Short term pain, long term gain

Investment Rating - The report maintains a BUY rating for Sunny Optical with a target price of HKD 49.37, representing an upside of 31.8% from the current price of HKD 37.45 [1]. Core Insights - Sunny Optical's FY23 results were disappointing, with revenue and net income reported at RMB 31,681 million and RMB 1,099 million, reflecting year-on-year declines of 4.6% and 54.3% respectively. The results were below market consensus and the company's own estimates, primarily due to weak smartphone demand, ASP and GM pressures, and increased interest expenses [1][2]. - The company is focusing on improving its product mix to enhance ASP and GM, with expectations for a gradual recovery in global smartphone shipments in FY24E, driven by flagship models from top-tier clients [3][5]. Company Update - Sunny's high-end product contribution has stabilized, with a notable performance in the 6P+ lens segment, which accounted for 32% of the high-end product mix in FY23. However, overall high-end product shipments declined by 20% year-on-year [2]. - The company provided conservative guidance for FY24E, expecting a 5% year-on-year growth in HLS shipments while HCM shipments are anticipated to remain flat [3]. - Sunny's investment in R&D has increased, with R&D expenses reaching approximately RMB 2.6 billion, accounting for 8.1% of total revenue, and FY24E CAPEX is guided to increase by 20% year-on-year to around RMB 3.0 billion [6][7]. Financial Performance - The report indicates a significant reduction in FY24E-25E EPS estimates by 22.4% and 32.7% respectively, due to lower sales and GM assumptions. Despite this, a mild recovery is expected in FY24E [7][10]. - Revenue for FY24E is projected at RMB 35,823 million, with a gross margin of 22.6%, reflecting a decrease of 590 basis points compared to previous estimates [10]. Market Position and Outlook - Sunny Optical holds a dominant position in the Chinese handset market with approximately 50% market share and is well-positioned to benefit from the increasing adoption of automotive products and non-smartphone segments, which accounted for over 30% of total revenue in FY23 [4][7]. - The automotive segment continues to show strong growth, with vehicle-related product sales increasing by 28.6% year-on-year, and the company expects to reach RMB 2.0 billion in automotive CCM revenue for FY24E, representing a 25% year-on-year growth [6].