For those of you who are unfamiliar with the Company, Sunny Optical is a leading integrated optical manufacturer in China that specializes in the design, research and development, manufacture and sale of optical-related products. The Company operates its business through three main segments: Optical Components (such as lens for handset, vehicle and AR/VR), Optoelectronic Products (such as handset camera module) and Optical Instruments (such as microscope), accounting for 33%, 66% and 1% of FY22 revenue. According to the Sunny Optical, it ranks first in the global handset and vehicle lens market in terms of market share.
Weak smartphone in 1H23
Sunny Optical's net profit for the 1H2023 decreased by 67.8% y-o-y to RMB 436.7 million, within the Company's previous profit warning. Revenue declined by 15.9% y-o-y to RMB 14.28 billion, mainly due to weak smartphone demand and de-specification of smartphone cameras. The vehicle lens business growth remains solid. Additionally, there was a 5.9 percentage point drop in the gross profit margin compared to last year, and a 4.1 percentage point drop compared to the previous half-year, resulting in a current gross profit margin of 14.9%.
2H23 is not looking good either
Management guided down the shipment projection for 2023, indicating a significant change in the trajectory of handset lens shipments (HLS). HLS shipment was originally expected to grow by 5% y-o-y in 2023, but Management now anticipates a substantial shipment decline of 10% y-o-y. This change is primarily a consequence of the ongoing weakness in the smartphone market, which is expected to see an overall decline of 6-7% y-o-y.
Sunny Optical is expected to see a revenue rebound in the second half of 2023, driven by the typical increase in orders for the iPhone and other Chinese smartphone makers. However, the company's margin improvement potential is limited due to factors such as less competitive pricing than its competitors and higher depreciation costs. These factors are likely to affect the pace and extent of margin improvement. Additionally, these factors could continue to put pressure on the company's ability to expand its margins over the longer term, especially after this current downcycle.
The automotive and XR (extended reality) sectors have demonstrated growth in the current year; however, this growth has been more moderate than initially anticipated. Concerning the vehicle module segment, the management has revised its revenue projection for 2023 downward to RMB 1.6 billion, reflecting a 60% y-o-y increase, down from the previous target of RMB 2.0 billion. Similarly, in the XR domain, despite a ramp-up in demand from a major customer subsequent to the introduction of new products in the second half of 2023, the pace of revenue growth is expected to slow down to 20% y-o-y in 2023. This contrasts with the earlier guidance of 30% y-o-y growth and the growth rate of over 50% y-o-y observed in 2022, as stated by the management.
Conclusion: More challenges ahead
Sunny Optical's ability to improve its smartphone shipment mix during the down cycle and continue to ramp up its auto business shows its capabilities. However, its recovery road is likely to be bumpy. Valuation is also way too expensive at >20x PE ration now, compared to other peers.
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