Asia's Apple supply-chain stocks such as Sunny Optical and AAC Technologies have slumped this week amid the global selloff of technology stocks. However, Daiwa remains upbeat on smartphone camera supply chain stocks with the rise of the multi-cam trend and the emergence of 3D sensing technology, which the broker says will be the next key driver, and suggests the recent pullback in the shares could be a buying opportunity.
Analyst Kylie Huang expects the adoption of 3D technology in Apple's flagship iPhone X to trigger 3D sensing being adopted more widely by top-tier brands like Huawei, Oppo, Vivo, Xiaomi and Samsung. Huang forecasts shipments of 3D-sensing adopted smartphones to rise to 200/425/618m in 2018/19/20E, respectively, from 34m in 2017E and zero in 2016.
Given the growing importance consumers place on image quality, Huang expects expects the adoption of dual-cam technology to rise further. She now forecasts shipments of dual-cam adopted smartphones to rise to 502/690/856m in 2018/19/20E, respectively, from 268m in 2017E (vs. our earlier forecasts of 255m in 2017E and 420m in 2018E).
Three stocks Huang suggests will benefit most from these trends are: Largan, the leader in lens sets; Sunny, the major camera module and lens set provider; and AAC, for which we see lenses as a new driver. The recent pullback in the shares of the three companies offers a buying opportunity, Huang suggests:
Largan Precision (3008.TW). We view Largan as well-positioned to benefit from the dual-cam adoption trend, driven by its broader adoption of dual cams in mid-range models, in addition to high-end models. As such, we forecast dual-cam-adopted smartphone shipments of 502/690/856m for 2018/19/20, respectively, from 268m in 2017E. We also see further upside for our earnings forecasts for 2019 and beyond for Largan from 3D sensing. We believe Largan is in talks with major customers regarding supplying them with Tx lenses in 2019, which would be a potential growth driver for Largan, in addition to its current Rx lens sets product. We reaffirm our Buy (1) rating on the stock with a new 12-month TP of TWD5,800 (from TWD6,680), now based on a PER of 20x (from 21x PER previously and vs. its past-5-year range of 8-24x), applied to our revised 1-year forward EPS forecast, to reflect muted near term sentiment due to lukewarm iPhone demand and China smartphone inventory adjustments. We view the recent pullback in the share price due to the market resetting expectations for the iPhone X as presenting a further opportunity to accumulate.
Sunny Optical (2382.HK). In addition to its increasing dual-cam adoption and ongoing camera spec upgrades, Sunny Optical stands to be a major beneficiary of the rising adoption trend of multi-cams in smartphones, in our view. We forecast 3D-sensing-adopted smartphones to provide an additional market size of USD13.5bn for the camera module suppliers by 2020, and view Sunny as well-positioned to benefit from this trend on the back of its leading position in handset camera modules (HCM). We expect 3D sensing to contribute 4-12% of its revenue each year in 2018-19E. Accelerating dual-cam adoption should also provide strong growth drivers for Sunny in both HCM and handset lens sets. For vehicle lenses, we see Sunny maintaining its leading position and expect it to continue benefiting from the multi-cam trend in the automotive segment on rising demand for ADAS. We reaffirm our Buy (1) rating and raise our 12-month target price to HKD165 (from HKD160), on an unchanged PER of 36x, compared with its past-3-year trading range of 10-36x, applied to our revised 1-year-forward EPS forecast. We view recent share-price pullbacks due to China inventory adjustments in 4Q17-1Q18 for China brands (OPPO/Vivo) as a good opportunity to accumulate given Sunny is less impacted by this due to its strong relationship with Huawei.
AAC Technologies (2018.HK). We are positive on AAC and view it as well-placed to benefit from multi-cam adoption for 3D sensing in smartphones due to its recent breakthrough in optics. AAC has recently recorded a strong production yield for its lens products with major project wins from top-tier China brands in 2H17, and we believe the company is in talks with a Korea customer and likely to see more projects/client wins in 2018. In addition to the company's intact revenue growth momentum from the acoustics and haptics business, we see further upside from 3D sensing, and a good possibility that its WLO or hybrid lens solution will tap into the demand for Tx lenses for 3D sensing from major smartphone customers in 2019, which we have not yet factored into our forecasts. We reaffirm our Buy (1) rating and raise our 12-month target price to HKD200 (from HKD195), based on an unchanged PER of 27x, compared with its past-3-year trading range of 13-25x, applied to our revised 1-year-forward EPS forecast. We view recent share-price pullbacks due to market resetting expectations for iPhone X going into the quiet season and inventory adjustments for China brands as a good opportunity to accumulate.