Event: Shunyu Optical Technology organized an Investor Day event on June 18 and 19, 2024 to introduce technology trends and company development opportunities such as mobile phone lenses and camera modules, car lenses and camera modules, AR/VR, and discuss the potential growth of smart hardware under the AI wave. Our review is as follows:

Mobile phones: The company focuses on optical innovation and product structure improvement. We maintain the judgment that the company's mobile phone business shipments, ASP, and gross margin increased simultaneously throughout the year, and paid attention to the profit elasticity brought about by product restructuring. Demand for mobile phone optics showed a weak recovery trend in 2024. The company expects global/domestic smartphone sales to +3.5%/+0.4% year on year 24 to 11.69/276 million units. The global mobile phone camera installation coefficient will remain flat year on year, and folding screen phone sales will be +39% year over year. As high-end models restart the trend of optical innovation, the company will focus on optical innovations such as large image surface, glass plastic hybrid, variable aperture, and periscope in main camera/telephoto lenses, as well as technology applications such as lighter and thinner lenses in folding screen phones. Furthermore, in the medium to long term, AI applications will drive technological upgrades in mobile phone optical hardware in the fields of information perception and non-visible light, becoming another growth point in the future. From January to May '24, mobile phone lens/ camera module shipments were +25%/+22% year-on-year. We believe that the company's smartphone business recovery in 2024 is expected to surpass the early 24 guidance. At the same time, optical innovation, upgrading, and active strategic adjustments will help increase the share of high-end products this year, compounded by a recovery in operating rate. It is expected that the recovery in ASP, revenue and gross margin of the mobile phone business will be stronger than shipments throughout the year. Furthermore, the company's cooperation with North American customers and Korean customers is gradually deepening, and its share and product range are constantly expanding, and it will also become a growth point for the next two to three years.

Automotive: The automotive lens business continues to develop rapidly, and actively seizes opportunities for vehicle camera module technology upgrades and overseas growth. 1) The company's automotive lenses have a stable position at home and abroad. In 2023, the market share of automotive lenses/high-end ADAS lenses was 31%/nearly 50%, and the product introduction rate in domestic NEV brands reached 80%. The company continues to innovate in high-end ADAS lenses such as automotive glass plastic hybrid lenses and 17M automotive lenses, and has a leading edge in R&D and mass production experience; it is expected that in the future, the automotive lens business will continue to grow faster than the industry average for the past five years. 2) The trend of pixel upgrading and function expansion of vehicle camera modules continues, superimposing the company's vertical integration and ecological synergy advantages. The vehicle camera module business is expected to have broad room for growth; the company is actively developing a global layout, and the gradual development of overseas markets will help ease the price pressure brought about by the domestic competitive environment. 3) The company's lidar, AR-HUD, and smart headlight business currently has a low base and plenty of on-hand orders. It is expected that revenue and market share will grow rapidly in 2024, but profitability still needs to be improved during the new business expansion period.

AR/VR: Focus on the transformation of XR hardware in end-side AI applications, and continue to increase investment in the XR field, especially in the AR field. AR/VR technology is undergoing a trend evolution in early B-side professional applications - current C-end entertainment applications - future everyday office applications. End-side AI is expected to help XR become the next generation productivity tool and place higher demands on hardware. The company has a layout in terms of display, perception and interaction, and the whole machine, and actively participated in the technical route of leading companies. Previously, the official guide was to increase XR business revenue by +15% year-on-year in 2024. We believe that new products from major customers are expected to drive actual revenue beyond the guidelines. The company is expected to invest 1 billion yuan in the AR/VR field in 2024, lay out a 12-inch semiconductor optical test line in Shanghai, and concentrate the development and mass production of AR optical waveguides. We believe that the power of AI models will accelerate the development of the AR glasses industry. Optical devices account for a high proportion of the BOM cost of AR terminal equipment, and the emergence of future downstream explosives will create another growth pole for the company.

Maintain an “overweight” investment rating. The company's mobile phone business is expected to benefit from the recovery in mobile phone demand in 2024 and the trend of optical imaging innovation in high-end Android models. Lenses and camera modules will achieve a sharp rise in shipments, ASP, and gross margins; at the same time, the product share of North American and Korean customers is expected to continue to increase, opening up room for growth in the next three years. The integrated layout of the automotive business has obvious advantages, and automotive intelligence drives the growth of automotive lenses, camera modules, lidar, and projection display businesses. The forward-looking layout of the XR business and continuing to increase investment, especially in the AR field, is expected to achieve long-term growth along with the development of the XR market and the launch of new products from major customers. We expect the company's total revenue for 2024-2026 to be 370/419.47.4 billion yuan, net profit to mother of 19.24/30 billion yuan, corresponding EPS of 1.84/2.32/2.83 yuan, corresponding to the current PE price of 25.7/20.4/16.7 times, maintaining the “increase” rating.

Risk warning: Macroeconomic risks fall short of expectations, industry competition increases risks, mobile phone demand recovery falls short of expectations, automotive and XR business progress falls short of expected risks.