In the first week of 2024, mobile phone giant Apple suddenly suffered a series of downgrades from investment banks, which dealt a "hammer" to the already sluggish prospects of the smartphone industry.
This week, investment bank Piper Sandler downgraded Apple's rating twice, pointing out that Apple's mobile phone sales growth has peaked, and was worried that its mobile phone inventory in the first half of 2024 was too high, and downgraded its rating from "overweight" to "neutral"; Barclays also downgraded Apple to "underweight", believing that the poor sales of the iPhone 15 will continue, and although the iPhone 16 has not yet been launched, it is not expected that there will be any major upgrades to stimulate consumer upgrading, and Apple is expected to fall by more than 15% in 2024.
As a well-known fruit chain leader, Sunny Optics (02382), which has been supplying camera modules to Apple, also suffered from the pond fish, recording "four consecutive declines" at the beginning of the year, with a cumulative decline of more than 10% in 4 working days.
Compared with the high of HK$119 at the beginning of 2023, Sunny Optical's share price has almost "halved", and it is in the lowest valuation range in the past five years. However, whether the low valuation means that the left side layout opportunities should be carefully considered from more aspects such as business and market.
Revenue and net profit both declined, when will the fundamentals "pick up"?
According to Zhitong Financial APP, Sunny Optical Technology is engaged in the design, research and development, production and sales of optical and optoelectronic related products, and its main products include three categories: first, optical parts (vehicle lenses, vehicle lidar ("lidar") optical components, VR spatial positioning lenses, mobile phone lenses, digital camera glass spherical lenses and other optical components); the second is optoelectronic products (mobile phone camera modules, 3D photoelectric modules, vehicle modules and other optoelectronic modules); The third is optical instruments (microscopes and intelligent testing equipment, etc.).
Although Sunny has actively transformed and promoted the in-vehicle business in recent years, as of the first half of 2023, mobile phone-related products still account for about 67.9% of the revenue, continuing to be an important revenue pillar of the company. Therefore, dragged down by the still sluggish market in the smartphone industry, Sunny Optics' revenue and net profit continued to decline in the first half of the year, and various financial data were "bleak".
Specifically, in the first half of the year, Sunny Optics achieved revenue of 14.28 billion yuan, a year-on-year decrease of about 15.9%; net profit was 437 million yuan, a year-on-year decrease of about 67.8%. Among them, the revenue of mobile phone-related products was 9.69 billion yuan, a year-on-year decrease of 24%; The revenue of automobile-related products was 2.47 billion yuan, a year-on-year increase of 44%, accounting for about 17.3% of the revenue.
Affected by the weak downstream consumer demand, the company's gross profit margin also fell simultaneously. In terms of business, the revenue of optical parts business decreased by 1.8% year-on-year to 4.318 billion, and the gross profit margin of the segment decreased from 35.5% to 26.0%; The revenue of optoelectronic products business decreased by 21.3% year-on-year to 9.737 billion, and the gross profit margin of the segment decreased from 11.6% to 6.9%.
However, with the signs of recovery in the smartphone market in the second half of the year, the monthly sales of Sunny Optical's mobile phone-related products have also rebounded. In November 2023, Sunny Optics shipped 1.924 million glass spherical lenses, a year-on-year increase of 48.9%; mobile phone lens shipments were 118 million pieces, a year-on-year increase of 29.3%; The shipment of mobile phone camera modules was 51.998 million pieces, a year-on-year increase of 49.9%. In addition, due to the inventory control carried out by customers at the end of the year, the shipment volume of automotive lenses was 6.784 million units, down 13.1% month-on-month and 8.4% year-on-year.
In this regard, Morgan Stanley issued a report pointing out that the company's mobile phone lens and camera module shipments in November were better than expected, and the annual delivery volume may exceed the management's annual target. At the same time, based on the low base effect in the same period, the automotive lens can easily achieve the annual target growth of 15%.
Smartphone industry shipments are expected to improve in Q4
Looking at the performance of the entire consumer electronics industry in recent years, it is mainly under pressure from two aspects: the global economic recovery is less than expected, which makes consumers' purchase demand decline sharply; The lack of breakthrough innovation in the smartphone industry has also significantly extended the replacement cycle for consumers.
According to Zhitong Financial APP, with the industry data in the third quarter showing positive signs of bottoming out, there is a high degree of certainty that the smartphone market demand will usher in a moderate recovery in 2024.
According to Counterpoint Research's Smartphone 360 Report's forecast for global smartphone shipments, global smartphone shipments are expected to decline by 5% year-on-year in 2023 to reach 1.2 billion units, the lowest level in nearly a decade. However, shipments in the fourth quarter of this year will increase by 3% year-on-year to 312 million units, mainly driven by the recovery of demand in China and emerging markets such as the Middle East and Africa (MEA) and India. Counterpoint expects global smartphone shipments to increase by 3% year-on-year in 2024, forming a bottom reversal trend.
According to TrendForce, global smartphone production in the third quarter was approximately 308 million units, up 13% quarter-on-quarter, which was less than the pre-pandemic level but increased by about 6.4% compared to the same period in 2022, ending an eight-quarter annual recession cycle. According to its forecast, the total output of smartphones in the fourth quarter has the opportunity to increase by 5~10% quarter-on-quarter, and the total output of smartphones in 2023 will be about 1.16 billion units.
Although the recovery momentum is established, it is clear that the smartphone industry has not returned to the high growth situation of the past. Observing the technological innovation trend of the industry in 2024, most of the new technologies such as 5G networks, folding screens, cameras, and the Internet of Things are showing an embarrassing situation of "applauding but not applauding", which has failed to bring a significant boost to market demand. In contrast, due to the popularity of the GPT model this year, many mobile phone manufacturers have turned to bet on the "AI + mobile phone" track.
At the recent AI Forum 2023, Samsung unveiled its self-developed generative AI model "Samsung Gauss" (Samsung Gauss), and revealed that it will introduce Galaxy AI in its Galaxy flagship phone. In terms of domestic manufacturers, the new vivo S18 series released by vivo will be equipped with a blue heart model, which is the industry's first batch of mobile phones with a 10 billion model in the terminal.
It is worth noting that, not to mention that the current AI terminal applications have not yet reached the mature stage and the hardware cost remains high, it is still unknown whether AI can drive consumers to change their phones and bring actual sales growth to the mobile phone industry. However, it is certain that as mobile phone manufacturers allocate more costs to AI and computing hardware, the profitability of optical lenses, including Sunny Optics, may be further weakened.
Will the automotive and XR business become a new focus?
Specific to the business level of Sunny Optics, although the main business of smart phones will most likely continue to be under pressure, "the east is not bright and the west is bright", and the automotive and XR business may become an unexpected growth point.
With the gradual alleviation of the shortage of chips in the automotive supply chain and the continuous penetration of intelligent driving, the company's on-board business revenue in the first half of the year was 2.471 billion yuan, a year-on-year increase of 43%, the revenue accounted for 17% (a year-on-year increase of 7pcts), and the shipment of on-board lenses reached 47 million pieces (a year-on-year increase of 25.2%).
According to Zhitong Financial APP, the automotive industry's upgrade trend to "electrification, networking, and intelligence" has driven the increasing demand for optical and other sensors. According to the "2023 Automotive Camera Industry Tier2 Research Report" released by Zosi Automotive Research, Sunny Optics still occupies the first echelon of automotive lens companies, maintaining a large gap with competitors, and it is expected that Sunny will maintain a 40% market share in 2023.
Benefiting from the high technical barriers to automotive lenses and the company's leading market share, the growth of the automotive business is expected to partially offset the decline in the smartphone business. In addition, Sunny has also laid out sub-sectors such as LiDAR, head-up display ("HUD") and smart car lights, which will also benefit from the technological upgrade trend of the automotive industry.
Affected by the cold sales of VR equipment market, Sunny Optics' XR business revenue in the first half of the year was 469 million yuan (down 29% year-on-year), accounting for 3.3% of revenue (down 0.6pcts year-on-year).
The XR industry in 2023 is more "calm" than in previous years, and even Apple's release of its first spatial computing headset, Vision Pro, has failed to bring much heat to the industry, and many tech giants such as Google have quietly suspended or canceled the research and development of XR products.
It can be seen that the entire XR industry is still in its infancy, not only is the technology not mature enough, the market scale is small, and the corresponding content, scenarios and industrial chain ecology are still blank. In this case, some XR companies have begun to change their strategies, transforming XR products from independent hardware products to accessories and extensions of smart devices such as mobile phones.
No matter from the perspective of the industry or the scale of Sunny Optics' own business, XR is still too early to really contribute to a considerable increase in performance.
brief summary
Although there is no shortage of bright spots in the automotive business, it is difficult for Sunny Optics to achieve a significant performance reversal in the short term due to the overall "water reversal" of the smartphone industry. Considering the risk that the recovery of the smartphone industry is less than expected, the company's vehicle business is not progressing as expected, and the stock price upward momentum is not sufficient, the current Sunny Optics may lack obvious attraction to investors in the secondary market.