Dual drivers from autos and phones;initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia China Technology Hardware & Equipment Company Sunny Optical Date 20 June 2016 Initiation of Coverage Dual drivers from autos and phones; initiating with Buy Reuters Bloomberg Exchange Ticker 2382.HK 2382 HK HSI 2382 Forecasts And Ratios Year End Dec 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 8,426 10,696 13,195 15,011 16,956 Reported NPAT (CNYm) 566 762 1,142 1,392 1,656 Reported EPS FD(CNY) 0.52 0.71 1.06 1.30 1.54 DB EPS growth (%) 20.5 35.2 50.0 21.9 18.9 ROE (%) 18.6 21.5 27.0 27.2 26.8 PER (x) 15.1 17.8 20.2 16.6 13.9 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items It's another sunny day ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016. Price at 20 Jun 2016 (HKD) 25.30 Price target - 12mth (HKD) 32.00 52-week range (HKD) 28.10 - 12.08 HANG SENG INDEX 20,170 Birdy Lu Research Analyst (+886) 2 2192 2822 birdy.lu@db.com Frank Lin Research Associate (+886) 2 2192 2824 frank.lin@db.com Price/price relative 481216202428326/1412/146/1512/15Sunny OpticalHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute 3.5 16.6 45.4 HANG SENG INDEX 1.6 -2.4 -24.6 Source: Deutsche Bank Two distinct new tends should push both earnings and valuation higher for Sunny Optical. First is the adoption of dual-camera modules for high end smartphones, boosting both volume and pricing, where Sunny already holds a top two ranking. The second is the proliferation of cameras in the auto sector where it is the largest supplier, with a projected 30% market share in a 40% margin product, growing at 30% pa. This combination should raise earnings 50% this year followed by close to 20% annually until 2018. We note the company has strong free cash flow and a large net cash position; we initiate with a Buy given more than 20% upside potential. Smartphone upsides – spec upgrades, dual camera and vertical integration We expect Sunny’s handset lens sales to be 23% CAGR in 2016-2018E, with GPM increasing from 35% in 2015 to 40%+ (due to improved product mix and spec upgrades). Chinese smartphone vendors are aggressively upgrading camera resolution and other features. Sunny made a breakthrough in 10MP+ lens in 1H15 and has quickly gained market shares in China. In the CCM business, our dual camera industry report (on June 20) highlights Sunny as a key beneficiary, as it serves as the primary supplier for Huawei, the most aggressive dual-cam adopter. Lastly, Sunny is the only tier-one CCM maker that has strong in-house lens module capability, which helps improve the cost structure. Gaining an edge in non-IT sector Sunny is making aggressive inroads into the automotive sector. It ranks as the world’s largest vehicle lens maker with a 30%+ share. In view of strong automotive camera demand for safety specs, we expect the global vehicle lens market to post a 30%+ CAGR in the next few years. With Sunny’s focus on the pre-installed market, it should benefit from this trend. The market has high entry barriers and limited competition, due to: 1) strict temperature/durability requirements; and 2) a long certification process required by automotive OEMs. Thus, Sunny should enjoy a favorable and sustainable GPM (~40%), owing to solid partnerships with global automotive vendors (Autoliv, Continental, Delphi). Valuation and investment risks Our target price of HKD32 is based on 20x 2017E P/E, or 0.7x PEG, in line with regional peers (excluding A-share) of 15-30x P/E, or 0.8x PEG. We believe this valuation is justified by an improving sector growth outlook. Downside risks: market share loss and fiercer-than-expected competition in the CCM field. 20 June 2016 Hardware & Equipment Sunny Optical Page 2 Deutsche Bank AG/Hong Kong Model updated:15 June 2016 Running the numbers Asia China Hardware & Equipment Sunny Optical Reuters: 2382.HK Bloomberg: 2382 HK Buy Price (20 Jun 16) HKD 25.30 Target Price HKD 32.00 52 Week range HKD 12.08 - 28.10 Market Cap (m) HKDm 27,178 USDm 3,502 Company Profile Founded in 1984, Sunny Optical is the leading optical related products manufacturer in China. The company engages in the production of optical related products including optical component (DSC, handse