Sunny Optical’s full 2024 results were an overall miss as non-ops gain in 2H24 turned out to be the key reason behind HoH net income improvement. Though mix and ASP were better in 2H24, soft CCM shipment volume did drag on the overall recovery pace. Company's 2025 guidance indicates a more aggressive strategy towards winning more HLS and HCM market share while maintaining dominant automotive lens leadership. While well positioned in emerging segments like XR and robotics, mgmt. expects meaningful revenue contribution only in 2-5 years, contingent on form factor iteration and cost reduction. We revise our 2025/26E EPS upward by 3%/5% to reflect a better product mix of smartphone and national subsidy impact. Maintain BUY with a higher target price of HK$89.
Key Factors for Rating
2H24 result miss if excluding non-ops: Revenue grew 12% YoY to RMB19.4bn, missing BOCIe and consensus by 11% and 8% respectively, primarily due to soft shipment in 4Q24. GPM expanded 2.1ppts HoH to 19.3% thanks to improved product mix from high-end Android and US clients. OPM increased 1.2ppts HoH to 6.5%, slightly behind street due to increase in Opex for IT system upgrade and mgmt. consultancy. NI surged 144% YoY and 50% HoH to RMB1.6bn, thanks to strong net non-ops income of RMB0.64bn, consisting of govt’ grant, investment and interest income.
Smartphone mix improvement: 2H24 smartphone revenues increased 8% YoY to RMB12bn, driven by HLS volume (+5% YoY) and ASP growth (40% YoY in our estimate), partially offset by 22% YoY decline in HCM shipments. In 2024, high-end HLS (6P and above) and high-end HCM (periscope and large image size) shipments grew 11.5% and 27.5% YoY respectively. The company maintains global leadership in both HLS and HCM with 30.8% and 12.1% market share in 2024. Mgmt. guides HLS/HCM shipment to grow 5%/5-10% and HLS/HCM ASP to be up/flat for 2025. Sunny is mass producing many high-end products, such as multi-fold prism, 7P HLS, Glass-plastic hybrid HLS, multi-group telephoto HLS, OIS and periscope HCM with integrated actuators.
Automotive business in acceleration: 2H24 revenues grew 12% YoY to RMB3.2bn, primarily driven by vehicle module growth. Mgmt. guides 2025 VLS volume growth at 15-20% with stable GPM and VM revenue growth at 40%. Sunny secures leadership in global 8MP module market and ranks No.1 in global VLS market with 32.3% share in 2024. The company has commenced mass production of industry-first small-sized anti-fatigue integrated driving system and self-developed PGU for a leading HUD manufacturer. LiDAR and HUD business customers span European, North American, Japanese automotive manufacturers and domestic NEV OEMs.
XR and robotic vision long-term upside: XR revenues increased 13% YoY to RMB1.6bn in 2H24, driven by key US client's AI glasses and VR demand. Mgmt. projects flat 2025 XR revenue with a structurally weak VR growth offset by decent AI/AR growth. The company serves over 30 AI glasses customers, leading globally in optical display and imaging modules. However, mgmt. expects AI glasses (without display) shipment momentum likely to be constrained by CMOS shortage while AR (with display) adoption may take 5-6 years to materialise due to high SiC waveguide cost. Regarding robotic, Sunny is currently in co- development with prominent Chinese robotic customers.
Key Risks for Rating
1) Demand miss for high spec smartphone; 2) slower-than-expected market share gain; 3) new price war initiated by peers; and 4) weak macro.
Valuation
We raise our 2025/26E EPS forecasts by 3%/5%, to reflect YTD product mix improvements and sustained market leadership across all three key segments. Maintain BUY with new target price of HK$89 based on 22x 2026E EPS (was 24x 2025E EPS).