Analysts

[Table_Author]
● Mo Wenyu ● Olivia Niu
(8621)61118752 (852)2823 0415
mowy@cjsc.com.cn niuzhuolin@cjsc.com.hk
SFC No. BQT625 SFC No. BQG669

Please Read the Ratings Definitions and Important Disclosures

 [Table_Title1]
Sunny Optical Technology (2382.HK)

Foreseeable Growth As Global Optics Leader

[Table_Title]

[Table_Summary]
 Invisible winner in global optics business

Sunny Optical (“SO”) is the world leading optics manufacturer. The company was founded in 1984
and was listed on HKEX in June 2007 (Ticker: 2382.HK). SO principally engaged in the design
and manufacturing of optical products, covering smartphone business, automobile business and
so on. SO delivers rapid growth during past decades with revenue rockets more than 15 times
while market value jumped nearly 100 times. We deem SO's rapid growth is attributed to rise of
[Table_Invest]
Publish Date 2021-08-19
China Android brands and its “Mingpeijue” strategy which adheres to “customer-centered”
Report Type Company Initiation
principle.
Rating BUY
Last Price HK$215.40  Smartphone camera business: ready to monetize upgrade momentum

The global smartphone market enters into stock competition stage as the shipment volume is
pacing down and SO is ready to monetize the upgrade momentum. Smartphone makers flocks
into product hardware upgrading to create differentiated portfolio. Optics function has become the
main battlefield for smartphone upgrades including multi-camera design, 3D sensing design,
large size image design, etc. SO’s smartphone business is divided into Headset Camera Modules
(HCM) and Handset Lens Sets (HLS) segment. We believe that the catalysts for its camera
module business come from best-in-class product innovation and mass-production capabilities to
capture incremental orders from high-end smartphone. And the catalysts for handset lens set
business attribute to fast-developing in-house R&D achievements.

 Automobile camera business: step into fast-growing stage with solid

position

With the ascending penetration of electric vehicles, the functions of automotive cameras are
diversified and the EVs equipped with multi-camera becomes popularity. The basic autonomous
driving function requires multiple cameras to realize automatic cruise, automatic parking, while it
also urges higher resolution of cameras to detect more information in autonomous driving
environment. SO is the world’s largest supplier of Vehicle Lens Set (VLS) with wide-covered
product reserves. We deem it will benefit from EV sector’s foreseeable growth riding early mover
advantage and long-established recognition with global reputable vehicle makers.

 VR/AR camera business: strategic deployment on emerging market

We consider the VR/AR application market relies on hardware device penetration and extension
of application scenario. SO has stepped into VR/AR products strategically and shows quick and
innovative response to current clients. We believe SO will benefit from VR/AR market’s potential
growth in long run.
[Table_Risk]
Risks:
1. Failure in smartphone optics upgrading.
2. Vehicle camera optics upgrading below expectation.

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Company Initiation

Content
Invisible winner in global optics business ..................................................................................... 5
Beneficiary of China smartphone revolution .................................................................................................. 5
Topline delivers resilient growth throughout COVID-19................................................................................. 6
Intensive R&D investment to enhance competitiveness ............................................................................... 8
Smartphone camera business: ready to monetize upgrade momentum .................................... 10
Smartphone camera market fueled by optical upgrades wave ................................................................... 10
Higher resolution for both main and front camera .......................................................................................................... 10

Better image quality with more lens pieces and G+P mix ............................................................................................... 11

Better user experience with multi-camera functions ....................................................................................................... 12

SO targets to be global no.1 HCM manufacturer ........................................................................................ 14

Camera upgrades brings great challenge to module suppliers ....................................................................................... 14

HCM giants to expand market share in the industry reshuffle ........................................................................................ 15

SO targets to be no.1 module suppliers as the high-end product shipment ramps up ................................................... 15

Largest HLS vendor for Android, eyeing on Apple orders ........................................................................... 17

SO is the largest lens vendor for Android smartphone ................................................................................................... 17

Narrowing technology gap with Largan attracts Apple orders on track ........................................................................... 18

Automobile camera business: step into fast-growing stage with solid position .......................... 21
SO maintains leading position to harvest sector growth ............................................................................. 21
Rising automotive camera market leaves great potential for optics application ......................................... 21
VR/AR camera business: strategic deployment on emerging market ........................................ 26

Figures and Tables

Figure 1: SO’s development path .................................................................................................................................5
Figure 2: SO’s revenue (100 million yuan) ...................................................................................................................5
Figure 3: SO’s market value (100 million yuan)............................................................................................................5
Figure 4: Global smartphone market share pattern in 2018Q1-2021Q1 ......................................................................6
Figure 5: SO’s income breakdown over 2006-2020 (in terms of product) ....................................................................7
Figure 6: SO’s income breakdown over 2018-2020 (in terms of downstream sector) .................................................7
Figure 7: SO’s revenue balloons up during 2006-2020 (in terms of product, RMB in million) .....................................7
Figure 8: SO’s HCM shipment volume is climbing yet sector paces down (’000) ........................................................7
Figure 9: Shipment volume of periscope modules and large image size modules with high margin surges ...............8
Figure 10: Sector comparison in terms of gross margin ...............................................................................................8
Figure 11: Comparison of R&D investment (RMB in million) ........................................................................................8

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Company Initiation

Figure 12: Global smartphone shipment volume remains stable ...............................................................................10

Figure 13: BOM cost per iPhone increases significantly ............................................................................................10
Figure 14：The camera upgrading of Huawei’s P series ........................................................................................... 11
Figure 15: Xiaomi's first 7p lens and first 8p lens .......................................................................................................12
Figure 16: Average number of cameras per smartphone climbs over 2015-2020 .....................................................13
Figure 17: Multi-camera penetration during Q1’18-Q3’20 ..........................................................................................13
Figure 18: Global camera module market share ........................................................................................................15
Figure 19: HCM supplier consolidation driven by smartphone market .......................................................................15
Figure 20：Tri-camera module of SO .........................................................................................................................16
Figure 21：5X-zoom periscope camera module of SO ..............................................................................................16
Figure 22: SO’s HCM shipment volume movement ...................................................................................................16
Figure 23: SO’s ASP for HCM product is higher than O Film .....................................................................................16
Figure 24: Synergy trend between module and lens business ...................................................................................17
Figure 25: SO’s internal transaction value (CNY’000) ................................................................................................17
Figure 26: SO’s HLS shipment volume shows seasonal volatility ..............................................................................18
Figure 27: Optical business comparison within industry (million yuan) ......................................................................18
Figure 28: The number of SO’s patent surpassed that of Largan’s in recent year .....................................................18
Figure 29: The proportion of SO’s invention patents is lower than that of Largan (2020) ..........................................18
Figure 30: The proportion of high-resolution in SO’s optical shipments is gradually approaching Largan ................19
Figure 31: The proportion of SO’s value-added handset lens sets has increased .....................................................19
Figure 32: SO's overseas revenue has growth potential to boost overall earning (Inner ring: 2019, Outer ring: 2020)
....................................................................................................................................................................................20
Figure 33: SO’s vehicle lens set for rear view camera ...............................................................................................21
Figure 34: SO’s VLS shipment volume remains prosperity ........................................................................................21
Figure 35: 8MP-pixel lens’s maximum perceived distance is 3 times of 1.2MP-pixel lens’s (meter) .........................23
Figure 36: Nio’s 8MP HD camera layout ....................................................................................................................24
Figure 37: Different electronic end products shipment in the last five years（million） ............................................26
Figure 38: SO’s Fresnel lens product .........................................................................................................................27

Table 1: SO’s development in handset lens sets upgrading .........................................................................................9

Table 2：Glass lenses perform better than plastic lenses .........................................................................................12
Table 3：Multi-camera solution of major smartphone brands ....................................................................................13
Table 4: Camera module encapsulation technology evolution ...................................................................................14
Table 5: Typical category of vehicle camera ...............................................................................................................22
Table 6: Camera layout for typical vehicles ................................................................................................................22
Table 7: Autopilot computing platform’s computations and representative vehicle models........................................24

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Company Initiation

Invisible winner in global optics business

Beneficiary of China smartphone revolution
Sunny Optical is the world leading optics manufacturer. The company was found
in 1984 and was listed on the main board of the Hong Kong Stock exchange in June
2007 (Ticker: 2382.HK). SO principally engaged in the design, research and
development, manufacture, and sales of optical and optical-related products, covering
eight sectors such as smartphone business, automobile business, security business,
microscopes business, AR/VR business. As at 2020, SO’s market share of handset
lens sets (HLS) ranks no.1 in the world, while that of vehicle lens sets (VLS) ranks no.1,
and the headset camera modules (HCM) ranks no.2. SO delivers rapid growth during
past decades (2011-2020). Its revenue rockets more than 15 times while market value
jumped nearly 100 times.

Figure 1: SO’s development path

Commenced handset camera modules business • Made a successful HK$77 million

placement
• Reached strategic cooperation
• Enhanced R&D and production with Konica and successfully
capacity of handset lens sets entered into high-end lens set
• Owned plastic aspherical lens market
technology
• Entered into vehicle lens set
business

Listed on the Main Strategic Established Sunny • Set up new production plants
Board of Hong Kong deployment Optical(Zhejiang) in Vietnam and India,
of the 3D producing handset camera
Stock Exchange Research Institute
sensing modules and vehicle lens sets
product Co., Ltd in
Hangzhou • Established subsidiary in
Germany
Established and Participated
commenced in image
optics business digitalization
area

Set up production plants in

Issued US$600 Vietnam, mainly for handset
Established camera modules production
million five-
Set up subsidiaries Zhejiang Sunny
year bonds
in U.S. and South Optical Intelligence
Korea Technology Co., Ltd
in Hangzhou

Source: Investor events material, CJS International

Figure 2: SO’s revenue (100 million yuan) Figure 3: SO’s market value (100 million yuan)

500 2500

2000
400

1500
300
1000
200
500
100
0
May-14

May-19
Jan-11
Jun-11

Jan-16

Jun-21
Jun-16

Jan-21
Mar-20
Mar-15

Feb-18
Feb-13
Apr-12

Oct-19
Oct-14

Apr-17
Jul-13

Jul-18
Nov-11

Dec-13

Nov-16

Dec-18
Sep-12

Sep-17

Aug-20
Aug-15

0
201 1 201 2 201 3 201 4 201 5 201 6 201 7 201 8 201 9 202 0

Source: Wind, CJS International Source: Wind, CJS International

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Company Initiation

We deem the strong growth of SO is attributed to:

(1) the rise of China smartphone market

SO's rapid growth is attributed to prosperity of China Android brands and the
transfer of smartphone industrial chain towards local suppliers. As the “world
factory” for smartphone, China has developed complete smartphone industry chain
from demand side and supply side. Excellent domestic smartphone brands such as
HOVM tend to choose local suppliers with first-mover advantage. Worldwide
comparable company Largan's rise also relies on deep and stable relationship with
customer A, defeating Kangzhida in the Nokia era rapidly.

Figure 4: Global smartphone market share pattern in 2018Q1-2021Q1

100%

80%

60%

40%

20%

0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2018 2018 2018 2018 2019 2019 2019 2019 2020 2020 2020 2020 2021
Samsung Apple Xiaomi OPPO vivo Huawei realme Others

Source: Counterpoint, CJS International; Note: Huawei’s market share in 21Q1 excludes Honor segment

(2) “Mingpeijue” strategy with focus in optical business

SO implements “Mingpeijue” strategy in 2004 and adheres to “customer-

centered” principle. The company insists to put the interest of customers on priority,
and has established a stable, close and long-term strategic cooperative relationship
with global famous customers. At present, the company’s main customers in the optical
industry are Samsung, Sony, Nikon, Magna, Autoliv, Continental, etc., and the
optoelectronics business areas include Google, Qualcomm, Bosch, Amazon, ZTE,
Huawei, Lenovo, OPPO, Vivo, Xiaomi etc., instrument business areas such as Carl
Zeiss, Olympus etc.

Topline delivers resilient growth throughout COVID-19

The company developed a well-established product mix with focus on
optoelectronic products. The product matrix is mainly divided into three segments:

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Company Initiation

1) optical components, 2) optoelectronic products, 3) optical instruments which

accounted for approximately 24%/75%/1% of revenue in 2020. The handset lens set,
vehicle lens set in optical components business and handset camera module in
optoelectronic products are major products.

Figure 5: SO’s income breakdown over 2006-2020 (in terms of Figure 6: SO’s income breakdown over 2018-2020 (in terms of
product) downstream sector)

Source: Wind, CJS International Source: Investor events material, CJS International

The company’s topline shows resilient growth driven by smartphone business

despite a sharp fall of customer H’s orders. From 2018 to 2020, the company’s
optical component generated RMB 6.02/8.82/9.18 billion revenue with a CAGR of
23.5%. And optoelectronic products posted revenue of RMB 19.61/28.75/28.49 billion
with a CAGR of 20.5%. The HCM shipment volume increased 9.7% yoy against trend,
gaining global market share.

Figure 7: SO’s revenue balloons up during 2006-2020 (in terms of Figure 8: SO’s HCM shipment volume is climbing yet sector paces
product, RMB in million) down (’000)

Source: Wind, CJS International Source: Investor events material, CJS International

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Company Initiation

SO’s profitability is improving thanks to portfolio premiumization and yield rate

optimization. Its gross profit reached RMB 8,697 million (+12.2% yoy) in 2020 with a
GPM of 22.9% (+2.4 pct). The improvement in GPM was attributable to optimizing yield
rate of optoelectronic products business, while the segment’s GPM increased from 9.3%
in 2019 to 12.6% in 2020.

Figure 9: Shipment volume of periscope modules and large image Figure 10: Sector comparison in terms of gross margin
size modules with high margin surges

Source: Investor events material, CJS International Source: Investor events material, CJS International

Intensive R&D investment to enhance competitiveness

Intensive R&D investment is the core advantage to enhance market
competitiveness. SO's R&D expenditures advanced significantly in last 3 years and
exceeded that of O Film in 2020. In terms of R&D’s achievements, the company has
realized mass production of 100mn pixel large image surface smartphone lens, wide-
angle lens, 8mn pixel full glass front-view vehicle lens with glass aspherical lens,
mobile phone pan/tilt anti-shake module and MOB, MOC packaging technology.

Figure 11: Comparison of R&D investment (RMB in million)

Source: Wind, Bloomberg, CJS International

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Company Initiation

Table 1: SO’s development in handset lens sets upgrading

Upgrading Stage
Mass production of 100 million-pixels large
High resolution
image handset lens
Number of lenses Developed 8P lenses successfully

Freeform handset lens sets Developed successfully

Developed continuous zoom handset lens sets
Optical zoom
successfully
Developed millimeter-scale ultra-macro
Macro shooting
shooting handset lens sets successfully
Commenced super-small distortion wide-
Wide angle angle(115°) handset lens sets mass
production
Commenced gimbal stabilization handset
camera modules mass production, and
Image stabilization
developed sensor-shift handset camera
modules successfully
Source: Investor events material, CJS International

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Company Initiation

Smartphone camera business: ready to

monetize upgrade momentum
Smartphone camera market fueled by optical
upgrades wave
The growth of global smartphone shipments volume is pacing down. The global
smartphone market has entered stock competition stage. Global smartphone shipment
volume is expected to fluctuate anchoring a stable scale according to IDC’s estimation.
Smartphone makers flocks into hardware upgrading to create differentiated portfolio.

ASP upside potential relies on upgrading optical components. Optics function has
become the main battlefield for smartphone upgrades. Consumers are highly
concerned about pictures and videos as the prime communication approach especially
in the 5G era. According to a survey conducted by ZDC in 2019, the element that
mobile phone users in China care about most is the camera function, ahead of
smartphone design and other features. Therefore, major smartphone makers invest to
upgrade handset cameras from multiple dimensions. Taking Apple as an example, the
increase in iPhone’s ASP is driven by lens upgrades in recent years. From iPhone 6
Plus to iPhone 12 Pro, the cost of the smartphone camera has risen from US$12.5 to
US$96, while the BOM ratio of the camera has risen from 5.8% to 18.68%.

Figure 12: Global smartphone shipment volume remains stable Figure 13: BOM cost per iPhone increases significantly

Source: IDC, CJS International Source: IHS, Tech Insights, CJS International

Higher resolution for both main and front camera

The main camera of middle-upper Android smartphones has undergone camera
resolution upgrades through 8MP -> 12MP -> 24MP -> 48MP -> 64MP -> 108MP.
Currently the rear camera of 48MP+ has become the standard setting for Android
smartphone. We believe the upgrading of main camera will be driven by penetration of
48MP and 64MP. Besides, the resolution of front camera and innovative function are

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Company Initiation

also advancing. Taking Huawei as an example, the front cameras of its flagship P10
Pro to P40 Pro, has climbed from 8MP->24MP->32MP->32MP+3D sensing.

Figure 14：The camera upgrading of Huawei’s P series

Main
Camera
Quad-camera (main)
Dual-camera (front)
Tri-camera

Quad-camera

Dual-camera

Front
Camera

Source: Huawei, CJS International

Better image quality with more lens pieces and G+P mix
The number of lenses determines camera’s light gathering capacity which
influences image texture, 7P/8P lenses are likely to become mainstream choices
in future. Theoretically, the more lenses per camera represents better image quality.
Nowadays mainstream smartphone has upgraded the number of lenses from 5P/6P to
7P/8P. The Mi 9 Transparent Premium Edition is equipped with the world's first 7P
camera, the Mi CC9 Pro Premium Edition is equipped with the world's first 8P camera,
and the iPhone 12's main camera is also equipped with a 7P lens. 7P and 8P lenses
have stronger light-gathering and resolution capabilities than 6P lenses, which can
reduce optical chromatic aberration. However, the increase in number of lenses per
camera will also cause several issues such as protrusion of the lens matrix and optical
axis deviation. Considering the most balanced revolution trend, we believe that the
marginal benefit for leveling up the lens to 9p/10p would be limited, while 7p and 8p
lens might become the mainstream choices in future.

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Company Initiation

Figure 15: Xiaomi's first 7p lens and first 8p lens

Source: Xiaomi, CJS International

The glass-plastic lenses mix is emerging in smartphone camera to achieve

better image quality. Glass lenses are significantly better than plastic lenses on
refractive index, temperature resistance, function stability etc. However, the production
of glass lenses is comprehensive which requires manual grinding to raise production
cost. Smartphone camera commonly uses plastic lenses from cost-controlling
consideration. In recent years, the rapid optical upgrades bring several side effects
such as low light intensity and lens protrusions, camera lens makers released glass-
plastic hybrid lenses to take both advantages of plastic and glass lenses. For example,
Xiaomi’s Redmi K40 adopts the 1G5P solution (1 glass lens + 5 plastic lenses).

Table 2：Glass lenses perform better than plastic lenses

Materials Features
Better plasticity, low density,
higher flexibility, low optical
Plastic precision, material is not
uniform, and the refractive
index is 1.65
Stable material performance,
low temperature drift, better
temperature resistance,
Glass
better abrasion resistance
and scratch resistance, and
the refractive index of 2.0
Source: China Chyxx.com, CJS International
Craft Pros Nons
Poor heat resistance, large
thermal expansion coefficient,
Low cost, light weight, can
poor wear resistance, low
Injection molding, lens combine systematic
mechanical strength, the
assembling components with optical
electronic components are easily
components
deformed and affect the optical
performance
Manual grinding and Better optical performance,
High cost, low production yield
molding flexible product design

Better user experience with multi-camera functions

The rapid migration of tri/quad cameras drives the solid growth of handset lens
set shipments in recent years. The specific function of handset function is the largest
selling point for smartphone makers, and the brands have released multi-camera
model with telephoto, wide-angle, ToF, macro and other unique optical functions to

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Company Initiation

offer better user experience. According to Counterpoint estimates, the average number
of cameras per smartphone has increased from 2 in 2015 to 3.7 in 2020. Multi-camera
per smartphone’s penetration contributes most to smartphone’s market expansion.

Figure 16: Average number of cameras per smartphone climbs over Figure 17: Multi-camera penetration during Q1’18-Q3’20
2015-2020
4

0
2015 2016 2017 2018 2019 2020

Source: Counterpoint, CJS International Source: Omdia, CJS International

Table 3：Multi-camera solution of major smartphone brands

No. of camera Brand Model Front Main
Apple iPhone 11 Single Wide angle + Ultra wide angle
Huawei P9 Single Color lens + Black and white lens
Dual Oppo R11 Single Wide angle + Telephoto
Xiaomi MIX 3 24MP+depth Wide angle + Telephoto
Vivo Y31s Single Main camera + Depth
Ultra wide angle + Wide angle +
Apple iPhone 11 Pro Single
Telephoto
Ultra wide angle + Wide angle +
Huawei Mate 30 Single
Telephoto
Triple Oppo A35 Single Main camera + Macro lens + Depth
Redmi Note 10 Main camera + Ultra wide angle+ Macro
Xiaomi Single
Pro lens
Main camera + Ultra wide angle + Black
Vivo iQOO Neo 5 Single
and white lens
Wide angle + Ultra wide angle +
Huawei P40 Pro 32MP+depth
Telephoto + ToF
Wide angle + Ultra wide angle +
Oppo Find 3 Pro Single
Telephoto + Macro lens
Quad
108MP Main camera + Ultra wide angle
Xiaomi Note 9 Pro Single
+ Macro lens + Depth
Main camera + Portrait lens + Wide
Vivo X50 Single
angle + Macro lens
Wide angle + Ultra wide angle +
Huawei Mate 40 Pro+ 13MP+ToF
Telephoto + Periscope telephoto + ToF
Wide angle + Ultra wide angle +
Huawei Mate 40 RS 13MP+ToF
Telephoto + Periscope telephoto + ToF
Penta or above 108MP Main camera + Telephoto + Ultra
Xiaomi CC9 Pro Single telephoto + Ultra wide angle + Macro
lens
Nokia Pure View Single 3*Black and white lens + 2*Color lens

Source: company website, CJS International

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Company Initiation

SO targets to be global no.1 HCM manufacturer

Camera upgrades brings great challenge to module suppliers
Handset camera module suppliers face benefits and challenges with the growing
importance of camera performance to smartphone makers and consumers.
Smartphone makers endeavor to (1) improve image quality from diverse aspects such
as more cameras, more lens, smaller pixel size and image stabilization and (2) add
comprehensive features to optimize interaction between consumer and smartphone
such as 3D sensing application. The smartphone optics upgrading boosts packaging
technology evolution from bottom to up. For example, flip chip packaging is now in
widespread use in several high-end smartphone models of Samsung and Apple to
meet the demand for products that offer better performance, occupy smaller size, and
environmentally sustainable. There’s no doubt only the HCM supplier with strong R&D
and production capacities will strengthen relationship with the most valuable
smartphone makers and solidify position in high-end HCM market.

Table 4: Camera module encapsulation technology evolution

CSP (Chip Scale Package) COB(Chip On Board) FC (Flip Chip)

FC is a kind of chip packaging technique in

CSP describes a wafer-level packaged die with
Principle spherical bumps located on a grid with a
predefined pitch.
CSP packaging allows for lower cost, less
Feature substrate waste and smaller footprint than
traditional molded BGAs.
Height Thick
COB technology describes the mounting of a bare
chip in direct contact with the substrate to produce
LED arrays.
COB packaging allows for a much higher packing
density, which results in higher intensity and greater interconnects with shorter distances than wire,
uniformity for smartphone makers.
Thin
which the active area of the chip is "flipped over"
facing downward. Instead of facing up and
bonded to the package leads with wires from the
outside edges of the chip, any surface area of
the flip chip can be used for interconnection.
FC packaging allows for a large number of
which greatly reduces inductance.
~1 mm thinner than COB

Accuracy Low High High

Image
Low Regular High
quality
Cost of
Low, only SMT production line needed High, ~RMB10mn 30%~50% higher than COB
production
Production
>96% ~96% <90%
Yield
Smartphon
e Low-end smartphone Mid-high end smartphone (HXOV) High-end smartphone (Apple, Samsung)
application

Source: Haleh Ardebili & Jiawei Zhang, Chip Scale Pack, China Baogao, CJS International

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Company Initiation

HCM giants to expand market share in the industry reshuffle

Global HCM competition is relatively scattered, with CR3/CR5 of 36%/50%. Among
them, the market share of O Film/Sunny Optics/Q Technology is 17%/13%/9%,
respectively. We believe that the global HCM market is undergoing consolidation.
The main catalysts come from: (1) The concentration of downstream
smartphone brands continues to increase. Leading mobile phone makers
represented by Apple, Samsung, Xiaomi, etc. tend to deeply bind specific module
manufacturers to lock stable supply and control costs riding mass production
advantage. (2) Accelerating innovation in the smartphone optics field raises
difficulty of HCM technology, downstream brands judge suppliers with strict
yield and capacity requirements. In recent years, smartphone optics function has
experienced an all-round upgrade and the difficulty of design and manufacturing climbs
significantly. Leading module manufacturers with strong R&D and supply capabilities
are expected to further expand market share in the industry reshuffle.

Figure 18: Global camera module market share Figure 19: HCM supplier consolidation driven by smartphone market

80.0%
O Film, 18%

70.0%

60.0%

50.0%
SO, 13% 40.0%

30.0%

20.0%

Q Tech, 9% 10.0%

0.0%
2017 2018 2019 2020

O Film SO Q Tech LGI Foxconn LuxVision CR5 of smartphone CR5 of HCM supplier
Sharp SEMCO Truly Cowell Primax Others

Source: Yole, CJS International Source: Yole, Guanyan, CJS International

SO targets to be no.1 module suppliers as the high-end product

shipment ramps up
Sunny Optical ranks no.2 in global HCM market in 2020. It has developed stable
cooperation with reputable smartphone brands such as Huawei, Samsung,
Xiaomi and OV. We believe that the major catalysts for SO’s HCM business are
(1) distinguished product innovation capabilities to capture incremental orders
from overseas brands; (2) vertical integration with handset lens set business to
enhance company's earnings.

SO values module innovation capabilities to fulfill the ascending demand from

high-end smartphone products. The smartphone components integration trend

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Company Initiation

makes it more difficult to manufacture corresponding module product. SO encourages

innovation and develops advanced module manufacturing craft. SO’s HCM products
rank no.2 with a market share of 13% globally, slightly behind O Film’s 17%.
Nevertheless, high-end module products show more presence in SO’s portfolio than O
Film’s. In 2020, SO's high-end periscope and large image camera module shipments
accounts for 10.3% of total revenue as a sharp leap. We deem SO is expected to
benefit from its high-end positioning and module innovation capabilities amid the optics
premiumization trend.

Figure 20：Tri-camera module of SO Figure 21：5X-zoom periscope camera module of SO

Source: Sunny Optical website, CJS International Source: Sunny Optical website, CJS International

Figure 22: SO’s HCM shipment volume movement Figure 23: SO’s ASP for HCM product is higher than O Film
70,000 100%
60
60,000 80%
50
50,000 60%
40
40,000 40%

30,000 20% 30

20,000 0% 20

10,000 -20%
10
0 -40%
Feb/19

Feb/20

Feb/21
Apr/19

Jun/19

Apr/20

Jun/20

Apr/21

Jun/21
Dec/18

Aug/19

Dec/19

Aug/20

Dec/20
Oct/19

Oct/20

0
2018 2019 2020

Sunny Optical O Film

Handset camera module YOY

Source: Sunny Optical website, CJS International Source: Sunny Optical website, CJS International

The synergy between the HCM business and upstream HLS business is
expected to improve company's earnings. SO is the earliest domestic HCM maker
which commenced handset lens set business. In order to maintain market
competitiveness, SO's HCM and HLS segments operate independently and both
achieve leading position in corresponding markets. From the perspective of improving
the resource utilization efficiency within industry chain, optics manufacturers starts to

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Company Initiation

carry out vertical integration. Sunny Optical’ s HCM segment purchases about 1/5 of
the company's HLS products, while the rest of the lens comes from external
manufacturers. We believe SO may benefit from the synergy effect between upstream
HLS and downstream HCM segment and its earnings get further improvement.

Figure 24: Synergy trend between module and lens business Figure 25: SO’s internal transaction value (CNY’000)

O Film (002456.SZ) acquired 10,000,000 25%

Fuji TJ factory. Fuji TJ is capable 9,000,000
of manufacturing vehicle lens
SO starts to invest in in-house 8,000,000 20%
set and handset lens set and
camera lens design and
owns more than 900 7,000,000
manufacturing.
copyrights in lens design and
manufacturing. 6,000,000 15%
5,000,000
2004 2017 2018
4,000,000 10%
Q Tech (1478.HK) acquired 3,000,000
Newmax Tech (3630.TW).
2,000,000 5%
Newmax Tech manufactures
and sells optics mirror and 1,000,000
plastic lens to optical
- 0%
equipment manufacturers and
2016 2017 2018 2019 2020
computer peripheral digital
imaging manufacturers. External transaction Internal transaction % of internal transaction

Source: Investor events material, CJS International Source: Sunny Optical website, CJS International

Largest HLS vendor for Android, eyeing on Apple

orders
SO is the largest lens vendor for Android smartphone
SO ranks in global tier 1 handset lens suppliers. Handset lens set shipment volume
normally exhibits seasonal volatility while Q1 and Q2 are traditional off-seasons, and
Q3 and Q4 are peak seasons. SO is largest HLS vendor for Android smartphone with
a 33% market share and its HLS shipment volume exceeded 1.5 billion in 2020. The
company’s HLS business has covered several international reputable brands
Samsung, Huawei, Xiaomi, OPPO, Vivo etc.

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Company Initiation

Figure 26: SO’s HLS shipment volume shows seasonal volatility Figure 27: Optical business comparison within industry (million yuan)
16,000 80%
180,000 80%
160,000
60%
140,000 12,000 60%
120,000 40%
100,000
20% 8,000 40%
80,000
60,000 0%
40,000 4,000 20%
-20%
20,000
0 -40%
Jun/19

Jun/20

Jun/21
Apr/20
Apr/19
Dec/18

Aug/19

Feb/21

Apr/21
Feb/19

Dec/19

Aug/20
Feb/20

Dec/20
Oct/19

Oct/20
0 0%
2018 2019 2020

Revenue of SO's optical components Revenue of Largan

Handset lens set YOY Revenue of Genius Gross margin of SO's optical components
Gross margin of Largan Gross margin of Genius

Source: SO’s referral materials, CJS International Source: Wind, Bloomberg, CJS International

Narrowing technology gap with Largan attracts Apple orders on

track
SO successfully entered into high-end handset lens set market after the
acquiring Konica Minolta's facility in 2013. The strategic cooperation brings
breakthrough in narrowing technology gap with Largan, which could be traced in the
number of patents and shipment structure.
Patents: The number of patents jumped from 239 in 2014 to 2096 in 2020 and
surpassed Largan in terms of quantity. At the same time, SO’s patents are still inferior
to Largan in terms of quality. Patents are divided into three categories, invention
patents, utility model patents, and appearance patents and invention patents are
considered to be most valuable. Regarding patents components, 96% of Largan’s
patents are invention patents (1228 items), versus 30% of Sunny Optical’s patents are
invention patents (623 items).

Figure 28: The number of SO’s patent surpassed that of Largan’s in Figure 29: The proportion of SO’s invention patents is lower than that
recent year
of Largan (2020)

Source: Taiwan China Intellectual Property Bureau, SO’s annoucement, CJS Source: Taiwan China Intellectual Property Bureau, SO’s announcement, CJS

International International

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Company Initiation

Shipment structure: In terms of resolution shipment volume, the contribution from

high resolution lens set of Sunny Optical grows rapidly in recent years. The proportion
of SO’s 8MP+ HLS shipment volume was 36 pct behind of Largan’s in 2014. With the
rapid breakthrough in high-end product mix, the proportion of SO’s 10MP+ HLS
shipment volume was 26 pct behind of Largan’s in 2018. In terms of lens set, the
contribution from 6P+ products of SO increase from 19.2% in 2018 to 24.7% in 2020.

Figure 30: The proportion of high-resolution in SO’s optical shipments Figure 31: The proportion of SO’s value-added handset lens sets has
is gradually approaching Largan
increased

Source: Largan, SO’s referral materials, CJS International Source: SO’s referral materials, CJS International

SO is expected to attract Apple’s mass orders with distinguished optics design

and manufacturing advantage and fast-growing deployment in high-end market.
Largan supplies lenses to Apple since 2019Q3 and become the largest vendor thanks
to its superior technology and stable yield. To reduce over-reliance on specific vendor,
Apple allocated part of lenses orders to GSEO. However, GSEO occurs unstable yields
for a few products and its supply for iPhone 12’s 7P lenses also delays shipment
recently. SO shows strong design and manufacturing capacities in flagship Android
products, we believe the company will attract Apple’s orders thanks to stable supply
capacity and narrowing tech gap with Largan. Largan's revenue in 2019 was RMB 14.1
billion, while SO’s HLS segment generated (including in-house sales) RMB 6.26 billion
revenue. The incremental potential from overseas reputable client may shape SO’s
another growth curve.

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Company Initiation

Figure 32: SO's overseas revenue has growth potential to boost overall earning (Inner ring:
2019, Outer ring: 2020)

Source: Wind, CJS International

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Company Initiation

Automobile camera business: step into fast-

growing stage with solid position
SO maintains leading position to harvest sector growth
SO is the world’s largest supplier of vehicle lens set (VLS) with wide-covered
product reserves. SO entered VLS market in 2004 and obtained vehicle-level product
certifications during 2004 to 2006. In 2008, SO established Ningbo Sunny Automotive
Optech Company and endeavored to develop the vertical vehicle-level product. SO
has achieved successful business extension towards vehicle market, covering front
view, rear view, surround view, side view and other lens sets currently. The company
is capable to provide various high-end LIDAR optical solutions and HUD optical
machine solutions as well as mass production experience of core optical component.
SO reaches deep and close cooperation with world top 5 automotive safety electronics
manufacturers, and its downstream products are widely used in reputable vehicle
brands like BMW, Benz, Audi, Toyota, Honda, Chrysler, Ford, GM, VW, Volvo and so
on. From 2012, SO’s VLS shipment volume ranks top 1 in the world for consecutive
seven years with a market share above 30%. In 2019, its VLS shipment volume
climbed 25% yoy to 50 million.

Figure 33: SO’s vehicle lens set for rear view camera Figure 34: SO’s VLS shipment volume remains prosperity
8,000 250%

7,000 200%
6,000
150%
5,000
100%
4,000
50%
3,000
0%
2,000

1,000 -50%

0 -100%
Apr/19

Jun/19

Apr/20

Jun/20

Apr/21

Jun/21
Dec/18
Feb/19

Aug/19

Dec/19

Feb/20

Aug/20

Dec/20
Feb/21
Oct/19

Oct/20

Vehicle lens set YOY

Source: SO’s referral materials, CJS International Source: SO’s referral materials, CJS International

Rising automotive camera market leaves great

potential for optics application
With the ascending penetration of electric vehicles and smart vehicles, the
functions of automotive cameras are richer and the EVs equipped with multi-
camera becomes popularity. In the past, vehicle cameras were mainly used for
simple purposes such as reversing monitoring and driving records. In recent years, the
popularity of electric vehicles pushes vehicle camera’s revolution towards multi-

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Company Initiation

functions. Nowadays, the vehicle cameras are commonly used to realize primary
automatic driving functions (ADAS, Advanced Driver Assistance Systems). The basic
autonomous driving function requires multiple cameras, including front-view, rear-view,
surround-view, side-view, and inner-view cameras to realize automatic cruise,
automatic parking and so on.

Table 5: Typical category of vehicle camera

Camera view Type of lenses Function Installation position
Vehicle collision warning,
lane departure warning,
Front view Monocular/Binocular Above the front windshield
traffic sign recognition,
pedestrian collision warning
Four cameras are assembled
around the car for image
stitching to achieve a
Surround view Wide angle Panoramic parking
panoramic view, and
algorithms can be added to
achieve road perception
Installed in the tail box to
Rear view Wide angle Reverse image
realize parking assistance
Ordinary Installed under the rearview
Side view Blind spot monitoring
perspective mirror
Installed in the rearview
Inner view Wide angle Fatigue reminder mirror inside the car to
monitor the driver’s status
Source: Qianzhan, CJS International

Major EV makers have introduced vehicles with multi-camera. Recent-introduced

smart vehicles such as Extreme 001(极氪 001), Zhiji L7(智己 L7) and Nio ET7(蔚来
ET7) are equipped with 15, 12 and 11 cameras respectively, which significantly surpass
last smart vehicle generation’s average 5 cameras. We believe the demand for
automotive cameras are expected to climb continuously amid intensive competition in
smart EV sector and advanced level of autonomous driving.

Table 6: Camera layout for typical vehicles

No.
of Front Side Surround Rear Inner
Vehicle type Other support functions
cam view view view view view
era
Automatic secondary steering,
Tesla’s modle 3 8 3 4 - 1 -
acceleration and braking in the lane
Automatic secondary steering,
Tesla’s modle s 8 3 4 - 1 -
acceleration and braking in the lane
Automatic secondary steering,
Tesla’s modle x 8 3 4 - 1 -
acceleration and braking in the lane
Tesla’s modle y 8 3 4 - 1 - AEB, BCW, BSD

Nio’s ET7 11 2 4 4 1 - S-APA with Fusion, LKA, LKAS

Nio’s ES8 5 1 - 4 - - CC, SDIS

Nio’s ES6 5 1 - 4 - - CC, SDIS

Nio’s EC6 5 1 - 4 - - CC, SDIS

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Company Initiation

HWC, urban high-level self-driving,

ARCFOX αS 14 4 4 4 1 1
AVP
Li’s ONE 5 1 4 - - ACC, SDIS

BYD E-SEED GT 5 1 4 - - ACC, TJA

BYD Don 5 1 4 - - ACC, TJA

ZEEKR 001 15 3 4 4 2 2 ACC, LCKS

IM L7 12 2 4 4 1 1 Highway and city navigation, AVP

Xpeng’s P5 13 3 4 4 1 1 NGP、City NGP、VPA

Source: Each company’s official website, Jiuzhang Autopilot, CJS International

Higher resolution of cameras is necessary to explore longer distances and

detect more information in autonomous driving environment. Generally,
automotive driving vehicles should be equipped with complete Perception System in
replace of the sensing of driver, thereby providing surroundings’ information,
recognizing unsafe objects accurately in time and response properly to avoid traffic
accident when facing emergency. Resolution determines the accuracy of target
detection and the further improvement of Target Detection Algorithm poses higher
requirement for the resolution of automotive cameras in order to meet the data need
of algorithm. According to Nio (蔚来)’s research, the perception distance of 8MP-
resolution camera is three times that of 1.2MP-resolution camera.

Figure 35: 8MP-pixel lens’s maximum perceived distance is 3 times of 1.2MP-pixel lens’s
(meter)

Source: Nio, CJS International

Latest-launched smart EVs all have equipped with 8MP HD cameras. Geely’s
Extreme 001 is equipped with eight ADS HD cameras (8MP): Front-view lens*3(Front
windshield: binocular*1 + Telephoto monocular camera*1) + side and rear-view*2(Wing)

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Company Initiation

+ side and front-view*2(Wing mirror foundation) + rear-view*2(Fastback). SAIC’s Zhiji

L7 is equipped with seven ADS cameras (5MP). Nio’s new SV ET7, to be delivered in
Q1 2022, is also equipped with 8MP HD cameras. Taking Nio as an example, Nio’s
ET7 adopts “Fusion perception of a wide range of heterogeneous sensors for cameras,
millimeter-wave radar, and LIDAR” Perception System Solution, and its sensor is
configured “LIDAR*1+ADS camera*7+Around-view camera*4+millimeter-wave
radar*5+ ultrasonic radar*12”. Especially, its ADS cameras are 8MP cameras for ultra-
distance visual perception, detecting vehicles outside 680m and pedestrians outside
220m.

Figure 36: Nio’s 8MP HD camera layout

Source: Jiuzhang Autopilot, CJS International

The computing power of autopilot platform grants the upgrading of high

resolution and multi-camera. Higher resolution and ascending quantity of vehicle
camera cause data to be processed rocket significantly, forcing the automobile
manufacturers to improve the platform computing power, which further supports the
hardware upgrade of the car perception layer. In the case of Tesla and Nio, Tesla’s
FSD HW 3.0 autopilot is capable of providing 144 Tops of computing power with eight
1.2 mega-pixel vehicle cameras, while Nio’s ET7 carrying four NVIDIA DRIVE Orin
chips to provide 1016 Tops computing power and a luxurious eleven 8 mega-pixel
cameras to power its autopilot platform.

Table 7: Autopilot computing platform’s computations and representative vehicle models

On-board computing Computation power Representative
Company Camera solution
platform model （TOPS） vehicle model
MDC 810 400 ARCFOX αS 4*Around-view cameras, 9*ADAS cameras

MDC 610 200 - -

Huawei
MDC 210 48 - -

MDC 300F 64 - -

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Company Initiation

DRIVE Orin 254 Nio’s ET7 11* 8mn mega pixel HD cameras

DRIVE AGX Pegasus 320 - -

1*2mn mega pixel triple camera+5*Perception
enhancing cameras+1* Smart cockpit camera
NVIDIA NVIDIA DRIVE AGX Xavier 30 Xpeng’s Xpilot 3.0
+1* Security assist camera +4*Around-view
cameras
DRIVE Hyperion 500 - -

DRIVE Atlan 1000 - -

1 *Sing camera, 1 * Road information collection
EyeQ4 2.5 Li’s One
camera, 4 * 360° Parking camera
Mobileye
EyeQ5 12 - -

Tesla FSD 144 Model 3 8*1.2mn mega pixel cameras

Source: Each company’s official website, CJS International

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Company Initiation

VR/AR camera business: strategic deployment

on emerging market
We consider the VR/AR application market relies on hardware device penetration
and extension of application scenario. Currently, VR device makers still positioned
themselves as “game console makers”, which means the market’s potential might be
predictable and limited to that of normal game console. We believe that if VR/AR device
and content producers could jumping out from game console position towards multiple
application scenarios such as entertainment, social media, education, the market might
spike up with more than 100 million shipment per year (vs. 30-50 mn shipment as game
console).

Figure 37: Different electronic end products shipment in the last five years（million）

Source: Statista, IDC, CJS International

SO has stepped into VR/AR products strategically. The company shows quick
and innovative response to current clients and we believe it will benefit from
VR/AR market’s potential growth. Since 2016, SO has provided front-facing
cameras for HTC Vive. It realized mass production of Fresnel lens sets and entered
into a lot of VR device makers supply chain in 2017. In terms of AR market, SO reached
strategic cooperation with Longjing Photoelectric Technology in 2019, the leader in AR
optical waveguide lens market. After that, SO successfully developed the AR diffraction
optical waveguide monochrome waveguide in 2020.

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Company Initiation

Figure 38: SO’s Fresnel lens product

Source: Company official website, CJS International

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Company Initiation

Rating Definition
Sector Rating Definition
Outperform: The sector is expected to outperform the benchmark in the next 12-month period
Neutral: The sector is expected to perform in line with the benchmark in the next 12-month period
Underperform: The sector is expected to underperform the benchmark in the next 12-month period
Company Rating Definition
Buy: A potential return of over 10% relative to the benchmark in the next 12-month period
Accumulate: A potential return ranging from 5% to 10% relative to the benchmark in the next 12-month period
Neutral: A potential return ranging from -5% to 5% relative to the benchmark in the next 12-month period
Reduce: A potential return of less than -5% relative to the benchmark in the next 12-month period
Not Rated: Not Rated as a result of lack of indispensable documents, unpredictable material, uncertainties the company
would be facing, or other reasons.
Benchmark: CSI 300 for A-share market; Hong Kong Hang Seng Index for Hong Kong market.

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