Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Sunny Optical 2382.HK Competition disruptive to GPM Slightly disappointing FY13 results Sunny Optical reported a FY13 results with 45.9% yoy revenue growth and 27.2% yoy net profit growth, which is -11.6%/ +0.5% versus our/ Bloomberg consensus estimates. It is because of slower revenue growth (36.7% yoy in 2H13 versus 57.4% in 1H13 and 58.7% in 2H12). In FY14E, we expect revenue to grow 29.0% in FY14E, as 1) handset lens sets (HLS) will be double with more more shipment to Samsung Electronics (005930.KS), and 2) handset camera module (HCM) business will grow with China smartphone market, despite slower growth rate of 25.0% versus 77.3% in FY13. O-film s aggressive expansion disruptive to GPM GPM has declined from 18.6% in FY12 to 16.6% in FY13, but been higher than 15.5%/ 16.5% of our/ Bloomberg consensus estimates. It is driven by GPM recovery in HCM business in 2H13, amid smartphone camera module moving towards 8MP+. The contribution from its 8MP+ HCM has increased from 17.7% in 1H13 to 25.1% in 2H13, and is expected to be 40.0% in FY14E. However, competitors including new players, O-film (002456.CH) have been expanding capacity. We believe its aggressive pricing will be inevitably disruptive to industry pricing dynamics and impose potential downside risks to GPM in FY14E. Project Tango cannot take the heart off decelerating HCM During the Mobile World Congress (MWC) held during Feb, Google (GOOG.US) has disclosed its new smartphone project named Tango (3D imaging capturing both space and motion). Sunny Optical has been selected as the exclusive partner to supply optical components. Its win as the premier partner shows the company s strong optical R&D capability. However, we cannot see material contribution for the company in FY14-15E, to compensate for the deceleration in HCM business. Reiterating NEUTRAL with TP of HK$8.42 We revise down our FY14/15E earnings by 14.1%/16.7%, mainly attribute to weaker-than-expected GPM. The company is trading at 12.1x FY14E PER, which is 30.7% discount to the average 15.8x of the handset lens set and camera module peers. We believe Sunny Optical s valuation will be discounted to those of peers, given threats from competitors aggressive expansion. We reiterate NEUTRAL with TP of HK$8.42, based on 15.8x FY14E PER which is derived from unchanged 20% discount to peers. Rating Neutral Maintain Target Price HKD 8.42 From 8.90 Current price HKD 8.05 Upside +5% 13 March 2014 Susanna Chui susanna.chui@cinda.com.hk (852) 2235 7131 Trading data 52-Week Range (HK$) 3 Mth Avg Daily Vol (m) No of Shares (m) Market Cap (HK$m) Major Shareholders (%) Auditors Result Due Company description 6.10/11.78 6.21 1,097.00 8,830.85 Wang Wenjian (42%) Deloitte 1H14E: Aug Founded in 1984, Sunny Optical is a leading integrated optical products manufacturer mainly for digital camera and handset. The company dominates in China handset market with ~50% market share. It focuses heavily on domestic OEMs (Huawei, ZTE, Lenovo and Coolpad), with customers in Korea (Samsung) and Japan (Panasonic and Nikon). Price chart HK$ 14.00 12.00 10.00 8.00 6.00 4.00 2.00 - RMB mn FY12A FY13A FY14E FY15E FY16E Revenue 3,984 5,813 7,497 9,326 11,075 Net Profit 346 440 524 614 702 Consensus NP 586 720 831 EPS (RMB) 0.36 0.44 0.53 0.62 0.71 P/E (x) 17.7 14.4 12.1 10.3 9.0 Sources: Bloomberg, CIRL estimates Page 1 of 5
Exhibit 1: Sunny Optical s revenue by business segment (RMB mn) 1H12 2H12 1H13 2H13 hoh yoy Optical Components 610.6 698.3 563.9 599.7 6.4% -14.1% Optoelectronic Products 1,074.1 1,416.5 2,119.8 2,296.6 8.3% 62.1% Optical Instruments 84.9 100.0 102.0 130.8 28.2% 30.8% Total 1,769.6 2,214.7 2,785.7 3,027.1 8.7% 36.7% Exhibit 2: Sunny Optical s shipment volume (Mn units) 1H12 2H12 1H13 2H13 hoh yoy Optical components 81,399 77,749 57,437 60,574 5.5% -22.1% Spherical lenses 32,881 31,528 17,547 16,517-5.9% -47.6% Handset lens sets 37,967 32,366 25,124 30,025 19.5% -7.2% Other lens sets 10,551 13,855 14,766 14,032-5.0% 1.3% Optoelectronic products 44,076 56,922 69,508 66,529-4.3% 16.9% Handset camera modules 42,983 53,663 67,695 64,814-4.3% 20.8% Other optoelectronic products 1,093 3,259 1,813 1,715-5.4% -47.4% Optical instruments 93,794 94,109 122,982 127,235 3.5% 35.2% Microscopic instruments 84,805 84,694 112,542 113,171 0.6% 33.6% Analytical instruments 8,989 9,415 10,440 14,064 34.7% 49.4% Total 219.3 228.8 249.9 254.3 1.8% 11.2% Exhibit 3: Sunny Optical s ASP of major segments (RMB per units) 1H12 2H12 1H13 2H13 hoh yoy Optical Components 7.5 9.0 9.8 9.9 0.9% 10.2% Optoelectronic Products 32.7 44.9 120.8 139.0 15.1% 209.5% Optical Instruments 2.2 3.1 4.1 4.4 7.2% 41.0% Total 167.7 159.9 188.7 215.7 14.3% 35.0% Page 2 of 5
Exhibit 4: Sunny Optical s handset camera module volume breakdown by pixel 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4.1% 7.0% 17.7% 18.2% 25.1% 26.3% 31.5% 38.5% 77.7% 66.7% 50.8% 36.5% 1H12 2H12 1H13 2H13 <5MP 5MP 8MP Exhibit 5: Sunny Optical s GPM by business segment 1H12 2H12 1H13 2H13 Optical components 22.4% 23.1% 22.80% 26.3% Optoelectronic products 15.0% 13.4% 12.10% 13.1% Optical instruments 33.7% 34.4% 36.70% 37.8% Total 19.2% 18.1% 15.8% 17.4% Exhibit 6: Sunny Optical selected as premier partner in Google s Project Tango Page 3 of 5
Exhibit 7: Financial statement Income statement Cash flow Year to Dec (RMB mn) FY12A FY13A FY14E FY15E FY16E Year to Dec (RMB mn) FY12A FY13A FY14E FY15E FY16E Revenue 3,984 5,813 7,497 9,326 11,075 Pre-tax profit 397 504 600 702 803 Gross profit (reported) 741 967 1,227 1,525 1,837 Taxes paid -43-45 -22-76 -89 EBITDA 513 659 791 964 1,129 Depreciation 109 147 179 241 288 Depreciation -109-147 -179-241 -288 Associates 4 1 1 1 1 EBIT 404 512 612 723 840 CFO bef. WC change 467 608 758 868 1,003 Net interest income (exp.) -3-7 -11-21 -36 Change in working cap -291-953 -334-362 -345 Associates -4-1 -1-1 -1 Cashflow from operation 176-345 424 506 658 Exceptionals/others 0 0 0 1 2 CAPEX -265-286 -450-450 -450 Profit before tax 397 504 600 703 805 Free cash flow -89-631 -26 56 208 Tax expenses -58-64 -76-89 -101 Dividends -105-133 -158-185 -212 Minority interest 7-0 -0-1 -1 Balance sheet adj. -29-26 -0-0 -0 Net profit 346 440 524 614 702 Sharse issued 0 8 0 0 0 Dividends -105-133 -158-185 -212 Others 17 612-25 -27-27 Net cash flow -207-169 -209-156 -30 Balance sheet Net cash (debt) start 222 141 334 125-31 Year to Dec (RMB mn) FY12A FY13A FY14E FY15E FY16E Net cash (debt) at year-end 15-28 125-31 -61 Cash & equiv 244 823 685 697 827 Trade receivables 1,098 1,419 1,809 2,225 2,612 Ratios Other receivables 0 0 0 0 0 Year to Dec (RMB mn) FY12A FY13A FY14E FY15E FY16E Inventories 775 1,158 1,499 1,865 2,208 Growth rate (%) Other current assets 375 1,004 1,004 1,004 1,004 Revenue 59.5 45.9 29.0 24.4 18.7 Fixed assets 646 785 1,056 1,265 1,427 EBITDA 53.0 28.5 20.0 21.9 17.1 Intangible assets 0 0 0 0 0 EBIT 63.8 26.5 19.6 18.2 16.2 Investment, associates etc 89 114 113 112 111 Net profit 60.8 27.2 19.0 17.1 14.5 Total assets 3,227 5,303 6,165 7,168 8,189 EPS 62.9 27.2 19.0 17.1 14.5 Margins (%) Account payables 1,037 1,407 1,804 2,224 2,609 Gross margin (reported) 18.6 16.6 16.4 16.3 16.6 Other payables 0 0 0 0 0 EBITDA 12.9 11.3 10.5 10.3 10.2 Short-term debt 103 489 560 728 889 EBIT 10.1 8.8 8.2 7.8 7.6 Other current liabs 11 36 90 103 115 Net margin 8.7 7.6 7.0 6.6 6.3 Long-term debts 0 0 0 0 0 Other ratios Deferred tax and others 18 23 23 23 23 ROE (%) 17.9 15.4 16.4 17.0 17.3 Other long-term liabs 0 0 0 0 0 ROA (%) 10.7 8.3 8.5 8.6 8.6 Total liabilities 1,169 1,955 2,476 3,078 3,636 Net gearing (%) (0.8) 1.0 (3.9) 0.9 1.5 Interest coverage (x) 128.7 77.6 55.9 35.1 23.0 Share capital 98 105 105 105 105 Receivables days 100.5 89.1 88.1 87.1 86.1 Reserves 1,824 2,745 3,086 3,487 3,951 Payables days 116.7 106.0 105.0 104.0 103.1 Shareholders' equity 1,922 2,850 3,191 3,592 4,057 Inventory days 87.3 87.3 87.3 87.3 87.3 Minorities 10 10 11 11 12 Effective tax rate (%) 14.7 12.6 12.6 12.6 12.6 Total equity 1,932 2,860 3,201 3,604 4,068 Net cash (debt) 141 334 125-31 -61 Exhibit 8: Revising up earnings forecast FY14E (new) FY14E (old) Diff FY15E (new) FY15E (old) Diff Revenue 7,497 7,623-1.7% 9,326 9,238 1.0% Net Profit 524 610-14.1% 614 737-16.7% EPS (RMB) 0.53 0.63-16.6% 0.62 0.76-19.2% Exhibit 9: Peer comparison Market cap PE (x) PB (x) Dividend yield (%) Ticker (HKD mn) FY13A FY14E FY15E FY13A FY14E FY15E FY13A FY14E FY15E Lens/ lens set company Largan Precision 3008 TT 1 47,892.11 19.8 16.8 14.7 6.4 5.0 4.1 1.7 2.3 2.8 Average (2.9) (29.0) 7.3 4.5 3.2 4.1 2.0 2.3 1.4 Camera module company Truly Intl Hldgs 732 HK 1 13,349.57 9.5 8.1 7.0 2.0 1.6 1.3 3.6 4.1 4.8 Lite-On Technolo 2301 TT 1 25,766.45 11.7 11.0 10.1 1.2 1.2 1.1 5.7 6.2 6.7 Shenzhen O-Fil-A 002456 CH 1 28,273.02 38.8 27.2 20.5 8.0 8.2 6.2 0.5 0.4 0.6 Average 20.0 15.4 12.5 3.7 3.7 2.9 3.3 3.5 4.0 Sunny Optical 2382 HK 1 8,830.85 14.4 12.1 10.3 2.5 2.2 1.9 1.9 2.3 2.6 Source: Bloomberg, CIRL Page 4 of 5
Rating Policy Stock Rating Sector Rating Rating Definition Buy Outperform HSI by 15% Neutral Between -15% ~ 15% of the HSI Sell Underperform HSI by -15% Accumulate Outperform HSI by 10% Neutral Between -10% ~ 10% of the HSI Reduce Underperform HSI by -10% Analysts List Antony Cheng Research Director (852) 2235 7127 antony.cheng@cinda.com.hk Hayman Chiu Senior Research Analyst (852) 2235 7677 hayman.chiu@cinda.com.hk Kenneth Li Senior Research Analyst (852) 2235 7619 kenneth.li@cinda.com.hk Lewis Pang Research Analyst (852) 2235 7847 lewis.pang@cinda.com.hk Susanna Chui Research Analyst (852) 2235 7131 susanna.chui@cinda.com.hk Shawn Yang Research Assistant (852) 2235 7617 xiaoxia.yang@cinda.com.hk Analyst Certification I, Susanna Chui hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was / were, is / are or will be directly or indirectly, related to the specific recommendations or views expressed in this report / note. Disclaimer This report has been prepared by the Cinda International Research Limited. Although the information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, Cinda International cannot and does not warrant the accuracy or completeness of any such information and analysis. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Recipients should understand and comprehend the investment objectives and its related risks, and where necessary consult their own financial advisers prior to any investment decision. The report may contain some forward-looking estimates and forecasts derived from the assumptions of the future political and economic conditions with inherently unpredictable and mutable situation, so uncertainty may contain. Any opinions expressed in this report are subject to change without notice. The report is published solely for information purposes, it does not constitute any advertisement and should not be construed as an offer to buy or sell securities. Cinda International will not accept any liability whatsoever for any direct or consequential loss arising from any use of the materials contained in this report. This document is for the use of intended recipients only, the whole or a part of this report should not be reproduced to others. Page 5 of 5