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Tri-camera smartphones may reverse $15-billion Sunny Optical wipeout

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SUNNY OPTICAL Technology Group Co. was set to end 2018 as one of Hong Kong’s biggest losers, an unnerving fall for a smartphone parts-maker that minted millionaires out of janitors and chefs during a remarkable decade-long run. Some are betting it’ll be back to its winning ways before 2019 is over.

The first whiff of trouble emerged in August, when it reported disappointing margins, stoking fears the smartphone boom was ending. That worsened a months-long backslide that wiped about HK$119 billion ($15 billion) off its market value since a June peak as investors dumped technology stocks. Sunny’s the third biggest loser on Hong Kong’s benchmark index in that time, and the seventh worst-performing stock on MSCI’s main Asian technology gauge.

Yet that selloff is unwarranted given its prominence as the supplier of choice to names from Huawei Technologies Co. to Xiaomi Corp., investors say. Founded three decades ago by factory worker Wang Wenjian, Sunny has wilted as evidence mounted that consumers are finally cooling on mobile devices. But that perspective fails to recognize Sunny’s technology leadership, or acknowledge the trend toward cramming three cameras into devices — one of the few bright spots for an otherwise bleak 2019 smartphone industry outlook, they argue. Optical components are also pervading new fields, such as cars that increasingly load up on sensors and cameras in the interest of safety.

“If you just look at smartphones, it’s going to be a pretty barren 2019. But when it comes to the cameras, that’s where the opportunity lies,” said Kenneth Lo, a fund manager at KGI Securities Investment Trust who counts Sunny among his top 10 ideas. “We’re talking about a shift in phone specs and an upgrade trend that will propel optical equipment companies.”

Cameras have become one of the biggest and most-compared selling points of smartphones, as brands from Samsung Electronics Co. to Apple Inc. race to equip gadgets with ever more powerful visuals. Huawei — which knocked Apple off its no. 2 perch — got the ball rolling this year when it unveiled a triple-camera device. Multiple cameras working in tandem are said to enhance zoom — addressing a perennial weakness of flat mobile devices — and produce sharper images.

The advent of “tri-camera” Android devices should more than double growth in demand for optical lenses to 19% in 2019, while appetite for modules should average 18% over 2018 to 2020, estimates Frank He, head of A-share tech hardware research for HSBC Qianhai Securities Ltd.




“The rapid technical evolution requires strong R&D capability and significant financial resources,” he said. Sunny “is set to gain share from overseas peers.”

Jeff Pu, an analyst at Guangfa Securities, sees Sunny’s valuation benefiting from the trend to three cameras. He expects 15% of global smartphones to sport three cameras next year, from just about 1% now. Pu isn’t alone: 30 analysts covering Sunny on average expect the stock to rise 46% over the next 12 months.

“Almost every major smartphone brand will adopt tri-cameras next year,” he said. “That increases demand for modules and lens, and Sunny will benefit both ways.”

One wild card: Huawei, which accounts for almost a fifth of the company’s revenue, helped fuel Sunny’s ascent. But the Chinese telecoms giant is now grappling with resurgent concerns about the security of its products and it’s uncertain how that might impact the business.

More fundamentally, much depends on how rapidly triple-cameras become the standard. On that score, Sunny — while one of the world’s largest optical component designers — has to contend with nimble rivals such as Largan Precision Co. or O-Film Tech Co. And the industry’s cyclical nature means components popular early on typically get commoditized.

That’s why Sean Huang, a Taipei-based fund manager with Jih Sun Securities Investment Trust Co., is among those still reluctant to dive into a company that before its 2018 selloff had grown almost 100 times over the past decade.

“I will consider reviewing Sunny Optical 2Q next year as it will benefit from demand for tri-cam and auto cameras on smart cars,” he said. “I may add it back if the demand is strong.” — Bloomberg