Sunny Optical Technology (2382. HK) 2022 Annual Performance Review: Mobile Optical Profitability is Under Pressure, Vehicle, VR/AR Rapid Growth

In 2022, the company's revenue will be 33.197 billion yuan, a year-on-year decrease of 11.5%; the gross profit margin will decrease by 3.4pct year-on-year to 19.9%, mainly due to the year-on-year decline in shipments of mobile phone lenses and mobile phone camera modules, resulting in lower capacity utilization. Due to: （1）A decrease in gross profit margin. （2）A year-on-year increase in OPEX expenses. （3）The depreciation of the RMB in 2022 resulted in a non-cash floating loss on the US$600 million bond issued on January 23, 2018, and recorded an exchange loss of RMB 353 million. The net profit attributable to the parent in 2022 will be 2.408 billion yuan, a year-on-year decrease of 51.7%, which is at the upper limit of the profit warning [-55%, -50%] range.

The demand for Android phones in 2022 was weak, and the gross profit margin of mobile phone optics declined: Against the background of weak demand for Android phones, the shipments of mobile phone lenses/camera modules in 2022 decreased by 17.2%/23.3% year-on-year respectively. Regarding profitability, the increase in 2H22A customers and Android high-end products drive product structure optimization and ASP increases month-on-month. Still, the year-on-year shipment decline leads to a significant decrease in capacity utilization. The intensified industry competition in the context of overall optical specification reduction has caused mobile phone lenses, mobile phones, etc. The gross profit margin of camera modules continued to decline year-on-year and quarter-on-quarter.

The profitability of mobile phone optics is still under pressure in 23 years. Focus on the potential recovery inflection point of Android mobile phone demand in 2H23: 1Q23 is still relatively weak. With the optimization of epidemic prevention and control policies and the recovery of the domestic economy, the replacement demand is still resilient. Focus on 2H23 The inflection point of the potential recovery of demand for Android phones. The company guides that the shipments of mobile phone lenses/camera modules in 23 years will increase by 5%/5% year-on-year, respectively. Corresponding to the low base of the same period last year, the shipments in 2H23 are expected to increase significantly year-on-year. In terms of profitability, because the capacity utilization rate in 23 years is still low and the industry competition pattern has not improved, we expect that the profitability of mobile phone lenses and mobile phone camera modules will continue to be under pressure. The gross profit margin of mobile phone camera modules should be at least 2H22.

The growth rate of vehicle lens shipments in 2022 aligned with expectations. It is expected to maintain steady growth in 2023: due to 1) the shortage of crucial components eased, and Annual shipments in 2019 increased by 16.1% year-on-year, in line with expectations. Considering that the year-on-year increase in sales of new energy vehicles has led to a rise in the demand for vehicle lenses, we expect that the shipments of vehicle lenses in 2023 will maintain steady growth.

In-vehicle new business and VR/AR have entered the heavy-duty stage, and the medium- and long-term growth logic is smooth: in 2022, the revenue of automobile-related products increased by 39% year-on-year, and the proportion of income increased to 12%. Module revenue has increased exponentially, and new vehicle-mounted business has entered the stage of heavy volume. In terms of VR/AR, the payment of VR/AR-related products in 2022 increased by 53% year-on-year, and the revenue accounted for 6%. Because: 1) high-value VRpancake display modules are mass-produced and occupy the prominent supply position for large customers; 2 ) VR spatial positioning modules are supplied to many domestic customers. We expect the revenue of VR/AR-related products in 23 years to record year-on-year growth of more than 30%. Considering: 1) Customer A's potential entry into the MR product supply chain; 2) In the long run, the value of XR optics will continue to increase, and the company also has the strength to enter into the integration of XR machines. We expect the new vehicle business and VR/AR to achieve rapid growth and the company's medium and long-term growth logic to be smooth.

Profit forecast, valuation, and rating: According to the 2022 annual performance report disclosed by the company, the net profit for 22 years is 2.408 billion yuan. Given the continued weak demand for Android phones and no improvement in the industry's competitive landscape, we lowered our 23-24 year net profit forecasts by 31%/34% to RMB 2.908/3.501 billion, respectively; we added a 25-year net profit forecast to RMB 4.315 billion. The company's stock price of HK$91.7 corresponds to a 23-year net profit forecast of 30xP/E. With customer A's progress exceeding expectations, new products such as vehicle lidar and VR/AR have increased the proportion of non-mobile business net profit. The superimposed smart-eye strategy continues to deepen. After the mobile phone business stabilizes, it is expected further to open up the valuation space for 23 years and maintain the "buy" rating.

Risk warning: Competition in the lens industry is intensifying; vehicle-mounted and VR/AR product volume is lower than expected.