2H23 performance: Revenue recovered 16% year over year but net profit fell 36% year over year
Shunyu Optical Technology (Shunyu) 2H23 revenue increased 16% year over year, thanks to a 16.1%/13.8% year-on-year increase in its mobile phone/vehicle business revenue. However, net profit declined 36% year over year, mainly due to the decline in profit margin of the optical components and optical module business of 1.2%/5.3% year over year. Although demand related to mobile phones picked up in 2H23 due to Huawei's return to the smartphone market, the company's gross margin continued to drop 0.8 percentage points month-on-month to 14.1%, the lowest level since the company went public in 2007. Looking ahead, we recommend investors pay attention to (1) the upgrade cycle for new models such as the Huawei P70, and (2) the company's automotive business (especially optical modules) to add new targets. We lowered our 2024/2025 net profit forecast by 16%/21% to RMB 1,627 million/RMB 2,017 billion. Purchase based on the SOTP valuation method at a target price of HK$60.
Automotive lenses: Pricing pressure intensifies but gross margins remain steady
Shunyu 2H23's in-vehicle business revenue increased 13.8% year over year. Among them, vehicle lens shipments increased 6% year over year, and vehicle camera module revenue increased 34% year over year. At the performance meeting, management confirmed that automotive products are facing downward price pressure, but due to improved product structure, gross margin remained flat year on year. We expect automotive product sales to increase 21.6% year over year in 2024 (car lens/car camera module sales increase 10%/26% year over year), and gross margin of each segment is expected to remain the same year on year.
Mobile camera module: slow recovery, gross margin bottomed out
Sales of Shunyu's mobile phone product 2H23 increased 16% year over year; we expect sales of its mobile phone camera module to drop 3% year over year, and sales of mobile phone lenses to increase 13% year over year. Although the gross margin of its mobile phone lenses has rebounded (we expect the gross margin to rise from 15% of 1H23 to 19% of 2H23), the gross margin of optoelectronic products fell 2.5 percentage points month-on-month to 4.4%, mainly due to the drag of mobile phone camera modules. Management guided the mobile lens/camera module business to have a gross profit margin of 20%/5% in 2024, and shipments increased 5%/0% year over year. We expect its mobile phone product revenue to grow 23% year over year in 2024, mainly due to an increase in the market share of Apple Lens, which has a higher average selling price.
Maintain a “buy” rating, target price of HK$60
We lowered our 2024/2025 net profit forecast by 16%/21% to RMB 1,627 million/RMB 2,017 billion. We calculated a target price of HK$60 based on the SOTP valuation method, corresponding to a valuation of HK$28.8 per share for the automotive business, HK$12.8 per share for the AR/VR business, HK$5.2 per share for the mobile business, and HK$13.1 per share for other businesses. Our target price corresponds to 36 times the 2024 forecast PE. Maintain a “buy” rating.
Risk warning: Competition is intensifying; electric vehicle penetration is weaker than we expected.