Sunny Optical Technology Group: -24.5%
Sometimes, businesses may be subjected to headwinds that are unlikely to persist and have their share prices beaten down due to marked differences in financial results from previous comparable quarters. This may happen even though the company might be taking the right steps in dealing with these challenges.
Sunny Optical Technology Group is an example of one such company. It has underperformed the benchmark Hang Seng’s 7.8% losses by losing 24.5%. At current prices, we think the company is very attractive and based on our updated in-house valuations, the intrinsic value of the company is roughly 40% above its current trading price of HK$82.20 ($14.08).
To recap, Sunny Optical is a global integrated optical components and products manufacturer, principally engaged in the design, R&D, manufacture, and sale of optical and optical-related products. The company’s business focus is on the application fields of optoelectronic-related products such as handsets, vehicles, security surveillance, virtual and augmented reality and robots, combined with optical, electronic, algorithm and mechanical technology.
FY2022 ended Dec 2022 was an underwhelming year for the company as it suffered from various headwinds which adversely affected its financial performance. Some of these headwinds include the rise in costs of energy, logistics and raw materials, chip shortages, the Russia-Ukraine conflict and the continuous recurrence of Covid-19, which affected the end-use consumption demand for the company’s products.
However, the prospects for FY2023 appear to be much brighter, although challenges such as high inflation, supply chain imbalances and trade frictions may continue to affect the company.
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The gradual easing of the supply shortage of automobile chips, along with the increasing tendency of upgrading the specification of cameras in vehicles in line with the trend of electrification, networking and intelligence of automobile, has created a tailwind for Sunny Optical. In addition, the gradual recovery of consumption demand, along with the continuous increase of investment in cameras by smartphone brand manufacturers to improve product performance, is expected to boost Sunny Optical’s smartphone-related business. Looking ahead, the company intends to implement business strategies specifically targeting customer demand-stickiness by leveraging on their technological and patent advantages, as the company learns to adapt to weakness in consumer demand caused by macroeconomic factors.
For the company’s most recent FY2022 period, revenue fell 11.5% while net profit decreased 51.7% y-o-y. Despite having poor relative top and bottom lines, the company’s cash flow was solid, with free cash flow only falling 1.5% and operating cash flow increasing 6.4% over the same period. Furthermore, Sunny Optical’s financial position improved from the previous comparable year with a lower gearing ratio. The company’s current ratio of 1.6 times, interest coverage ratio of 9.7 times and net cash position all reflect a strong balance sheet. At current prices, Sunny Optical trades at 2%, 22% and 18% discounts to global peers for its P/E, EV/Ebitda and P/B ratios respectively, indicating it is an attractive pick-up.
The stock has 33 “buy” calls, nine “hold” calls, and two “sell” calls, with a consensus target price of 50% above its current trading price.
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Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
