Sunny forecast for Sunny Optical with sales and EPS to rise 29% and 31% YoY

Thanks to increase in Chinese smartphone demand.

For FY14, it has been predicted that the sales and EPS of Sunny Optical will rise by 29% and 31% YoY thanks to the increase in Chinese smartphone demand and camera quality migration.

According to a research note from Maybank Kim Eng, however, its FY14/FY15 EPS forecasts are lower than consensus.

This is because Maybank Kim Eng believes the Street under-estimates the potential increase in price competition for camera modules amid the smartphone end-demand uncertainties in China.

Sunny Optical’s share price is likely to range trade, in Maybank Kim Eng's view.

Here's more from Maybank Kim Eng:

Largan (a pure camera lens maker) is a better play with similar trends but price competition in lenses is relatively mild due to more rational capacity expansion across the lens sector.

Our target price of HKD10.5 is based on 15x FY14F PER.

Risks to our call are China smartphone demand and competitors’ capacity expansion plan and/or production yield rate.

The results are likely to be a neutral to negative event.

Sunny Optical has already outperformed the HSI by 35% since April so upside is likely to be capped if it misses 1H14 earnings estimates.

We estimate 1H14 net profit of CNY266m or EPS CNY0.25, (+9% HoH and +35% YoY), vs Bloomberg consensus of CNY268m.

We sense downside risk to our 1H14 gross margin projection of 16.4% (vs. 15.8% in 1H13 and 17.4% in 2H13) due to severe price competition in the camera module business.