Sunny Optical:Playing quick catch up

Gaining competitiveness at high-res lenses

Sunny Optical has been aggressively ramping up its handset lens setmonthly capacity this year, increasing from 20m at the beginning of theyear to 30m in July and aiming to increase to 40m by year-end 2015.

Sunny’s high-resolution lenses are progressively gaining customers’qualifications. We expect 13MP+ lenses shipment will increase close to 4xsequentially in 2H15. We increase our handset lens revenue forecast by18-32% from 2015-17CL and lift our target price to HK$19.6 fromHK$16.4, rolling over to SOTP 15x 17CL earnings. Reiterate BUY.

The only Chinese handset lens maker with meaningful market shareSunny is the leading camera module maker in China with internal supply oflenses to Chinese phone markers (reaching 30-40%), and becoming a reliablesecond source to the Chinese phone makers after Largan. According to TSR,Sunny ranked #7 in 2014 with 5% global market share; however, with thecapacity ramp this year, we expect Sunny’s market share could reach 9-10%ranking top 3-5 in 2015, which is on track with management’s target of beingGlobal #2 in the coming few years.

Gaining customers’ qualificationsSunny supplies externally to Samsung, Sony, Sharp (for Nokia) and Chinesecamera module makers. For Samsung, Sunny mostly supplied 5MP wide anglelenses in 2H14 and shipments are increasing in 2015, on top of which Sunnyalso started shipping 8MP and 13MP+ lenses in 1H15. The company expectsshipment to Samsung will continue to grow going forward. Sony and Chinesebrands are also customers of 13MP/16MP lenses.

Ramping up high-res lenses in 2H15Sunny is ramping up shipment of 13MP+ lenses in 2H15 and expectsshipment mix will increase from 4.9% in 1H15 to 10-15% in 2H15. As thecompany is expanding monthly capacity from 20m in 1H15 to an average of35m in 2H15, we expect 13MP+lenses shipment will increase close to 4x HoH.

Maintain Buy with new target price of HK$19.60Factoring in 2H15 capacity expansions, we are lifting our handset lensesrevenue forecast by 26%/32%/18% from 2015-17CL. As the lens businessoffers much higher gross margin (35-40%) compared to camera modules(10%), we believe the continuous product mix shift into lenses will helpSunny to enjoy more profitable growth. We reiterate our BUY rating with anew target price of HK$19.60, rolling over to SOTP 15x 17CL earnings.