1H22A's performance fell short of expectations, with reduced regulations and declining capacity utilization rates dragging down profitability. Shunyu Optical Technology released 1H22A financial report. The company achieved revenue of RMB 16.97 billion, down 14.4% year on year, lower than market expectations of 3.7%. Among them, revenue from optical components was RMB 4.04 billion (+1.3% year-on-year), and revenue from optoelectronic products was RMB 12.3.7 billion (-19.2% year-on-year); net profit attributable to the mother during the period fell 49.5% year on year to RMB 1.36 billion, which was at the lower end of the previous guidance range (1.34 billion to 1.48 billion yuan), lower than market expectations of 18.7%. Affected by factors such as reduced smartphone regulations and declining capacity utilization due to weak demand, the company's 1H22A gross margin was 20.8% (year-on-year - 4.1pct, -0.7pct month-on-month). The company said that since the recovery prospects of 2H22E Android customers are not clear, the overall gross margin of the FY22E will show a downward trend. Among them, the gross margin of mobile camera module/lens will fall to 10%/30-35%, and vehicle lens gross margin is expected to remain at 40% as supply chain disturbances gradually ease.

Mobile optics: The short-term prospects for Android recovery are bleak, waiting for marginal recovery to be brought about by product and customer structure optimization. Affected negatively by weak demand for Android phones and downscaling regulations by mobile phone manufacturers, the company's 1H22A phone lens and camera module shipments fell 9.1%/20.1% year-on-year to 650 million/290 million units, respectively. Continuing the trend of 2H21A year-on-year decline, the unit price of mobile phone lenses fell 10-15% year on year, further dragging down the overall performance of mobile phone optics. The company management said that considering that the weak situation on the Android terminal has not improved significantly, it is expected that FY22E phone lens and camera module shipments will record year-on-year declines of -15% and -20% respectively (previous guidelines: 5-10%/10-15%). The competitiveness of 1H22A's high-end products has increased significantly. The proportion of mobile phone lens shipments of 6P and above increased to 30.1% (+7.3pct on year, +1.6pct on month), and the proportion of potential and large image surface module shipments increased to 13.8% (+6.8pct on year, +7.5 pct month-on-month). Mass production of 200 million pixel large images, double freeform lenses, and ultra-wide-angle lenses for double freeform lenses was achieved during the period. We believe that as the company's product structure continues to be optimized, the company's mobile phone lens and S customer's mobile phone lens modularization scale increases, the company's mobile phone optics business is expected to welcome an increase in the modular scale of mobile phone lenses for A customers and mobile phone lenses for S customers Marginally mild recovery.

Automotive and emerging optics: The automotive business is steady, medium and positive, and the VR/AR business continues to guide growth. The 1H22A car camera was disrupted by supply chain issues. Shipments increased slightly by 0.8% year-on-year to 37.61 million units, and the global market share remained above 30%. With the accelerated penetration of intelligent automobiles and the gradual improvement of supply chain disturbances in the second half of the year, vehicle cameras are expected to return to a steady growth channel. The company expects FY22E automotive camera shipments to grow 10-15% (previous guidelines: 20-30%). The development of the new in-vehicle business is steady and positive. The 8MP environmental sensing module has been mass-produced and three new fixed-point projects have been added. Lidar and HUD have obtained a total of 30 and 20 fixed-point projects, which will help the company seize considerable growth space in the long-term trend of automobile intelligence. In terms of emerging products, the company's 1H22A VR/AR related product revenue increased 10.5% year-on-year to 660 million yuan. The VR pancake module, which is lighter and thinner than the previous generation of Fresnel lenses, has already been mass-produced. The company maintained the FY22E VR/AR product revenue growth rate of about 50%.

Maintaining the “buy” rating, the target price is HK$136.0 per share. We anticipate that FY22E's revenue and profitability will still be dragged down by negative factors such as smartphone downgrades and weak demand for Android devices, while the increase in the share of smartphone optical products in overseas customers and the month-on-month increase in in-vehicle business are expected to make up for the negative factors to some extent. We adjusted the FY22E-FY24E revenue forecast to 333.3/382.3/4363 billion yuan, up -11.1%/+14.7%/+14.1%, respectively; adjusted FY22E-FY24E's net profit to the mother to 30.3/42.5/4.90 billion yuan. We adjusted our target price to HK$136.0 per share, corresponding to FY23E's price-earnings ratio of 28.8 times or the PEG level of 0.7 times.