The company issued an announcement regarding the signing of the “Acquisition Intent Agreement” to divest the camera module related business for specific overseas customers. The transaction partner was Wentai Technology. After the divestiture, the company will focus on businesses centered on Android optics (lenses, modules, 3D ToF, etc.), which is expected to accelerate penetration among mainstream customers. We forecast the company's EPS to be 0.32/0.56/0.74 yuan in 2020-2022, maintaining the “increase in holdings” rating.
The company signed an “Acquisition Intent Agreement” with Wentai Technology to divest the camera module business for specific overseas customers. Assets related to the transaction include 100% equity of Guangzhou Delta (camera module business for specific overseas customers, 2019 revenue of 5.1 billion yuan, net profit of 110 million yuan, revenue of 3.4 billion yuan for the first three quarters of 2020, net profit of 270 million yuan), and operating assets owned by the company and the holding company in China and overseas (other than Guangzhou Delta) that supply camera-related businesses to specific overseas customers (including fixed assets and intangible assets). The total transaction price is 10* Guangzhou Delta's 2020 audited net profit+operating asset transaction price. The company has already divested its Android touch related business in the early stages. This transaction plans to further divest camera module related businesses from specific overseas customers. Both require large fixed asset investment. After the divestment in the future, it is expected to be lightweight, focusing on businesses centered on Android optics (lenses, modules, 3D ToF, etc.). Overall, the company's optical module business is currently highly recognized by Android customers, and its position as the main supplier for mainstream customers is stable. The lens business is gradually expanding and entering high-end products, which is expected to accelerate penetration among mainstream customers.
The non-public offering plan has been approved by the Securities Regulatory Commission, and the subsequent camera business is expected to actively expand production. At the end of 2018, the company acquired Fuji-Tianjin and entered the field of mobile phones and vehicle lenses. The 2020 non-public offering plan was approved by the Securities Regulatory Commission. The capital raised is to invest 2.36 billion yuan in the high-pixel optical lens construction project, accounting for 30% of the total investment. The company shipped 132 million lenses in the first three quarters of 2020, +29% over the same period last year. We expect the company's current lens production capacity to be around 30kk/month, and is expected to reach 80kk/month by the end of 2021. In terms of products, the company currently includes 3P/4P/5P/6P/7P lenses, and 7P 108M optical lenses successfully completed small-batch verification in November 2020. We expect the company's lens revenue to reach 1 billion yuan in 2020 and to exceed 2 billion yuan in 2021.
Focusing on the main camera module business, the epitaxial layout is 3D ToF, fingerprint recognition, and smart vehicles. (1) Camera business: The company's camera module shipments in the first three quarters of 2020 were +21.81% year-on-year to 553 million units. Looking ahead, we expect the penetration rate of mobile phones with three cameras and above to reach about 56% year-on-year in 2021. At the same time, the unit price will increase several times over double cameras. The company plans to divest specific overseas customer businesses with low profit margins and focus on Android's main business, which is expected to gradually increase its profit level in the future; (2) 3D ToF: Shipments in the first three quarters of 2020 were +38.96% to 79 million units. The company has the production capacity of 3D structured light and ToF modules, and is the main supplier of 3D ToF modules in China; (3) Fingerprint recognition business: 2020H1 shipments were -9% year-on-year to 116 million units, mainly due to the contraction of the traditional capacitive fingerprint market and the penetration of off-screen fingerprints falling short of expectations; 4) In-vehicle Business: The company's business includes ADAS and vehicle cameras. Currently, it has obtained supplier qualifications from more than 20 domestic automobile manufacturers. The acquisition of Fuji Tianjin has also further strengthened the company's layout in terms of in-vehicle cameras. The revenue ratio of the automobile business is expected to gradually increase in the future.
Risk factors: Asset divestment and non-public offering projects fell short of expectations; industry demand fell short of expectations, core client revenue fell short of expectations, increased competition led to a decline in gross margin, and the consumer electronics industry continued to decline.
Investment advice: The company is a leading consumer electronics optical module leader in China. If divestment losses trigger the completion of the business, it will further focus on the main optical business. In the future, as the transaction is implemented, the company is expected to achieve high certainty of growth. Optical innovations such as multi-camera, 3D sensing, and under-screen fingerprinting will continue in the future, and it is expected that the company will continue to benefit. We maintained the company's EPS forecast for 2020-2022 at 0.32/0.56/0.74 yuan, maintaining the “increase in holdings” rating.