We hosted Sunny Optical at CMBI Technology Corporate Day on 25 Jun, with strong client interest and positive takeaways. Key highlights: 1) smartphone market: mgmt. raised global/China smartphone shipment forecast by 1.7%/1.1% to 1.17bn/ 276mn (+3.5%/0.4% YoY) at Investor Day in Jun; 2) HCM/HLS: ASP/GPM recovery on track in 2024 driven by spec upgrade (e.g. AI phones), easing competition, high-end customer share gains and higher utilisation; 3) auto VLS: 40%+ GPM maintained and auto module growth to drive profitability; and 4) XR biz: diffractive waveguide to become mainstream in XR devices and positive on AR Glass as the next computing platform. Overall, we believe Sunny will benefit from the next AI-driven spec upgrade cycle given its technology leadership, strong product roadmap and strong client base. The stock now trades at 36x/26x FY24/25E P/E, and our SOTP-based TP of HK$47.31 implies 25.9x FY25E P/E.
　　Smartphone: HCM/HLS ASP/GPM upside on easing competition, high-end spec upgrade and better mix; AI phones to boost replacement cycle. Mgmt. reiterated their positive view on smartphone shipment recovery and raised 2024 global/China smartphone shipment forecast by 1.7%/1.1% to 1.17bn/276mn (+3.5%/0.4% YoY) on its Investor Day in June. For ASP/GPM, mgmt. expected high-end spec upgrade, stabilized competition, and global share gains will drive ASP/GPM recovery in 2H24E. In addition, mgmt. expected improving HLS/HCM UTR (70-80% now) in 2H24E given no capacity expansion, and gave HLS/HCM GPM guidance of 20%+/5%+, implying further upside in 2H24E. For 2025/26E, mgmt. expected AI smartphones to boost the replacement cycle, resulting in cam spec upgrade opportunities including 3D and deep perception interactive lenses.
　　Automotive: VLS GPM of ~40% in 2024; auto modules momentum to drive profitability. While slower customer demand and cost reduction still weigh on auto segment, mgmt. remains positive on improving cost efficiency and high- end orders to drive business growth in 2024. In terms of product pipeline, 1M/2M/3M/5M hybrid ADAS started mass production and 8M hybrid ADAS will enter mass production in 2024, which is positive to potential US client wins. Overall, mgmt. expects stable VLS GPM at ~40% in 2024 and strong growth of higher-ASP auto modules will drive profitability ahead.
　　XR: AR Glass to become next computing platform, backed by diffractive waveguide and optomechanical systems. Mgmt. is positive on AR glass to become the next computing platform for consumers, and optical components will account for 50%+ of total BOM costs. Sunny is investing heavily in related technologies including diffractive waveguide and optomechanical systems, and we think it is well positioned to capture opportunities with global AR/VR leaders.