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Sunny Optical Technology Group: A clear buy at current prices

Thiveyen Kathirrasan
Thiveyen Kathirrasan • 4 min read
Sunny Optical Technology Group: A clear buy at current prices
Sunny Optical is a leading producer of camera modules used in handsets and other equipment.
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Optical components maker zooms in on fast-growing industries

Hong Kong-listed Sunny Optical Technology Group Co is a leading global integrated optical components and products manufacturer. The company is principally engaged in the design, research and development, manufacture and sales of optical and optical-related products. Such products include optical components such as handset lenses, optoelectronic products such as handset camera modules, and other similar ones used in optical instruments such as microscopes and intelligent inspection equipment.

The company focuses on the application fields of optoelectronic-related products, such as handsets, vehicles, security surveillance, virtual and augmented reality (VR/AR) and robots, combined with optical, electronic, algorithm and mechanical technologies.

In the most recent 1HFY2022 ended June 30, 2022, the company’s results were poor. Revenue fell 14.4% y-o-y, and gross profit was down by 28.8%. Despite this, the operating cash flow and free cash flow were still positive, indicating that the business is still cash-profitable. The bulk of its revenue, or 75%, is derived from handset-related products and 10% from vehicle-related products, with the rest deriving from VR/ AR-related products, optical instruments and digital camera-related products.

Sunny Optical’s optical component segment made progress and breakthroughs in smartphone-related, vehicle-related and emerging optics areas, such as new-generation VR-positioning lens sets and hybrid surrounding-view lens sets. Through continuous innovation and R&D, the company was also able to build competitive barriers in its optoelectronic products for smartphone-related, vehicle-related and robotic vision areas. Sunny Optical enhanced its market competitiveness for its optical instruments segment through new technologies and progress in the microscopes and intelligent equipment field.

The company’s moat was strengthened through authorised patents, which grew from 2,971 to 3,334, with another 4,064 pending approval. These patents mainly relate to handsets, vehicles, security surveillance, VR/AR, and robots. Sunny Optical’s expanded global layout has enhanced its large-scale and high-end manufacturing capabilities, such as having production bases outside China, like in India and Vietnam, with R&D centres in the US and South Korea.

See also: More upside for Indian equities despite rich valuations

The company’s outlook and strategy moving forward is its continued focus on differentiated breakthroughs in smartphone cameras, which is a very lucrative segment. A focus area is autonomous driving, as it has potential in optical applications, where Sunny Optical has expertise. Other focus areas include vehicle camera-related products and display-related products. Furthermore, the broad VR market prospects provide a clear business opportunity for Sunny Optical and other new opportunities in markets such as robotic vision.

The company’s one-year total return was –54.7%, perhaps inflated by the seemingly poor results in the latest period. Sunny Optical has had over five years of positive income, operating cash flow and free cash flow, as shown in the chart. Financial safety-wise, Sunny Optical has strong liquidity with a current ratio of 2.6 times, and solvency is not an issue as the company is net cash. In terms of yield, the company’s earnings and operating cash flow are 3.8% and 3.2%, respectively, which is slightly more attractive than the risk-free rate of 2.9%. Compared to regional peers, Sunny Optical trades cheaply, with a 1% and 12% discount for its P/E and EV/Ebitda ratios, respectively, indicating that it is an attractive pick.

See also: Awaiting catalysts: China’s post-reopening recovery has disappointed but experts see better prospects ahead

Sentiments-wise, the company has 33 “buy” calls, nine “hold” calls, and three “sell” calls, with a consensus target price of around 10% above its current trading price of HK$99.45. Based on our in-house valuations of the company, we believe that the intrinsic value of the company is at least 30% above its current trading price. Sunny Optical has a great outlook and is still cash-profitable; it is a clear buy at current prices.

Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.

Photo Credit: Bloomberg

Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.

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