Kate Lin: Welcome to Morningstar. The confidence of Chinese consumers has been impeded recently due to headwinds from COVID zero policy and fears that a recession may be on the horizon. What does this fear mean for upstream suppliers like camera module makers? Do opportunities in the metaverse and other developments like EVs cushion the risk facing these companies? We have Phelix Lee, equity analyst at Morningstar, here.
Hi, Phelix. Tell us how Sunny Optical is impacted by China lockdowns and slowdown.
Phelix Lee: Hi, Kate. Sure. So, Sunny Optical (02382), especially in the second corner, from April to June, they are affected by a series of lockdowns in and around Shanghai. So, basically, production went on relatively – the production was relatively normal, but the biggest problem in and around Shanghai was the logistics problems. So, even if Sunny Optical managed to produce all the required components, it faced a lot of difficulties shipping these components to downstream manufacturers and assemblers. So, this kind of logistic disruption applies to Sunny and also to other suppliers as well.
Lin: So, after these events, what adjustments have you made to your fair value estimates and why?
Lee: So, for example, on Sunny, we have reduced slightly our fair value estimate to HK$180 per share, so that's around a 5% reduction. So, the adjustments account for several things. One is the disruptive production in April and to a lesser extent, May. And we also reduced some of the demand forecast, especially for 2022 because of the slightly more tepid demand as a result of the strict COVID zero policies in China.
Lin: So, turning to the more positive side, what does the development of the metaverse and an increased EV sales mean for lens makers?
Lee: So, for Sunny Optical, for example, even though we have reduced our 2022 estimates, we have actually increased our mid-cycle forecast, or our long-term forecast for metaverse and especially EV-related sales. So, we are seeing a higher visibility on the EV side because by now more than 20% of new Chinese vehicles are electrically powered, and we believe the rest of the world could follow China's trajectory. On the metaverse side, we are seeing quite a large addressable market on this application, because on smartphones one usually expects four or maybe five cameras per phone. But on Metaverse related sales like AI augmented or virtual reality devices, we are seeing up to 12 to 14 optical sensors, components, cameras or other optical devices on each metaverse device. So, this represents a very large, untapped incremental market for Sunny Optical.
Lin: Wonderful. Thank you so much, Phelix. For Morningstar, I'm Kate Lin.
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