Sunny Optical:Continuously outpacing;March shipments

What street has underestimated: 1) we believe the street has overstated thenegative impact from the declining legacy camera module shipments, whichshould be partially offset by ASP enhancement (from 5/8MP to 13MP). Inaddition, lower camera module shipments should better support the blendedGPM (legacy camera modules’ ~10% vs. Handset Lens’ >35%/ Vehicle Lens’40%); 2) we believe the street has underestimated the upside potential from itshandset lenses (low base of market share) and margin improvement.

Handset lens business better than expected: Sunny Optical hasoutperformed its peer (Largan Mar rev, -23% YoY) for three consecutivemonths. We are not only positive on this short-term outpace, but we are alsopositive on the company’s long-term development of handset lenses driven by1) product mix upgrade (higher ASP), 2) margin expansion (by improving theoutput ratio and production yield rate), and 3) market share gains.

Vehicle lens business steady L/T growth driver: The company posted 42%YoY in Mar (vs our full-year assumption of 40% YoY and a good track recordof 47% YoY in 2015). The Street thinks the story (ADAS) is priced in while webelieve the industry trends and the potential total addressable market are notyet factored in given the low adoption rate of ADAS before 2018 (mandatorypolicies to kick off in 2018).

Camera module business declined as expected: The lower the mix of thislegacy business, the better the corporate GM. The company has postednegative YoY for three consecutive months. We expect the blended grossmargin (16.5% in 2015) to be expanded for the long term consideringsignificant margin difference between camera module (10% in 2015) handsetlenses (>30% in 2015) and vehicle lenses (>40% in 2015).