Sunex Optics: A Leading Optical Company Looked Down Upon, Is It Really That Bad?

$ HK Shunyu Optical Technology's 2022 annual report (as of December 2022) was released after trading hours on March 20, 2023. The main points are as follows:

1. Overall performance: There are shining points in the underperformed performance. Shunyu Optical's revenue in 2022 fell by 11.5% for the whole year, and net profit drop hit 51%. This was mainly due to the decline in the mobile phone industry and macro-environment.

Considering the performance of only the second half of the year, it's still bleak, but the second half revenue of 16.2 billion yuan was better than market expectations (14.8 billion yuan), and the above-expectation mainly comes from the automotive and VR/AR businesses. The gross profit margin of 19% in the second half of the year was slightly lower than the market's expected 19.7%.

2. Business situation: High growth in the automotive and VR sectors can't make up for the "collapse" of the mobile phone sector. The market's failure to meet its targets for the mobile phone business was expected. Shunyu Optical's mobile phone business experienced a 23% drop in the second half of the year, which is consistent with the previously disclosed shipping situation. Above-expectation results were mainly achieved in the company's automotive and VR businesses, both of which saw year-on-year growth of 77% and 87%, respectively, in the second half of the year.

Overall: Shunyu's 50% drop in profits resulted in poor performance. However, compared to the already low market expectations, the company is not as "bad" as people think.

Currently, almost 70% of Shunyu's revenue still comes from the mobile phone business. As a member of the industry chain, it is difficult for the company to be independent of the beta of the market. In the past year, the sustained weakness of the mobile phone market has directly impacted the company's performance. Therefore, starting from the mobile phone market, the market has already lowered its expectations for the company.

However, the market also overlooked the growth potential of the company in emerging businesses. In the second half of the year, the company achieved year-on-year growth of more than 70% in both the automotive and VR/AR businesses. This also coincides with the financial report, which has led to revenue exceeding market expectations by nearly CNY 1.4 billion.

Based on Shunyu's current situation, Longqiao Dolphin believes that there is no obvious improvement in demand for Shunyu and the Android mobile phone industry chain, but there is a trend of continuous inventory digestion, which is noticeably effective.

The current market has low expectations for the industry chain, which has been partly reflected in stock prices. As inventory digestion and some businesses develop, it may bring above-expectation results. This has also brought about Shunyu's above-expectation performance in revenue in this financial report. Although there is no obvious improvement in demand now, when the company is "underestimated" by the market, it may have some opportunities for above-expectation rebound.

Below is Longqiao Dolphin's specific analysis of Shunyu Optical's financial report:

1. Overall Performance: There are shining points in the underperformed performance

1.1 Revenue

Shunyu Optical Technology achieved revenue of CNY 33.2 billion in 2022, a YoY drop of 11.5%. However, the company achieved revenue of CNY 16.2 billion in the second half of the year, an 8.1% YoY drop, which exceeded market expectations (CNY 14.84 billion). As downstream demand for mobile phones weakened, the company's revenue fell into a trough and the market also lowered its overall expectations for the company. However, the growth in demand for automobiles and AR/VR helped narrow the decline in the company's revenue in the second half of the year.

1.2 Gross profit margin

In 2022, Sunex Optics achieved a gross profit of RMB 6.6 billion, a YoY decline of 24.4%. The decline in the company's gross profit was greater than the decline in revenue, mainly due to a significant drop in gross profit margin. The company's full-year gross profit margin was 19.9%, down 3.4 percentage points YoY.

Looking at the second half of the year alone, Sunex Optics achieved a gross profit of RMB 3.083 billion in the second half of 2022, a YoY decline of 18.7%, but the decline narrowed. The gross profit margin in the second half of the year fell to 19%, slightly lower than the market's expected 19.7%, but Dolphin believes that the company's gross profit margin is already approaching the bottom range.

1.3 Core cost situation

Sunex Optics' core costs mainly include sales, management, and R&D costs. In 2022, the company's three core costs totaled RMB 4.085 billion, a YoY increase of 11.2%. The three core costs accounted for 12.3% of the company's total costs.

Looking at the second half of the year alone, Sunex's three costs were slightly reduced, mainly due to the company's control of R&D costs. From the perspective of the company's cost structure, R&D costs are the largest component of the company's costs and were reduced in the second half of the year.

1.4 Net profit situation

In 2022, Sunex Optics achieved a net profit of RMB 2.474 billion, a YoY decline of 51%, close to the upper limit of the company's previous profit warning (RMB 2.245-2.494 billion). The company's net profit margin was only 7.5% in the first half of the year, a YoY decline of 6 percentage points.

Looking at the second half of the year alone, the company's net profit was RMB 1.095 billion, a YoY decline of 53%, and the net profit margin fell to 6.8%.

The dual decline in revenue and gross profit margin ultimately led to a "sharp decline" in the company's net profit.

II. Progress of downstream businesses: High growth in automobiles and VR cannot sustain the "collapse" of mobile phones From the revenue of Sunex Optics in 2022, the smartphone business is still the company's largest source of income, but its proportion has decreased from 80% in the past to 70%. The automotive business and the AR/VR business are constantly growing, and the company has started to disclose the two income streams separately in the past two years.

2.1 Smartphone business

The smartphone business achieved revenue of 23.3 billion yuan in 2022, a year-on-year decrease of 21.35%. The smartphone business is the "culprit" of the company's performance collapse, directly pulling down the company's performance for the whole year.

Looking only at the second half of the year, the company achieved revenue of 10.5 billion yuan from its smartphone business in the second half of the year, a year-on-year decrease of 23.5%, and the decline accelerated. This is mainly due to the trend of weak demand in the smartphone market and the reduction of cameras, and some of the accelerated decline in the second half of the year is also due to downstream customers beginning to adjust their orders.

From Sunex's revenue composition, the smartphone business still accounts for about 70%, and still has a significant impact on the company's performance. According to IDC data, the global smartphone market was weak in 2022, with a decline in global shipments of 11.3%. And since most of the company's customers are Android-based, the overall impact is even greater, resulting in a decline of about 20% for the company.

In Sunex Optics' smartphone business, there are two main products: smartphone lenses and smartphone camera modules, both of which have experienced significant declines and have yet to show any clear signs of improvement.

① Smartphone lenses: Sunex Optics' smartphone lens shipments from July to December 2022 were 541 million, a year-on-year decrease of 25.1%;

② Smartphone camera modules: Sunex Optics' smartphone camera module shipments from July to December 2022 were 228 million, a year-on-year decrease of 27%.

Looking at the shipment volume of Sunex Optics' smartphone business in the second half of 2022, both lenses and modules declined by more than 20%. In terms of the magnitude of the decline in smartphone income and parts shipments, the decline in Sunex's smartphone business is mainly caused by the decline in shipments.

The decline in smartphone camera modules is greater than that of lenses, mainly because the company's smartphone module customers are mainly Android-based, while the company's smartphone lens customers are not limited to Android but also include Apple. According to the disclosed shipment data of January and February in 2023, there has been a significant decline in both months, and the shipment volume of mobile phone parts has not yet shown any improvement.

2.2 Emerging Businesses - Automotive and AR/VR Businesses

Starting from the past two years, Sunex Optics has disclosed the revenue of automotive and AR/VR businesses, reflecting the company's emphasis on the future development of these two businesses. Because the company's past mobile phone business has accounted for too much (up to 70%), the company's performance and stock price performance are heavily dependent on the cyclical performance of mobile phones. The development of two emerging businesses can enhance the company's ability to resist risks.

1) Automotive Business: Sunex Optics achieved a revenue of 4.1 billion yuan and a year-on-year growth rate of 38.74% in 2022. The revenue contribution of the automotive business continues to increase to 12%, which is the company's second-largest source of revenue outside of mobile phones.

Looking at the second half of the year alone, the company's automotive business grew by 76.9%, with revenue alone exceeding 2 billion yuan. The growth of the automotive business is mainly benefited from the development of automotive intelligence and the company's exploration in the automotive industry.

In the automotive lens market, Sunex has always held a monopolistic position with a global market share of more than 30%. Sunex Optics' automotive lens shipment in July-December 2022 was 41.3 million, a year-on-year increase of 34.7%.

From the monthly data of automotive lenses, this business is one of the few that continues to grow. Looking at the latest shipment data for January and February 2023, the monthly shipment volume of automotive lenses increased by more than 20% year-on-year. The Dolphin believes that the continuous growth of automotive lenses is mainly driven by the demand for automotive intelligence, and there is still room for penetration rate improvement.

2) AR/VR Business: Sunex Optics achieved a revenue of 2.06 billion yuan and a year-on-year growth rate of 53.3% in the full year of 2022. In a year that wasn't great for businesses, the company's AR/VR business still grew rapidly, benefiting from the company's exploration in the client field. Although the current contribution of AR/VR business is only 6.2%, it still has the potential to be more promising than mobile phones in the future.

Research on Sunex Optics Technology by Changqiao Dolphin

Financial Report Season On August 16, 2022, Telephone meeting "Smartphones continue to decline, while automobiles and AR/VR will return to the high-growth stage: Sunny Optical 22H1 Conference Call" and Financial report review "Weakness in Smartphones Crushes Sunny Optical’s First Half of the Year" were held.

In-depth analysis was conducted on November 2, 2021, on "Intelligentizing Automobiles, Creating a New Sunny Optical?" and on October 13, 2021, on "Sunny Optical: A Hundred-Fold Bull Stock in Ten Years-What Did It Do Right?".

Risk disclosure and statement for this article: Dolphin Investment Research Disclaimer and General Disclosure.