total addressable market (‘TAM’) and long-term strategy to implement an integrated business model (in addition to Head-up Displays and Lidar), in our view.
Not immune from industry headwinds. We trimmed our FY18E/FY19E revenue and profit estimates by 2.4%/6.3% and 15.3%/18.8% respectively and lowered our DCF-based price target to HKD100 (from HKD132). Maintain Hold.
Sunny Optical Technology Group is an optical manufacturing group based in Hong Kong. Co. is engaged in the design, research and development, manufacture and sales of optical and optical-related products. These products include optical components (such as glass spherical and aspherical lenses, plane products, handset lens sets, vehicle lens sets and other lens sets), optoelectronic products (such as handset camera modules, smart television video modules, security surveillance cameras and other optoelectronic modules) and optical instruments (such as microscopes, optical measuring instruments and various optical analytical instruments).
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