"Guo Lian" loses its halo, is it difficult to find a buying point for SUNNY OPTICAL?

In the first week of 2024, Apple, the mobile phone giant, suddenly encountered consecutive downgrades from investment banks, dealing a heavy blow to the already sluggish outlook of the smartphone industry.

This week, investment bank Piper Sandler downgraded Apple's rating twice, pointing out that the growth rate of Apple's smartphone sales has peaked and expressing concerns about the high inventory of smartphones in the first half of 2024. As a result, they downgraded Apple's rating from "Buy" to "Neutral". Barclays also downgraded Apple to "Sell", believing that the poor sales of iPhone 15 will continue, and even though iPhone 16 has not been released yet, there are no significant upgrades that can stimulate consumer upgrades. It is expected that Apple may decline by more than 15% in 2024.

As a well-known leader in the supply chain, SUNNY OPTICAL (02382), which has been supplying camera modules to Apple, has also suffered. It recorded a "four-day consecutive decline" at the beginning of the year, with a cumulative decline of more than 10% in four working days.

Compared to the high of HKD 119 at the beginning of 2023, SUNNY OPTICAL's stock price has now been nearly halved, reaching its lowest valuation range in nearly five years. However, whether the low valuation means an opportunity for a left-side layout still needs to be carefully considered from various aspects such as business and market.

When will the revenue and net profit rebound?

According to Zhitong App, SUNNY OPTICAL Technology is engaged in the design, research and development, production, and sales of optical and optoelectronic products. Its main products include three categories: optical components (car lenses, car laser radar optical components, VR spatial positioning lenses, mobile phone lenses, digital camera glass spherical lenses, and other optical components), optoelectronic products (mobile phone camera modules, 3D optoelectronic modules, car modules, and other optoelectronic modules), and optical instruments (microscopes and intelligent detection equipment, etc.).

Although Shunyu has actively transformed and promoted its automotive business in recent years, as of the first half of 2023, revenue from mobile phone-related products still accounted for approximately 67.9%, continuing to be an important source of revenue for the company. Therefore, affected by the sluggish smartphone industry, SUNNY OPTICAL's revenue and net profit continued to decline in the first half of the year, and its financial data was bleak.

Specifically, in the first half of the year, SUNNY OPTICAL achieved revenue of CNY 14.28 billion, a decrease of approximately 15.9% compared to the same period last year, and a net profit of CNY 437 million, a decrease of approximately 67.8% compared to the same period last year. Among them, revenue from mobile phone-related products was CNY 9.69 billion, a year-on-year decrease of 24%, and revenue from automotive-related products was CNY 2.47 billion, a year-on-year increase of 44%, accounting for approximately 17.3% of the total revenue. Due to the weak downstream consumer demand, the company's gross profit margin has also declined. In terms of business segments, the revenue of the optical components business decreased by 1.8% YoY to CNY 4.318 billion, and the gross profit margin of the segment decreased from 35.5% to 26.0%; the revenue of the optoelectronic products business decreased by 21.3% YoY to CNY 9.737 billion, and the gross profit margin of the segment decreased from 11.6% to 6.9%.

However, with signs of recovery in the smartphone market in the second half of the year, SUNNY OPTICAL's monthly sales of smartphone-related products have also rebounded. In November 2023, the shipment volume of SUNNY OPTICAL's glass spherical lenses reached 1.924 million units, a YoY increase of 48.9%; the shipment volume of smartphone lenses reached 118 million units, a YoY increase of 29.3%; the shipment volume of smartphone camera modules reached 51.998 million units, a YoY increase of 49.9%. In addition, the shipment volume of automotive lenses was 6.784 million units, a MoM decrease of 13.1% and a YoY decrease of 8.4% due to customer inventory control at the end of the year.

In response to this, Morgan Stanley released a report pointing out that the shipment volume of smartphone lenses and camera modules in November exceeded expectations, and the full-year delivery volume may exceed the management's annual target. At the same time, based on the low base effect of the same period, the automotive lenses can easily achieve a 15% annual target growth.

Q4 smartphone industry shipments are expected to improve

Looking at the performance of the entire consumer electronics industry in recent years, it has been mainly affected by two pressures: the global economic recovery is not as expected, leading to a significant decline in consumer purchasing demand; and the lack of breakthrough innovations in the smartphone industry has significantly extended the replacement cycle for consumers.

According to Zhitong App's understanding, with the positive signs of a bottoming out in the industry data in the third quarter, there is a high degree of certainty that the demand for the smartphone market will experience a moderate recovery in 2024.

According to Counterpoint Research's "Smartphone 360 Report" on global smartphone shipments, it is expected that global smartphone shipments will decrease by 5% YoY to 1.2 billion units in 2023, reaching the lowest level in nearly a decade. However, shipments in the fourth quarter of this year are expected to increase by 3% YoY to 312 million units, mainly driven by the recovery of demand in emerging markets such as China, the Middle East and Africa (MEA), and India. Counterpoint predicts that global smartphone shipments are expected to increase by 3% YoY in 2024, forming a bottoming out trend. TrendForce and Jibang Consulting also pointed out that the global smartphone production in the third quarter was about 308 million units, an increase of 13% MoM. Although it is not as high as before the pandemic, it has grown by about 6.4% YoY, ending the eight consecutive quarters of annual decline. According to their predictions, with the combination of e-commerce promotions and the year-end shopping season, the total smartphone production in the fourth quarter has the opportunity to increase by 5-10% MoM, and the total production for the whole year of 2023 is estimated to be about 1.16 billion units.

Although the recovery is established, the smartphone industry is clearly unable to return to the high-growth situation of the past. When observing the technological innovation trends in the industry in 2024, new technologies such as 5G networks, foldable screens, cameras, and the Internet of Things mostly face the embarrassing situation of being popular but not in high demand, failing to significantly boost market demand. In contrast, due to the popularity of GPT large models this year, many smartphone manufacturers have shifted their focus to the "AI + smartphone" track.

At the recent AI Forum 2023, Samsung announced its self-developed generative AI model "Samsung Gauss" and revealed that it will introduce Galaxy AI in its Galaxy flagship smartphones. As for domestic manufacturers, the vivo S18 series released by vivo will be equipped with the Blue Heart large model, making it one of the first smartphones in the industry to have a billion-parameter large model implemented on the terminal.

It is worth noting that, not to mention that various AI terminal applications have not yet reached a mature stage and the hardware costs remain high, whether AI can drive consumers to upgrade their phones and bring actual sales growth to the smartphone industry is still unknown. However, it is certain that as smartphone manufacturers allocate more costs to AI and computing power hardware, the profit margin of the optical lens segment, including SUNNY OPTICAL, may be further weakened.

Can the automotive and XR businesses become new highlights?

Specifically for SUNNY OPTICAL's business, although the smartphone main business is likely to continue to be under pressure, the automotive and XR businesses may become unexpected growth points.

With the gradual easing of the shortage of automotive supply chain chips and the continuous penetration of intelligent driving, the company's automotive business revenue in the first half of the year was 2.471 billion yuan, a year-on-year increase of 43%, accounting for 17% of the total revenue (a year-on-year increase of 7 percentage points), and the shipment volume of automotive lenses reached 47 million units (a year-on-year increase of 25.2%).

According to Zhitong App, the upgrading trend of the automotive industry towards "electrification, networking, and intelligence" is driving the increasing demand for optical sensors. According to the Tier 2 research report on the automotive camera industry in 2023 released by Jossi Automotive Research, SUNNY OPTICAL still occupies the top tier of automotive lens companies, maintaining a significant lead over its competitors, and it is expected that Shunyu will maintain a 40% market share in 2023. Benefiting from the high technological barriers of automotive lenses and the company's leading market share, the growth of the automotive business is expected to partially offset the decline in the smartphone business. In addition, Sunny Optical has also laid out in niche areas such as LiDAR, Head-Up Display (HUD), and intelligent car lights, which will also benefit from the trend of technological upgrades in the automotive industry.

Affected by the sluggish sales of VR devices, Sunny Optical's XR business revenue in the first half of the year was CNY 469 million (a decrease of 29% YoY), accounting for 3.3% of the total revenue (a decrease of 0.6 percentage points YoY).

The XR industry in 2023 appears to be more "calm" compared to previous years. Even the release of Apple's first spatial computing headset, Vision Pro, did not bring much heat to the industry. Many tech giants such as Google quietly suspended or canceled the development of XR products.

It can be seen that the entire XR industry is still in its early stages, with immature technology, a small market size, and a blank slate in terms of content, scenarios, and industry chain ecology. In this situation, some XR companies are changing their strategies, transforming XR products from standalone hardware products to accessories and extensions for smartphones and other smart devices.

Whether from the perspective of the industry or Sunny Optical's own business scale, it is still too early for XR to make a significant contribution to performance growth.

Summary

Although the automotive business has its highlights, Sunny Optical is still constrained by the overall "retrograde" of the smartphone industry and is unlikely to achieve significant performance reversal in the short term. Considering the risks of the smartphone industry's slower-than-expected recovery and the slower-than-expected progress of the company's automotive business, as well as the insufficient upward momentum of the stock price, Sunny Optical may currently lack significant attractiveness to investors in the secondary market.