1H25 net profit beat on GM and stable cost control
　　Sunny’s 1H25 result was a mixed bag, with revenue largely in-line with Bloomberg consensus supported by auto+ XR business (+18.2%/+21.1% Yoy), while net income far beat consensus by 15%. Revenue and net profit came in at RMB19,651mn/1,646mn respectively (+4.2%/+52.6%Yoy), Sunny’s 1H25 revenue and net profit reached 46.5%50% of our FY25E forecasts, in which the latter was ahead of FY23- 24 average (i.e. 41% of full year) We attributed Sunny’s strong net profit beat to: i) smartphone end
　　demand gradual recovery (esp. flagship models), and increased high- end product mix, which drove up ASP and GM. Blended GM was ahead of our FY25E estimate by 0.9 ppt and came in 19.8% (vs. 1H24/2H24 at 17.2%/19.3%), the highest since 1H22, thanks to optical components (HLS+VLS) and optoelectronics (HCM + auto CCM) margin improvement on spec upgrade; ii) SG&A ratio edged down by 0.2 ppt Yoy to 3.95% and iii) lower interest expense and effective tax rate.
　　Quality growth strategy stays intact, GM upside potential in HLS and HCM;
　　Sunny continue to uphold its global leading position in HLS and HCM with 30.8%/12.1% market share in 2024. Handset related sales was up 1.7% Yoy to RMB13.2bn thanks to spec upgrade and lesser competition help improve both ASP and GM which more than offset the drop in shipment volume. Management shared that both the ASP of HLS and CCM grew 20% Yoy, in which revenue from 6P and above HLS, hybrid (glass+plastic) HLS, periscopes and large image size (> 1/1.5”) camera modules grew>9%/>100%/>20% respectively. Optical components (mainly HLS) and optoelectronics (mostly HCM) shipment volume arrived at 594mn/249mn units (-6.4%/-21.0% Yoy) respectively. Sunny’s YTD (7M25) HLS and HCM shipment reached 50%/47% of our FY25E shipment forecasts (HLS: +5% Yoy/ HCM + ~8% Yoy). Sunny continues focusing on improving product mix which would benefit both ASP and GM in the medium term, mainly driven by top-tier clients’ flagship model with AI features. Management remains positive on long term prospects (incl. variable aperture, hybrid lens, OIS and sensor-shift stabilization), meanwhile AI technology and foldables would lead the growth of high-end smartphones and promote a new round of replacement cycle in the medium term.
　　Sunny’s optical components and optoelectronics’ GM came in at 31.0%/10.6% respectively. Optical components’ GM stayed above 30% level for the 4th consecutive HoH despite a 0.8ppts Yoy drop, we continue to believe Sunny benefit from the recovery in premium smartphone market, which drove up both ASP and GM in the long run, meanwhile improved yield rate also benefits HCM’s GM. Management guided FY25E HLS to be similar to 1H25, while HCM GM sticked to FY25E guidance at 8-10%.
　　XR related revenue grew 21.1% Yoy to ~RMB1.2bn and took up 6.1% of total revenue (vs. 1.6%/3.6%6.2%/5.9%/6.7% in FY20-FY24), thanks to explosive smart glasses market. Sunny currently serves >30 AI glass customers and maintains global leading market share in optical display and imaging modules. Sunny sticked to its flattish XR revenue growth in FY25E, as VR growth to be offset by decent AI/AR growth.
　　Automotive products: Strong CCM order book paves way for future growth;
　　Vehicle related products (incl. both VLS+ vehicle camera modules) sales rose 18.2% Yoy to RMB3,400mn and accounted for ~17.3% of total revenue (vs. 7.9%/12.4%/16.7%/16.0% in FY21-FY24), on the back of VLS shipment grew ~21.7% Yoy to 64.7mn units. Sunny guided automotive revenue growth would be >20% in FY25E, we expect to be driven by both VLS & auto CCM shipment growth, together with ASP upside, maintained FY25E VLS shipment to grow 15-20% (vs. +10-15% VLS shipment guidance in FY24) Yoy, driven by pixel migration and higher ADAS density per car. Sunny’s 7M25 shipment was ahead of our FY25E shipment forecast and arrived at ~76.1mn units (+22.6% Yoy, ~64% of FY25E of our forecasts, vs. ~60% on average in FY23-FY24), we model VLS shipment to grow mid- teens in FY25E.
　　Sunny’s automotive business outlook remains upbeat, driven by project wins, and increasing no. of cam adoption accompanied by more compact design (e.g. COB packaging technology on automotive CCM) with added value (e.g. active defogging, de-ice and dirt removal), pixel migration etc. Sunny continued to deepen its strategic ecological cooperation with global mainstream intelligent driving platform providers such as Horizon Robotics (9660.HK), Qualcomm (QCOM US), Mobileye (MBLY US) and NVIDIA (NVDA US), and continued to expand its product matrix of vehicle modules to consolidate technological leadership. In 1H25, Sunny ranked global No.1 of 8MP vehicle modules in terms of market shares. Sunny also accelerated its expansion into overseas markets and newly secured designation for 8MP products from a leading European automotive manufacturer. We believe Sunny continue to benefit from increasing automotive CCM, LiDAR and ADAS penetration, thanks to their leadership in VLS (No.1 with >30% global market share) and leading supplier in automotive CCM. Management shared that Sunny has obtained >RMB150mn
　　for LiDAR designated projects, a recap that auto CCM order book on hand was ~RMB15bn, we believe the order book bodes well for Sunny’s vehicle business in mid-long term.
　　1H25 CAPEX mainly on HCM, automotive and infrastructure
　　Sunny continues to invest in product R&D and technology upgrades. R&D expense arrived at ~RMB1.6bn and accounted for 8.3% of total revenue (vs. 5.9%/6.6%/7.0%/8.4%/8.1%/7.6% in FY19-FY24). We expect Sunny R&D expense would maintain at ~8% in FY25E/FY26E.
　　Sunny’s 1H25 CAPEX came in at RMB1,480mn (+41.5% Yoy), and reached 57% of its FY25E CAPEX guidance at ~RMB 2.6bn. A recap that ~40% would be used in XR (RMB 600mn R&D) and auto segment (RMB 400mn in total for lens and modules capacity expansion, each reaching 11kk/1.4kk/month (i.e. +1.6x /40% increment from current designed capacity), while RMB 800mn will be allocated to expanding infrastructure in Vietnam (including new factories) and China.
　　Raise FY25E-27E EPS forecasts; Quality growth + diversification strategy well on track; Maintain BUY
　　We raise Sunny’s FY25E-27E net profit estimates by 10.9%/13.2%/21.5%, on better GM forecasts, while leaving revenue estimate largely unchanged. We still expect a mild recovery in FY25E/26E driven by top-tier smartphone clients. We still view Sunny’s leadership in HLS and HCM remains intact, and their strategy to diversify away from smartphones is well on track, with non-smartphone revenue contribution (with auto+XR accounted for >60% of the non-smartphone sales) increased to >35% of total revenue in 2H24.
　　Sunny is now trading at FY26E 18.3x PE (~ 1 s.d.below Sunny’s 10-year average), we expect FY24-27E net profit CAGR would accelerate to 25.2% (vs. 18.7% in our last update) on the back of i) gradual global smartphone market
　　recovery, ii) continued share gain in top-tier smartphone clients and iii) increasing non-smartphone
　　contribution. Sunny’s clear mid-term product roadmap would continue to play a part in Sunny’s new growth engine, we maintain Sunny’s rating at BUY with new TP at HK$108.05, which translates to FY26E 25.0x target PE (implying 1.0x PEG). Sunny remains one of our sector top pick, we continue to advise investors to accumulate on dip to ride on Sunny’s long term growth (auto+XR+ increasing AI adoption in smartphones).
　　Risk Factors
　　Downside risks include: 1) Prolonged upstream component supply shock; 2) Further slowdown in PRC customers’ smartphone shipment ;3) Slower than expected multi-lens/HCM adoption in Android camp; 4) non-smartphone products’ shipment/ sales disappoints, 5) pricing pressure arising from overseas players and domestic peers and 6) RMB depreciation