Sunny’s 1H25 results beat, mainly driven by robust smartphone GPM recovery and consistent growth across EV and XR, leading to a 9.7% stock price increase following the announcement. Company’s positive 2025 guidance indicates a sustained market share gains in high-end HLS and HCM, alongside its dominant leadership in VLS and LiDAR. Mgmt. also believe the company will benefit from XR, IoT and robotics in the long run given its current leading position. We revise our 2025/26E EPS upward by 7%/1% to reflect a better product mix of smartphone and EV. Maintain BUY with a higher target price of HK$100 based on 24x 2026 EPS representing 1.0x PEG.
　　Key Factors for Rating
　　1H25 result beat: Revenue grew 4% YoY to RMB19.7bn, fueled by growth in smartphone, EV and XR businesses, beating BOCIe by 5%. GPM increased 0.5ppt HoH to 19.8% driven by improved handset product mix and higher profitability in EV segment. OPM increased 1.1ppts HoH to 7.6%, slightly below BOCIe but in line with street due to R&D expense rise (+12% HoH). NI surged 53% YoY to RMB1.6bn, thanks to segmental GPM improvement and strong net non-ops income of RMB0.4bn (incl. investment and FX gains).
　　Smartphone: 1H25 smartphone revenues increased 2% YoY to RMB13bn, driven by ASP growth in both HLS and HCM (+25% YoY in our estimate), partially offset by 21% YoY decline in HCM shipments. In 1H25, revenue from high-end HLS (6P and above), glass-plastic hybrid HLS and high-end HCM (periscope and large image size) grew 9%, 100% and 20% YoY respectively. Mgmt. guides HLS/HCM GPM to achieve 30%+/c.9% in 2025, with total revenue +5% YoY, stemming from sustained exposure to high-end products for key US and Korean clients (e.g. OIS and periscope), aligning with the trend toward extreme miniaturisation and professional-grade imaging.
　　Automotive: 1H25 revenues grew 18% YoY to RMB3.4bn, primarily driven by vehicle module growth. Mgmt. guides 2025 revenue growth at 20%+. In 1H25, Sunny obtained an 8MP vehicle module designated projects from a top European automaker and over RMB1.5bn order for LiDAR designated projects.
　　XR: XR revenues increased 20% YoY to RMB1.2bn in 1H25, driven by key a US client's AI glasses. Sunny maintain global No.1 market share of imaging modules for smart glasses and achieve mass production capabilities for full-chain optical product and ODM services. Mgmt. projects mild 2025 XR revenue growth with a structurally weak VR growth offset by decent AI/AR growth. Key challenges of AI glass with display are CMOS sensor shortages and the high cost of lightweight MicroLED.
　　Key Risks for Rating
　　1) Weak demand for high-end smartphone; 2) slower-than-expected market share gain; 3) new price war initiated by peers; and 4) macro and tariff impact.
　　Valuation
　　We raise our 2025/26/27 EPS forecasts 7%/1%/3%, indicating ASP growth in HLS/HCM and potential revenue boost in EV and XR. Maintain BUY with new TP of HK$100 based on 24x 2026E EPS, representing 1.0x PEG.