20160614-美银美林-舜宇光学科技-02382.HK-Optimism_mostly_priced_in_by_rich_valuation_D_G_to_non-consensus_U_P_16页_1mb

Summary of Sunny Optical Analysis

Core Content

This research report evaluates Sunny Optical's financial performance and market valuation, highlighting both its growth potential and valuation risks. The report concludes with a downgrade of the investment rating from Neutral to Underperform, citing stretched valuations and weaker-than-expected shipment performance.

Key Points

• Earnings and Price Objective (PO):

  • Earnings for 2016/17E were lowered due to slower-than-expected YTD shipments, despite the positive contribution from dual-camera modules.
  • The PO was raised from HK$24.2 to HK$25.0, based on an 18x 2017E EPS multiple.

• Valuation Metrics:

  • The stock currently trades at 22x/18x 2016/17E EPS, which is above its peak cycle valuation.
  • The P/E ratio has declined over the years, from 38.25x in 2014A to 18.11x in 2017E.
  • The EV/EBITDA ratio also shows a decline, from 29.30x in 2014A to 13.30x in 2017E.

• Handset and Vehicle Lens Shipments:

  • Handset lens shipments grew 12% YoY, but lagged behind the full-year guidance of 20-30% YoY.
  • Handset module shipments declined 6% YoY, falling short of the 15-25% YoY growth target.
  • Vehicle lens shipments remained strong, with a 48.7% YoY increase, but the growth is expected to moderate in the future.

• Dual Camera Impact:

  • Dual camera modules are expected to provide a 3%/8% earnings upside in 2016/17.
  • However, the ASP erosion and low gross margin (8-10%) due to higher component costs and lower production yield limit the margin upside.
  • The report suggests Largan is a preferred stock for the dual camera theme.

• Investment Rationale:

  • The company has a strong position in the automotive camera market with a global market share of 25-30%.
  • Despite this, the current valuation is considered stretched, and the risk-reward profile is not attractive.

• Downgrade Reasons:

  1. High Valuation: The stock has risen 56% YTD and is trading at a premium to its historical P/E range.
  2. Slower Shipments: YTD shipments for handset lens and module are below guidance, indicating potential near-term earnings risks.
  3. Limited Earnings Upside from Dual Camera: While dual camera is a growth driver, its impact on earnings is limited due to ASP erosion and production yield challenges.

• Financial Performance:

  • Net income (adjusted) is expected to grow from 566 million CNY in 2014A to 1,350 million CNY in 2018E.
  • EPS is projected to increase from 0.529 in 2014A to 1.26 in 2018E.
  • Free Cash Flow per share is expected to rise from negative in 2014A to positive in 2017E.

• Valuation Analysis:

  • A SOTP (Sum of the Parts) valuation method was used to derive the 18x P/E multiple.
  • The lens business is valued at 20x, camera modules at 12x, and vehicle lenses at a premium of 30x.
  • The report suggests that the stock is currently overvalued relative to its historical P/E range.

• Risk Factors:

  • Intense competition in the CCM market, particularly from O-Film.
  • Potential margin pressures due to cost constraints and ASP erosion.
  • Overcapacity in the industry may limit margin expansion.

• Market Position:

  • Sunny Optical is a key supplier for major Chinese handset brands, including Huawei, Lenovo, OPPO, Gionee, and Vivo.
  • The company has five production sites in China and R&D centers in China, Singapore, and South Korea.

• Company Sector:

  • Electronics, specifically in the camera components space.

• Investment Opinion:

  • The report assigns an Underperform rating due to stretched valuations and limited upside potential.

• Stock Data:

  • Current price: 25.25 HKD.
  • Price objective: 25.00 HKD.
  • 52-week range: 10.96 HKD to 28.15 HKD.
  • Market value: 27,180 HKD.
  • Free float: 55.0%.
  • ROE for 2016E: 23.9%.
  • Net debt to equity ratio for 2016E: 2.9%.

• Performance Charts:

  • Historical P/E trends with standard deviation and median lines.
  • YTD share performance vs HS Index.
  • Monthly shipment data for vehicle lens, handset lens, and handset modules.
  • Semi-annual profit & loss and margin trends.
  • CCM margin semi-annual trend with peers.
  • Dual-camera module ASP, GPM, and total cost data.

• Key Assumptions:

  • The report provides detailed assumptions for annual shipments and ASP trends for different product lines.
  • It outlines the expected changes in gross margin and operating margin across different segments.

• Conclusion:

  • While Sunny Optical has strong growth potential in the handset and vehicle lens markets, its current valuation is seen as overextended.
  • The report suggests that the company's growth story has been largely priced in, and the risk-reward profile is no longer favorable.
  • The Blue Sky scenario includes major breakthroughs in handset lens business and higher vehicle lens shipments, which could improve margins.