Sunny Optical Technology Group Co., Limited

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

06 March 2013

Asia Pacific/China

Equity Research

Electronic Components & Connectors

Sunny Optical Technology Group Co., Limited (2382.HK / 2382 HK)

INITIATION

Lights, camera, action!

■ Initiating with an OUTPERFORM rating. Sunny Optical is a camera lens /

module producer with a dominant market share with branded Chinese

smartphone vendors. While the stock has outperformed the market

significantly over the past year, we believe the shares still have plenty of

room to run. Sunny Optical feeds off one of the best unit growth stories

around in tech, has a dominant position, the product cycle is in its favour,

further upside potential exists from newer technologies (3D gesture

detectors and array cameras) and the stock is still not well covered.

■ Strong unit growth with stable gross margins. As a leading supplier with

a ~50% share in China smartphone brands (ex-white-box), we expect Sunny

Optical to benefit from the sharp ramp up of branded Chinese smartphones

(estimated to grow ~2.4x over 2012-15E). Moreover, a strong product cycle

in handset cameras (pixel migration from 5MP to 8MP to 13MP) is boosting

ASP and mix, negating the impact of the usual like-to-like price declines. An

additional factor helping to maintain margins at the company level is its

strategy to produce more of its high-resolution lens in-house.

■ We are above consensus. Our 2013-14E EPS estimates are 16%/33%

above IBES, primarily because we are ahead of street in: (1) handset

camera sales growth (driven by pixel migration and overseas customer

penetration), and (2) high-margin specialty products (vehicle/ infrared lenses

and specialty cameras including 3D gesture detectors and array cameras).

■ Valuations should expand further. Our TP of HK$10.00 is based on 15x

FY13E P/E — in line with peers. We believe Sunny Optical merits a richer

multiple given its leadership position, strong execution, robust earnings

growth and the potential for further EPS upgrades. Key risks: lower-than-

expected China smartphone builds, component shortages and competition.

Share price performance

The price relative chart measures performance against the

MSCI CHINA F IDX which closed at 6363.92 on 06/03/13

On 06/03/13 the spot exchange rate was HK$7.76/US$1

Performance Over 1M 3M 12M Absolute (%) 15.8 48.5 198.1 Relative (%) 20.4 45.6 193.0

Financial and valuation metrics

Year 12/11A 12/12E 12/13E 12/14E Revenue (Rmb mn) 2,498.5 3,982.0 6,191.3 8,643.0 EBITDA (Rmb mn) 303.2 491.4 771.7 1,030.9 EBIT (Rmb mn) 211.5 334.8 551.5 766.6 Net profit (Rmb mn) 215.3 327.5 508.7 699.6 EPS (CS adj.) (Rmb) 0.22 0.34 0.53 0.72 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 0.34 0.45 0.54 EPS growth (%) 51.7 52.1 55.3 37.5 P/E (x) 28.9 19.0 12.2 8.9 Dividend yield (%) 1.1 1.6 2.5 3.4 EV/EBITDA (x) 20.7 13.1 8.3 6.0 P/B (x) 3.8 3.2 2.6 2.1 ROE (%) 13.3 17.8 23.4 26.4 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

0

100

200

300

400

0

5

10

Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Nov-12

Price (LHS) Rebased Rel (RHS)

Rating OUTPERFORM Price (06 Mar 13, HK$) 8.05 Target price (HK$) 10.00¹ Upside/downside (%) 24.2 Mkt cap (HK$ mn) 8,050 (US$ 1,038) Enterprise value (Rmb mn) 6,425 Number of shares (mn) 1,000.00 Free float (%) 49.0 52-week price range 8.05 - 2.24 ADTO - 6M (US$ mn) 4.3

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

Yan Taw Boon

852 2101 7039

[email protected]

Manish Nigam

852 2101 7067

[email protected]

06 March 2013

Sunny Optical Technology Group Co., Limited (2382.HK / 2382 HK) 2

Focus charts and tables Figure 1: Sunny Optical’s business overview—product segments, market share, customer base and competitors

Source: Company data, Credit Suisse research

Figure 2: Benefitting from unit growth and pixel migration Figure 3: Sunny’s handset camera blended ASP is rising

Source: Company data, used here and elsewhere with express

permission

Source: Company data, Credit Suisse estimates

Figure 4: In-house lens set adoption re-expanding Figure 5: Specialty products driving gross profit growth

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 6: Our 2013-14E EPS of Rmb0.53 / Rmb0.72 is 16% / 33% above street as we are more bullish on sales growth

Source: IBES, Credit Suisse estimates

Segments Optoelectronic Products Optical Components Optical Instruments

Products (apps) Camera modules (handset, tablets) Lens (DSC, handset, vehicle) Microscopic / Analytical instruments

1H12 sales mix 60.7% 34.5% 4.8%

Market share 4% (globally) / 50% (China) 4% N/A

Key customers Huawei DSC: Samsung, Panasonic, Nikon, Sony Carl Zeiss

Lenovo Handset lens: Sharp, Foxconn, Truly Optika

Coolpad Vehicle lens: Continental Amscope

Oppo Infrared lens: Autoliv Olympus

Competitors High-end: Lite-On Digital camera: Hoya, Kinko, Phoenix Optical

Mid-end: BYD, Foxconn, Kerr Handset lens: Largan, Genius, Asia Optical

Low-end: Truly, Q-tech, Global Optics Vehicle lens: Fujinon, Konica Minolta

Year 2011 2012 2013

Manufacturer Huawei Huawei Huawei

Model U8650 U8836D U9508

OS Android 2.3 Android 4.0 Android 4.0

Screen size 3.5" 4.3" 4.5"

Resolution 480x320 960x540 1280x720

Qualcomm MSM7227 Mediatek MT6577 Hisilicon K3V2

Single-core, 600MHz Dual-core, 1.0GHz Quad-core, 1.4GHz

Rear camera 3.2MP 5.0MP 8.0MP

Front camera 0.3MP 0.3MP 1.3MP

Price (RMB) 800 1,185 1,999

Processor

15.4

23.9

32.2

37.6

41.1

8.3%

54.7%

34.9%

16.7%

9.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2011 2012E 2013E 2014E 2015E

AS

P in

Rm

b

Blended ASP (Rmb) ASP Growth

75%

64%

36%

43% 44% 46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

20

40

60

80

100

120

140

160

180

200

2010 2011 2012E 2013E 2014E 2015E

Uni

t shi

pmen

t (m

n)

Handset camera modules (mn units) Internal lens (mn units) Lens insourcing %

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

Digitalcameralenses

Handsetlenses

Vehiclelenses

Otherlenses

Handsetcameramodules

Othercameramodules

Microscopicinstruments

Analyticalinstruments

Gro

ss p

rofit

(R

mb

mn)

2011 2012E 2013E 2014E 2015E

Driven by automotive and Infrared cameras

Driven by tablet camera, Smart TV

camera, 3D camera

Consensus CS Diff Consensus CS Diff Consensus CS Diff

Revenue 3,853 3,982 3.3% 5,274 6,191 17.4% 6,340 8,643 36.3%

Gross profit 737 751 1.9% 1,001 1,138 13.7% 1,198 1,586 32.4%

Net Profit 329 328 -0.5% 442 509 15.2% 530 700 32.1%

EPS 0.34 0.34 0.4% 0.45 0.53 16.3% 0.54 0.72 33.5%

Gross margin 19.1% 18.9% 19.0% 18.4% 18.9% 18.3%

Net Margin 8.5% 8.2% 8.4% 8.2% 8.4% 8.1%

2012E 2013E 2014E

06 March 2013


Lights, camera, action! We initiate coverage on Sunny Optical with an OUTPERFORM rating and a TP of HK$10.0.

Our positive stance is based on Sunny Optical’s: (1) dominant position in China smartphone

supply chain and robust unit shipment growth, (2) view of sustainable earnings growth driven

by pixel migration, (3) potential penetration at global tier one customers, and (4) upside

potential from specialty products (vehicle/IR lenses, tablets, gesture control, array cameras).

Riding on China smartphone growth

Sunny Optical is a leading handset camera lens/module maker in China (over 60% of

revenue from handset cameras) with top-tier Chinese smartphone OEMs (Huawei,

Lenovo, Coolpad, Oppo) as its customers. We estimate that branded Chinese smartphone

builds will see a 172% CAGR over 2011-15E, from 43 mn units to 382 mn units, driven by

share gains in the domestic market and export channel expansion. With its dominant

share (~50%) in branded Chines smartphones, we view Sunny Optical as one of the best

proxies of China smartphone growth. While competition is intense, Sunny Optical is

solidifying its position with its edge in vertical integration, strong optical imaging know-how

and long-standing customer relationship. China smartphone camera pixel migration is

raising the entry barrier further, widening the gap against domestic low-end competitors.

Mix improvement + lens insourcing = stable margins

Rapid smartphone market growth is leading to aggressive camera pixel migration as

OEMs compete to provide better imaging experience to consumers. Chinese smartphone

brands are still one generation behind at 3MP/5MP versus global brands which are ahead

at 5MP/8MP. As Chinese smartphones play catch up in pixel migration, we expect Sunny

Optical’s sales mix of 8MP and above camera modules to rise from 18.5% in 2012E to

50.3%/77.6%/88.6% over 2013-15E. Despite a like-to-like price erosion of 10-30%, rising

sales of high-resolution camera modules should drive blended ASP higher. Further, as the

company improves its high-resolution handset lens production capability, we look for a

rebound in its lens insourcing starting 2Q13E. We expect improving product mix and

increase insourcing of lenses to lead to sustainable gross margins (c.15%) in 2013-15E.

Specialty products providing upside

Beyond handset cameras, multiple new products are emerging as key earnings drivers,

such as vehicle / infrared lens, tablet cameras, Smart TV cameras and other specialty

cameras (gesture control and array cameras). While Sunny Optical is likely to gain more

lens outsourcing orders from Japanese digital still camera (DSC) makers, we do not

expect its DSC product sales to grow over the next few year given the cannibalisation from

smartphones. The rapid expansion of new high-margin specialty products should more

than offset the weaknesses in digital camera-related products, in our view. Future positive

revenue surprise could come if gesture control or if array cameras find wider acceptance.

Street’s earnings estimates look too light

Our 2013/2014 EPS estimates are 16%/33% above consensus as we are more bullish on

blended ASP growth and high-margin specialty products. We expect Sunny to deliver

52%/55%/38%/30% earnings growth in 2012-15E. Our target price of HK$10.0 is based on

15x FY13E P/E, the upper-end of its five-year range and in line with peers. We believe

Sunny deserves a richer valuation given its strong earnings growth, expanding ROE and

potential global tier one customer penetration. Essentially, until last year the stock, was not

big or liquid enough for an institutional holding; hence historical multiples were probably

too low. Key risks include: (1) lower-than-expected growth in China smartphone builds,

(2) component shortage (VCM and 8MP/13MP CIS), (3) intensified pricing pressure in

camera modules, and (4) slower-than-expected ramp-up of specialty cameras/lenses.

Sunny Optical is a key

beneficiary of unit growth in

China smartphone brands

Ramp-up of 8MP/13MP

handset cameras increasing

blended ASPs

Specialty lens and cameras

are emerging as earnings

drivers, offsetting DSC

weaknesses

Sunny, in our view,

deserves a richer valuation

given its earnings

momentum and expanding

ROE

06 March 2013


Sunny Optical Technology Group Co. 2382.HK / 2382 HK Price (06 Mar 13): HK$8.05, Rating:: OUTPERFORM, Target Price: HK$10.00, Analyst: Yan Taw Boon

Target price scenario

Scenario TP %Up/Dwn Assumptions Upside 11.33 40.79 17x 2013E P/E Central Case 10.00 24.22 15x 2013E P/E Downside 5.33 (33.75) 8x 2013E P/E

Key earnings drivers 12/11A 12/12E 12/13E 12/14E

Optical components (RMB mn)

1,128 1,250 1,453 1,712 Optoelectronic products 1,193 2,564 4,569 6,762 Optical instruments 177.8 168.6 169.3 169.3 — — — — — — — —

Income statement (Rmb mn) 12/11A 12/12E 12/13E 12/14E

Sales revenue 2,499 3,982 6,191 8,643 Cost of goods sold 1,976 3,231 5,053 7,057 SG&A 311.3 416.0 586.8 819.3 Other operating exp./(inc.) (91.7) (156.6) (220.2) (264.3) EBITDA 303 491 772 1,031 Depreciation & amortisation 91.7 156.6 220.2 264.3 EBIT 211.5 334.8 551.5 766.6 Net interest expense/(inc.) (41.2) (20.6) (10.6) (12.9) Non-operating inc./(exp.) (13.2) 29.4 40.4 49.5 Associates/JV — — — — Recurring PBT 239.6 384.8 602.5 829.0 Exceptionals/extraordinaries — — — — Taxes 37.8 62.0 98.9 136.3 Profit after tax 201.7 322.8 503.6 692.7 Other after tax income — — — — Minority interests (13.6) (4.7) (5.0) (6.9) Preferred dividends — — — — Reported net profit 215.3 327.5 508.7 699.6 Analyst adjustments — — — — Net profit (Credit Suisse) 215.3 327.5 508.7 699.6

Cash flow (Rmb mn) 12/11A 12/12E 12/13E 12/14E

EBIT 211.5 334.8 551.5 766.6 Net interest (3.0) — — — Tax paid (38.7) — — — Working capital (32.6) (215.4) (333.4) (348.7) Other cash & non-cash items (64.8) 156.6 220.2 264.3 Operating cash flow 72.4 276.0 438.3 682.2 Capex (172.5) (350.0) (350.0) (300.0) Free cash flow to the firm (100.1) (74.0) 88.3 382.2 Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) 259.8 — — — Investing cash flow 87.2 (350.0) (350.0) (300.0) Equity raised — — — — Dividends paid (43.5) (71.0) (98.3) (152.6) Net borrowings (33.3) 120.4 200.0 — Other financing cash flow (19.8) — — — Financing cash flow (96.7) 49.4 101.7 (152.6) Total cash flow 63.0 (24.6) 190.1 229.6 Adjustments 0.41 — — — Net change in cash 63.4 (24.6) 190.1 229.6

Balance sheet (Rmb mn) 12/11A 12/12E 12/13E 12/14E

Cash & cash equivalents 251.7 227.0 417.1 646.7 Current receivables 627 982 1,493 2,036 Inventories 472 708 1,080 1,489 Other current assets 471.2 471.2 471.2 471.2 Current assets 1,822 2,388 3,461 4,643 Property, plant & equip. 489.3 682.7 812.5 848.2 Investments 13.7 13.7 13.7 13.7 Intangibles 0.04 0.04 0.04 0.04 Other non-current assets 50.0 50.0 50.0 50.0 Total assets 2,375 3,135 4,337 5,555 Accounts payable 599 974 1,523 2,127 Short-term debt 62.4 200.0 400.0 400.0 Current provisions — — — — Other current liabilities 9.4 9.4 9.4 9.4 Current liabilities 671 1,183 1,932 2,536 Long-term debt 17.2 — — — Non-current provisions — — — — Other non-current liab. 26.4 26.4 26.4 26.4 Total liabilities 714 1,210 1,959 2,563 Shareholders' equity 1,708 1,965 2,375 2,922 Minority interests — — — — Total liabilities & equity 2,375 3,135 4,337 5,555

Per share data 12/11A 12/12E 12/13E 12/14E

Shares (wtd avg.) (mn) 965.4 965.4 965.4 965.4 EPS (Credit Suisse) (Rmb)

0.22 0.34 0.53 0.72 DPS (Rmb) 0.07 0.10 0.16 0.22 BVPS (Rmb) 1.71 2.04 2.46 3.03 Operating CFPS (Rmb) 0.08 0.29 0.45 0.71

Key ratios and valuation

12/11A 12/12E 12/13E 12/14E

Growth(%) Sales revenue 37.4 59.4 55.5 39.6 EBIT 49.1 58.3 64.7 39.0 Net profit 49.7 52.1 55.3 37.5 EPS 51.7 52.1 55.3 37.5 Margins (%) EBITDA 12.1 12.3 12.5 11.9 EBIT 8.47 8.41 8.91 8.87 Pre-tax profit 9.6 9.7 9.7 9.6 Net profit 8.62 8.23 8.22 8.09 Valuation metrics (x) P/E 28.9 19.0 12.2 8.9 P/B 3.78 3.17 2.62 2.13 Dividend yield (%) 1.10 1.58 2.45 3.37 P/CF 86.0 22.6 14.2 9.1 EV/sales 2.51 1.61 1.04 0.72 EV/EBITDA 20.7 13.1 8.3 6.0 EV/EBIT 29.7 19.2 11.7 8.1 ROE analysis (%) ROE 13.3 17.8 23.4 26.4 ROIC 12.2 16.6 21.6 25.1 Asset turnover (x) 1.05 1.27 1.43 1.56 Interest burden (x) 1.13 1.15 1.09 1.08 Tax burden (x) 0.84 0.84 0.84 0.84 Financial leverage (x) 1.43 1.63 1.82 1.86 Credit ratios Net debt/equity (%) (10.4) (1.4) (0.7) (8.2) Net debt/EBITDA (x) (0.57) (0.06) (0.02) (0.24) Interest cover (x) (5.1) (16.2) (51.9) (59.6)

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Source: IBES

0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012 2013

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2008 2009 2010 2011 2012 2013

12MF P/B multiple

06 March 2013


Table of contents Focus charts and tables 2 Lights, camera, action ! 3

Riding on China smartphone growth 3 Mix improvement + lens insourcing = stable margins 3 Specialty products providing upside 3 Street’s earnings estimates are too light 3

Sunny Optical Technology Group Co. 2382.HK / 2382 HK 4 Riding on China smartphone growth 6

A leading China smartphone camera module supplier 6 Global smartphone shipments going higher 7 Chinese smartphone share gains accelerating 7 A small player in a large global market ….. 10 …. and a fragmented supply chain ….. 10 …But dominates the China smartphone supply chain 11 Competitive edges strengthening market position 12

Mix improvement + lens insourcing = stable margins 14 Handset camera pixel migration trend continues 14 Image sensor innovations supporting pixel migration 16 Chinese smartphones migrating to 8/13MP in 2013 17 Pixel migration driving volume growth and better mix 18 Improving mix supporting rising blended ASP 19 Largan saw similar growth due to pixel migration 20 Revamp of in-house lens stabilizing gross margins 20

Specialty products providing upside 22 (1) Vehicle lens: Automotive cameras expanding fast 22 (2) Infrared lens: a long-tail growth opportunity 23 (3) Smart TV video module market growth continues 25 (4) Tablet cameras and emerging specialty cameras 26 Gesture recognition broadening addressable market 27 Array cameras – potentially taking off in 1H14E 30 New products offset digital still camera weakness 31

Street’s earnings estimates too light 32 Earnings outlook 32 Balance sheet analysis 33 CS estimates versus consensus 34 Sensitivity analysis 34 Valuations may expand as growth continues 35 Key risks to our call 36

Appendices 38 Company background 38 Employees and production bases 38 Sunny Optical management team profiles 38 Handset camera lens and modules 39

06 March 2013


Riding China smartphone growth We view Sunny Optical as one of the best proxies for China smartphone growth due to its

dominant position (~50% share) in the China supply chain and aggressive camera resolution

migrations in 2013-14E as Chinese smartphone brands expand their product portfolio.

A leading China smartphone camera module supplier

Sunny Optical (Sunny) is a leading optical component and product manufacturer in China. Its

products cover applications such as handsets/smartphones, digital still cameras (DSC),

vehicle imaging systems, surveillance systems, optical surveying instruments and analytical

instruments. In 1H12, the company generated 61%, 35% and 5.0% of its revenue from

optoelectronic products, optical components and optical instruments, respectively. By

application, handset-related products contributed 60-70% of its total revenue.

Figure 7: Sunny Optical’s business overview—products, market share, customers and competitors


In 2011, its revenue from handset camera modules increased significantly, by 72% YoY to

Rmb1,074 mn, driven by rapid growth in China smartphone unit shipments. The close

relationship with a number of top-tier Chinese handset makers such as Huawei, Lenovo,

ZTE, Coolpad, Lenovo is allowing the company to benefit from on the rapid growth of

branded Chinese smartphones. The company dominates in the China handset camera

module market, with about 45-50% share (excluding white-box handsets). Accounting for

~33% of its 1H12 sales, its top four customers are leading Chinese smartphone brands,

namely Huawei, Lenovo, Coolpad and Oppo.

Figure 8: Sunny’s handset camera module growth driven

by China smartphone unit growth and pixel migration

Figure 9: China handset brands accounted for 33% of

Sunny Optical’s revenue in 1H12




1H12 sales mix 60.7% 34.5% 4.8%






Competitors High-end: Lite-On Digital camera: Hoya, Kinko, Phoenix Optical

Mid-end: BYD, Foxconn, Kerr Handset lens: Largan, Genius, Asia Optical

Low-end: Truly, Q-tech, Global Optics Vehicle lens: Fujinon, Konica Minolta

0

500

1,000

1,500

2,000

2,500

Digitalcameralenses

Handsetlenses

Vehiclelenses

Otherlenses


Othercameramodules



Rev

enue

in R

mb

mn

2010 2011 2012E

Huawei11%

Lenovo 8%

Coolpad 8%

Oppo 6%

Samsung5%

Others62%

Handset related products

contributed 60-70% of

Sunny’s total sales in 1H12

Huawei, Lenovo, Coolpad,

and Oppo accounted for

~33% of Sunny Optical’s

1H12 sales

06 March 2013


Global smartphone shipments rising

Bottom-up analysis by the CS global telco equipment team, led by Kulbinder Garcha,

shows that the handset market may reach 2.1 bn units in 2013E, implying a low-single

digit YoY volume growth. Notably, while basic phones and feature phones continue to

decline in terms of unit shipment, unit shipment of smartphones should increase from 716

mn in 2012E to 1.4 bn by 2015E. Driven by continued shipment growth and shift towards

lower price points, smartphones could account for nearly 75% of handset shipments by

2017E, up from 35% in 2012E.

Figure 10: Smartphones to account for 75% of all handset volumes by 2017, up from 35% in 2012

Source: Gartner, Company data, Credit Suisse estimates

We estimate 32% of incremental smartphone volumes globally over the next three years

will be driven by China. We believe the rising demand is driven by several key factors,

including: (1) increase in affordability due to rapid downward shift in price-point, (2)

increase in smartphone supply and (3) continuous performance enhancement and

innovation in smartphone designs. China is often considered a “pure exporter”, but in this

case is a critical market for domestic Chinese smartphone brands. Overall market growth

looks poised to continue, driven by step-up in subsidies for sub-Rmb1,000 smartphones

from Chinese operators and better availability of smartphones across various price-points.

Exhibit 11: China will likely account for over 30% of volume growth in smartphones

∆ (2012 to 2015)

Smartphone units (mn) 2010 2011 2012E 2013E 2014E 2015E Units %

NA 72 107 121 136 149 161 41 6%

WE 86 97 114 133 146 157 43 6%

Japan 18 25 32 36 38 40 7 1%

Korea 7 20 21 24 26 26 5 1%

China 28 78 196 288 364 421 225 32%

India 9 13 21 41 65 103 82 12%

Rest of APAC 29 49 72 104 129 149 77 11%

Brazil 5 9 18 27 47 53 35 5%

Mexico 3 9 15 22 25 25 10 1%

Rest of Latam 9 15 24 38 46 56 32 4%

Russia 4 8 16 21 25 30 14 2%

Rest of CEE 9 12 20 29 36 43 23 3%

MEA 19 30 46 78 124 160 114 16%

Total 299 473 716 976 1,219 1,425 708 100%

Source: Gartner, Credit Suisse estimates

Chinese smartphone share gains accelerating

Samsung, Apple, and other tier-one branded smartphone vendors are driving growth in the

overall smartphone market; smartphone vendors such as Huawei, ZTE and “Chinese/other

brands” are seeing a very similar growth trajectory. Notably, Chinese smartphone vendors

saw unit shipment momentum rising from 4.5% of global smartphone volume in 1Q11 to

21.5% global market share in 4Q12.

Smartphones likely to see

19.4% CAGR over 2012-

17E

China market is one of the

key growth drivers

Apart from Samsung and

Apple, Chinese brands are

powering industry growth

06 March 2013


Figure 12: Apple, Samsung ... and “Other” driving

smartphones—notably Chinese brands as well

Figure 13: Chinese brands’ (Huawei, ZTE, Lenovo, etc)

global smartphone volume share rose to 21.5% in 4Q12

Source: Company data, Credit Suisse estimates Source: Gartner

Our bottom-up analysis of China smartphone builds shows total unit shipments increasing

at a CAGR of 183% over 2011-15E. The availability of reference design platforms from

Mediatek, Qualcomm and Spreadtrum for China smartphone vendors and the support of

low-cost component supply chain in China/Taiwan (touch, display, etc) are fuelling a rapid

increase in competitiveness, both in domestic telco carrier channels and open market

retail channels. Specifically, we see branded China smartphone builds increasing from 43

mn units in 2011 to 158 mn / 243 mn / 315 mn / 382 mn over 2012-15E, driven by: (1)

domestic China smartphone market and (2) export channel expansion.

Figure 14: China built smartphones likely to see 183% CAGR over 2011-15E

Source: Gartner, Company data, Credit Suisse estimates

(1) Chinese handset brands growing in domestic China market

Within the China smartphone market, domestic Chinese brands are ramping up faster than

global Tier-1 brands (such as Samsung, Apple and Nokia). The initial ramp up of

smartphones was dominated by overseas global Tier one brands, at about 70% share in

2011. However, in 2012, this market saw an inflection point and is now only 36% supplied

by global Tier-1 brands, 35% by the top-4 Chinese brands (Huawei, ZTE, Lenovo,

Coolpad), and 29% by the whitebox and second-tier Chinese brands. The key shift was

enabled by a substantially lowered entry barrier due to higher quality chipset and

reference designs and better availability of components (panels, touch, image sensors,

mobile DRAM).

Based on improving affordability and quality, we expect the total China smartphone market

to grow from 197 mn units in 2012E to 421 mn in 2015E, with global tier one brands

accounting for 30%, top Chinese brands 33%, and other brands and whitebox suppliers

0

20,000

40,000

60,000

80,000

100,000

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12E

1Q

13E

2Q

13E

3Q

13E

4Q

13E

Units (000)

Nokia Research in Motion Motorola

Apple Sony Ericsson / Sony Mobile HTC

Samsung LG Huawei + ZTE

Chinese / Others

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12

Chinese brands Chinese brand global share

(mn units) 2011 2012E 2013E 2014E 2015E 2011-15E CAGR

Huawei 20 30 45 60 72 138%

ZTE 11 27 40 55 66 158%

Lenovo 2 23 35 45 54 239%

Coolpad 6 19 30 40 48 168%

Gionee 0 15 20 25 30 562%

Oppo 0 7 12 15 20 1189%

TCL/Alcatel 1 6 12 15 20 194%

Hisense 0 4 9 10 12 278%

Xiaomi 0 4 8 10 12 236%

Tianyu 0 10 12 10 12 230%

G-Five 2 3 5 10 12 157%

Bird 1 5 8 10 12 221%

BBK 0 5 8 10 12 495%

Branded China builts 43 158 243 315 382 172%

Others (white-brands) 30 92 211 316 441 195%

China built smartphones 73 250 454 631 823 183%

Growth (YoY) 241% 81% 39% 30%

Within the China market,

domestic Chinese brands

are ramping up faster than

overseas Tier one brands

Smartphones now 38% of

units shipped in China

06 March 2013


37%. The availability of low-priced smartphones has already prompted a substantial rise in

smartphone penetration, from 17% of all handset units in 2011 (78 mn smartphones out of

458 mn handset sales) to 38% of units in 2012 (197 mn of 512 mn handset sales). By

2015, we model in our global forecast 421 mn smartphones of 570 mn handset sales (74%

of device units).

Figure 15: China smartphone market growing from 78 mn to 421 mn by 2015E


(2) Export channel expanding China built smartphone addressable market

While the export channel has taken off a bit slower, with penetration in emerging markets

increasing YoY from 16% to 23% in 2012, we project export units will reach 54% in 2015

(619 mn of 1.13 bn devices), an area of further potential upside. In 2012, we estimate

China built smartphones shipped 126 mn of its 250 mn units (50% of volume) in China.

We expect the export channel to open up in the coming years as price-points drop and

carriers also look to expand into the available 3G capacity. We forecast China built

smartphones to grow from 245 mn units in 2012 to 823 mn by 2015. Specifically, top

Chinese brands should increase unit shipments from 23 mn in 2011 to 126 mn / 200 mn /

258 mn / 292 mn over 2012-15E.

Figure 16: China smartphone vendor exports outpacing domestic shipments In millions, unless otherwise stated


(mn units) 2011 2012E 2013E 2014E 2015E

Samsung 14.4 30.3 42.0 50.0 65.0

Apple 7.7 18.1 25.0 31.0 36.0

Nokia 22.2 8.2 5.0 6.0 7.0

HTC 2.3 7.0 9.5 11.0 13.0

Motorola 4.7 4.7 4.7 4.7 4.7

Sony Mobile 3.0 2.4 2.4 2.4 2.4

Research In Motion 0.3 0.1 0.2 0.2 0.2

Overseas Tier One's 54.7 70.7 88.8 105.3 128.3

YoY Growth 29% 26% 19% 22%

Share 70% 36% 31% 29% 30%

Huawei Technologies 7.9 17.8 22.5 30.0 36.0

Lenovo 1.7 21.8 31.5 38.3 43.2

ZTE 6.1 14.7 22.0 27.5 29.7

Coolpad 3.4 14.9 27.0 34.0 36.0

Top Chinese Brands 19.1 69.2 103.0 129.8 144.9

YoY Growth 262.9% 48.8% 26.0% 11.7%

Share 24.5% 35.2% 35.7% 35.7% 34.4%

Other brands/whitebox 3.9 56.6 96.6 128.6 148.0

YoY Growth 1345% 71% 33% 15%

Share 5% 29% 33% 35% 35%

CS Model - China Smartphones 77.7 196.5 288.4 363.6 421.2

YoY Growth 153% 47% 26% 16%

China built smartphones 2011 2012E 2013E 2014E 2015E

Top Chinese Brands 19.1 69.2 103.0 129.8 144.9

Other brands/whitebox 3.9 56.6 96.6 128.6 148.0

China shipments (mn units) 23.0 125.8 199.6 258.3 292.9

YoY Growth 447.3% 58.7% 29.4% 13.4%

Share 31.3% 50.2% 44.0% 40.9% 35.6%

Export shipments (mn units) 50.5 124.7 253.9 372.8 529.8

YoY Growth 147% 104% 47% 42%

Share 69% 50% 56% 59% 64%

Asian-built smartphones (mn) 73.5 250.4 453.5 631.1 822.7

YoY Growth 241% 81% 39% 30%

Top Chinese brands are

increasing volumes from to

126 mn / 200 mn / 258 mn /

292 mn in 2012-15E

06 March 2013


A small player in a large global market …..

Globally, Sunny Optical plays in the camera module supply chain with unit shipments of

about 2.16 bn in 2012, according to industry estimates. Based on Sunny Optical’s camera

module unit shipment of 97 mn in 2012 and our estimated 2012E camera modules

revenue of Rmb2.3 bn, Sunny Optical has ~4% global market share. According to Yole

Development, the US$9.3 bn camera module market in 2012 comprises the ~US$6.6 bn

CMOS image sensor (CIS) market and the camera module assembly and test value chain

of about US$2.7 bn. Given the higher value add and greater technology innovation, CMOS

image sensor industry is about 70% of the entire supply chain. The CMOS image sensor

market is made up of: (1) design value chain of ~US$2.0 bn (including overhead and

SG&A), (2) the front-end manufacturing supply chain of about US$3.0 bn, (3) optical layer

market of US$400 mn and (4) back-end packaging value chain of about US$1.2 bn. The

~US$2.7 bn camera module assembly and testing supply chain consists of: (1) ~US$1.4

bn optical component market of lenses and IF filters, (2) auto-focus component industry of

the size of US$460 mn, and (3) module assembly and test market of ~US$900 mn.

Migration to higher-resolution cameras is driving market growth. While most of the gain on

higher content value pertains to CIS vendors from design innovations, camera module

assembly and testing companies also benefit as: (1) CIS costs are generally passed

through to the customers and (2) higher resolution camera modules require more complex

and precise assembly and testing.

Figure 17: CIS and camera module value chain—US$6.6 bn + US$2.7 bn = US$9.3 bn market

Source: Yole, Credit Suisse

…. and a fragmented supply chain …..

Taking a closer look, the $9.3 bn camera module value chain with over 2 bn unit

shipments is fragmented and has no dominant player. The market is fragmented as no

single player has a broad share of technologies, competencies and IP. The supply chain is

complex with numerous business models and vertical integration is limited. The top four

players in the US$6.6 bn CIS market, namely Omnivision, Samsung, Sony, and Aptina,

accounted for 78% of 2012 volume. The camera module assembly market is even more

fragmented—no vendor shipped more than 11% of the total volumes in 2012.

US$9.3 bn camera

module market

US$6.6 bn CMOS

image sensor market

US$2.7 bn camera

assembly market

Sunny Optical is a small

player with 4% share in a

US$9.3 bn market with unit

shipments of 2.16 bn

Camera resolution upgrades

benefit assembly companies

as well

Sunny Optical is a smaller

player in a fragmented

supply chain with limited

vertical integration

06 March 2013


Figure 18: CMOS image sensor volume share—top-4

vendors dominating nearly 80% of 2012 volume of 2.16 bn

Figure 19: The fragmented camera module market of 2.16

bn units, with no vendors having >11% share in 2012

Source: TSR, Company data, Credit Suisse estimates Source: TSR, Tessera, Credit Suisse estimates

…but dominates the China smartphone supply chain

While Sunny Optical is a small player globally, it dominates the China smartphone camera

module market with ~50% share, based on our estimate of 243 mn units branded Chinese

smartphones in 2013E (excluding white-box). Globally, Sunny Optical competes with tier

one camera module suppliers, namely Foxconn, ST-Micro, Toshiba, and Sharp, which

mainly supply to the Nokia; LG-Innotek, which mainly supplies to Apple and LG

Electronics; and SEMCO and Samsung Techwin, which mainly supplies to Samsung.

Sunny Optical’s major competitor in the China market is Lite-On Technology (LOT) from

Taiwan, with about 32% market share in China in 2012E, based on our estimate. Both

Sunny and LOT are key suppliers of high-resolution (8MP and above) camera modules to

Huawei, Lenovo, Xiaomi and other Chinese smartphone brands. However, only 30% of

LOT’s unit shipment goes to Chinese customers, mainly for flagship models, and 70% of

its capacity is occupied by Samsung, HTC and other international brands. Sunny Optical

has higher allocation share in mass-market Chinese smartphones given its closer

collaboration with Chinese vendors, quicker design turnaround time, and stronger local

support. The remaining 18% share in the China market goes to other domestics players,

generally at 5MP and below, such as BYD, Foxconn, Truly, Kerr and Global Optics.

Figure 20: Sunny dominates the China smartphone

market (excluding white-box) with about 50% share ….

Figure 21: … due to its vertical integration, manufacturing

capability, R&D and customer relationship

Source: TSR, Company data, Credit Suisse research Source: Company data, Credit Suisse estimates

Omnivision27%

Samsung22%Sony

18%

Aptina11%

Toshiba5%

ST-Micro3%

Sharp0% Hynix

0% Others14%

Foxconn11%

ST-Micro10%

Toshiba10%

Sharp7%

LG Innotek7%SEMCO

5%Samsung Techwin

5%

Lite-On5%

Cammsys5%

Hansung5%

Sunny Optical4%

Others26%

Sunny Optical

50%

Lite-On32%

Others18%

BYD

Foxconn

Truly

Kerr

Q-tech

Global Optics

Vertical Integration

(lens, camera module)

Manufacturing

capability(in-house automation)

Research & development

(optics, mechnical, electronics)

Customer relationship

(China handset makers)

Competitive edge

Dominating the China

supply chain (ex-white-box)

with ~50% share

LOT is a key supplier of

high-resolution camera

modules in flagship China

smartphone models but

Sunny Optical has higher

allocation with ~50% share

06 March 2013


Competitive edges strengthening market position

Competition in the camera module space in the China handset supply chain is increasing

with several new entrants, such as Kerr, O-Film and Truly, starting to ship 5MP cameras in

2013. Nevertheless, Sunny Optical has multiple competitive advantages that allow it to

stay above competition. Strong links with key CIS/VCM/lens suppliers, advanced

autofocus lens design and manufacturing capabilities, better scale and vertical integration

(in-house lens and camera module production capability) and strong relationship with top-

tier Chinese handset makers are key factors allowing Sunny Optical to remain a dominant

camera module supplier in the China smartphone supply chain, in our view.

(1) Vertical integration: Better scale, margins and efficiencies

Sunny Optical has better economies of scale in handset cameras versus its domestic

rivals, due to its capacity and vertical integration. It is one of the few companies in the

industry that possesses vertically integrated capability and deep know-how in optics (29

years in optics), electro-mechanical engineering and image processing. With in-house

module assembly and auto-focus lens set production capability, the company is able to

provide a total one-stop solution to its handset customers at a competitive price.

Sunny Optical’s handset camera gross margin is slightly higher than its peers who have to

source lenses externally. While most of its 3MP and below camera modules are equipped

with in-house lenses, Sunny Optical sources most of its high-resolution (>5MP) lenses

from Largan and Kantatsu in 2012. Per our checks, the company adopts voice coil motors

(VCM, for auto-focus) mainly from TDK and Mitsumi. To improve its cost structure, the

company plans to increase lens insourcing for high-resolution (5MP and above) camera

modules in 2013 and adopt VCM from domestic suppliers for its lower end products.

(2) Design manufacturing: Fast responsiveness and in-house automation stand out

Sunny Optical offers products with fast design response, optimised performance and

better cost balance to its cost sensitive and demanding Chinese handset customers. Most

importantly, it has in-house automation production capability, including automatic testers

and automatic painting machines. Its key production technologies include automation for

production and inspection for lens sets, plastic injection moulding technology with narrow

runway for handset lenses, mass production for glass aspherical lenses with several

cavities per mould. Its advanced COB technologies allow production of high-resolution

(>5MP) camera modules in a miniaturised form factor.

Figure 22: Sunny Optical’s vertically integrated capability is unique in the camera module supply chain

Source: Credit Suisse

Handset lens

Voice coil motor

Largan

Kantatsu

TDK

Mitsumi

Handset lens setCamera module

makers

CMOS image

sensor

Omnivision

Samsung

Sony

Aptina

Galaxycore

Printed circuit

board

Camera module Handset makers

Huawei

Lenovo

Coolpad

Oppo

Gionee

Sharp

Foxconn

Truly

Kerr

Global Optics

End productsComponents End customers

Sunny

In-house

Competition is rising but

Sunny Optical has several

competitive advantages that

solidify its position

Sunny Optical’s vertically

integration offers better

scale and cost efficiency

against competition

In-house production

automation and quick

design responsiveness are

key strengths

06 March 2013


(3) Research and development: Nudging the entry barrier up

The ongoing camera resolution migration in smartphones and Sunny’s R&D focus on high-

resolution camera lens / modules and specialty cameras set it apart from rivals. R&D in

the areas of optics, electronics and software image processing allowed the company to

ramp up 8MP/13MP handset cameras ahead of its domestic rivals who are still at

5MP/8MP. This was a result of its extensive R&D partnership with Pantech that made the

company a qualified supplier of 8MP/13MP handset cameras in 2011/12.

The company has developed and obtained patents for ultra-wide-angle high resolution

vehicle lenses. Sunny Optical also has extensive R&D in various infrared lens sets for

vehicle and security surveillance applications. The company successfully started the mass

production of smart TV video camera modules for Samsung in 2012. It also completed

R&D for a number of microscopic systems, analytical instruments oriented for

spectrophotometers, gas chromatographs and mass spectrometers and high-end

measuring machines. The company is developing new technologies, including array

cameras (see page 31 for details on this technology) and 3D gesture recognition cameras.

(4) Solid customer relationship: Stickier business relationships

Sunny Optical has a clear advantage given its close proximity with Chinese customers and

long-term partnerships with key domestic handset makers. By entering into the supply

chain of TCL handset business segment in 2009-10, Sunny Optical established a close

relationship with a number of fast-growing branded Chinese customers such as Huawei,

Lenovo, Coolpad. As these customers grow their market shares, Sunny Optical further

strengthened its business relationship by offering cost-sensitive, high-performance

handset camera modules that differentiate from their global competitors. On top of its

success in China, Sunny Optical is expanding its presence to top-tier international

customers with meaningful production ramp-up potentially starting in 2H13.

Figure 23: Sunny Optical—Porter's five forces analysis shows mild competitive threats

Factors Forces Analysis

Bargaining power with

suppliers

Medium Scale advantage, diversified supplier base, ability to pass through cost

Top five suppliers account for about 33% of total purchase (11.1% by the largest supplier). Raw

materials form ~75% of COGS; CIS and VCM are the main components which account for 60-70%

within that. Nevertheless, CIS and VCM are pass-through costs. The company has scale advantage

given its sheer volumes and in-house automation.

Bargaining power with

customers

Medium Low customer concentration and high cost efficiency offsetting pricing pressure

While handset vendors are likely to assert pricing pressure on component suppliers, Sunny's ability to

offer cost-effective high-end products is a key differentiation. Customer concentration is low: the top

five customers accounted for only 38% of sales, the largest customer contributed 11.5% in 1H12.

Threat of new entrants Mid-to-Low New entrants emerging in 5MP but maintains leadership in 8MP/13MP

Domestic new entrants such as Kerr, O-Film, Truly and Q-Tech are ramping up on 5MP camera

modules for mass market smartphones. Nevertheless, Sunny Optical retains its leading position in

higher resolution as China smartphone vendors migrate mid-to-high end models towards 8MP/13MP

cameras. This forms a high entry barrier as Sunny Optical has better yields and technology leadership.

Threat of substitute

products

Mid-to-Low Immature technology limiting substitution threat

While substitutes are emerging, such as wafer level optics (WLO) and liquid lens, new technologies

are still running at low yields and are limited to low-resolution front-facing cameras.

Competitive rivalry

within the industry

Medium Competitive rivalry is mild given the fragmented value chain

Sunny is dominant supplier in the China camera module supply chain with strong relationship with

Tier-1 smartphone vendors: Huawei, Coolpad, Lenovo and ZTE. The company is also reaching

international customers in markets such as vehicle lens and tablets.


Strong R&D and pixel

migration allowing the

company to stay ahead of

competition

Diversifying into others

specialty optical products

Clear advantage given close

partnerships with key

domestic handset makers…

…and also overseas

customer penetration in

2013

06 March 2013


Mix improvement + lens insourcing = stable margins Rapid expansion of the smartphone and tablet market, combined with increase in usage of

mobile social apps, is leading to higher-resolution camera specification migrations. The

resolution and miniaturisation race is ongoing, and performance metrics are also

becoming more stringent. In 2011, the average mobile handset was 30% of the pixel count

of the average digital still camera (DSC). By 2015, handsets will have 60% of the pixel

count of DSC on average, with some having more than 80%, according to iSuppli

Figure 24: Handset camera resolution catching up with digital still cameras

Source: IHS iSuppli Mobile and Wireless Communications Service

Handset camera pixel migration trend continues

According to IDC, 5MP and 8MP camera modules will dominate the smartphone market in

its forecast period of 2012-16E. By 2015-16E, 12MP and above cameras will begin to be

dominant in the mid-to-high-end smartphones. IDC expects 8MP to see a CAGR of 28.4%

over 2011-16, and the firm estimates 12MP and above cameras to see a CAGR of 150%

in the same period. By 2016E, IDC expects 12MP handset cameras to be the most

popular solution, shipping over 560 mn units globally.

Figure 25: Handset camera shipment by resolution: 8MP and above cameras rising fast

Source: IDC

0

100

200

300

400

500

600

2011 2012 2013 2014 2015 2016

VGA 1MP 2MP 3MP 5MP 8MP 12MP

Smartphone market growth

to lead to pixel migration

12MP+ rear facing camera

growing fast

06 March 2013


Secondary front-facing camera growth accelerating

Driven by 3G/4G and video proliferation in smartphones, the penetration of front-facing

(secondary) camera is on the rise. Yole Development estimates that about 35% of total

mobile handsets shipped in 2012 come with a front-facing camera. Notably, secondary

camera shipments should also see a CAGR of 15% over 2012-17E, much faster than

primary camera (rear-facing) CAGR of 8% in the same period, reaching a penetration rate

of nearly 50% by 2015E and over 57% by 2017E.

Figure 26: CIS shipments forecast in cell phones (mn units)

Source: Yole Development

HD video also driving secondary camera pixel migration

Within the secondary camera segment, low resolution VGA 0.3MP has been the dominant

resolution given lower cost. Driven by HD video solutions in 3G-enabled smartphones,

1.3MP/720p and 2.0MP/1080p HD video front-facing cameras are increasingly replacing

low-resolution VGA 0.3MP solutions. According to TSR’s handset camera shipment

forecast, high-resolution secondary cameras (1.3MP/720p and 2.0MP/1080p) will grow

from about 500 mn units in 2012 to about 1.2 bn units in 2016. Low-resolution 0.3MP VGA

cameras will decline from about 350 mn units in 2012 to less than 50 mn units by 2016.

Figure 27: Driven by HD video, 1.3MP and 2.0MP HD front-camera growing robustly

Source: TSR (2012 CCD/CMOS Area Image Sensor Market Analysis), Omnivision

Front facing camera

penetration likely rising from

35% in 2012E to 50% by

2015E

Front-facing cameras also

migrating towards higher

resolution

06 March 2013


Image sensor innovations supporting pixel migration

CMOS technology scaling has enabled image sensors to follow the Moore’s Law in

doubling pixel density per dollar every two years. As the majority of the CIS is composed

of analog circuits, CIS adopts technology nodes that are behind that of the most advanced

process node. In handset cameras, the main optical formats are 1/2.5”-1/6”, with the

highest volume in 1/4”. With proven optical formats in the market, CIS followed the

migration rule from the 2.25 μm to 1.1 μm pixels.

Figure 28: Resolution table—pixel size vs optical format Figure 29: “More than Moore’s” enabling pixel scaling

Source: Samsung Source: Chipworks, Credit Suisse research

As pixel dimension shrinks so does the area of the sensors that receive light, reducing the

sensitivity compared to those of the prior pixel size. This has led to innovations in

Backside Illumination (BSI) technology. The innovation was led by Sony and Omnivision in

2009, with BSI technology adopted to shrink pixel size below 1.4 μm. BSI has now

become the mainstream technology for high-performance CIS with 1.12 μm BSI pixels

now available and the industry is potentially moving towards 0.9 μm pixel and lower.

In addition to the conventional pixel shrinkage, “more than Moore” trends are increasingly

evident. The new innovation lies in stacked sensors based on advanced 3D stacking of a

specialised image sensors on top of deep-submicron digital CMOS (65 nm 1P7M) using

silicon via (TSVs) and micro-bumps. In conventional CIS, the pixels (sensors) and circuits

(logic) are formed on the same silicon substrate. Like oil and water, the co-existence of

two conflicting elements makes it difficult to optimize their characteristics and this also

imposes other constraints. Stacking pixels on the processing circuit rather than next to

each other, while putting the circuit and pixel sections on separate substrates, optimises

process manufacturing for each circuit and leads to sensors with greater sensitivity, faster

read-out, and greater signal processing integration. 3D sensor stacking technology is likely

to drive the next camera resolution migration.

Figure 30: Stacked CIS, the new BSI technology Figure 31: Sony shipping the first 3D sensor in 2012

Source: Sony Source: Yole

Pixel sizeRamp-up

yearsTechnology Node Innovation

1.75um 2007 - 2009 180nm/130nm/110nm CMOS scaling

1.40um 2009 - 2011 90nm/65nm CMOS scaling

1.10um 2011 - 2013 65nm BSI technology

0.90um 2013 - 2015 40nm 3D stacking

From 2007 to 2011,

resolution migration was

enabled by CMOS scaling

BSI enabled further pixel

shrinkage with good sensor

sensitivity

3D stacking technology

driving better CIS

performance from 2013

onwards

06 March 2013


Chinese smartphones migrating to 8/13MP in 2013

Chinese brands are still behind in camera resolution (pixel) migration. While smartphones

from global brands were mainly adopting 5MP/8MP cameras in 2012, Chinese brands are

still mainly at 3MP/5MP. In 1H12, Chinese smartphone makers mainly adopted 3MP

cameras for entry-level (<Rmb1,000) models and 5MP for mid-end (Rmb1,000-2,000)

models. Nevertheless, pixel migration is accelerating as Chinese vendors expand their

product portfolios. Chinese vendors started ramping up mid-to-high-end (>Rmb2,000)

devices with 8MP cameras in 2H12. Sunny Optical and Lite-On are the key 8MP camera

module suppliers in China. In 2013, we expect entry-level Chinese smartphones to migrate

from 3MP to 5MP and high-end smartphone models to upgrade to 8MP/13MP cameras.

Figure 32: Chinese smartphones migrate to 8MP in 2013 as product portfolio expands

Source: Company data

In 2013, Chinese smartphone vendors are adopting 13MP and 2MP/1080p cameras in

their high-end flagship models. Having qualified as a 13MP camera supplier to Pantech in

2H12, Sunny Optical started mass production of the high-end cameras in 1H13. Sunny

Optical has gained design wins in 13MP cameras with major Chinese smartphone makers

including Huawei, ZTE, Lenovo, Oppo and Coolpad. Lite-On is Sunny Optical’s major

competitor in the 13MP camera modules in the China smartphone supply chain.

Figure 33: Sunny supplies 13MP cameras to high-end smartphones at Pantech, Huawei, ZTE, Lenovo, Oppo, Coolpad

Source: Company data

Year 2011 2012 2013

Manufacturer Huawei Huawei Huawei

Model U8650 U8836D U9508

OS Android 2.3 Android 4.0 Android 4.0

Screen size 3.5" 4.3" 4.5"

Resolution 480x320 960x540 1280x720

Qualcomm MSM7227 Mediatek MT6577 Hisilicon K3V2

Single-core, 600MHz Dual-core, 1.0GHz Quad-core, 1.4GHz

Rear camera 3.2MP 5.0MP 8.0MP

Front camera 0.3MP 0.3MP 1.3MP

Price (RMB) 800 1,185 1,999

Processor

Manufacturer ZTE CoolPad Huawei Lenovo Oppo Pantech

Model Grand S 9960 Ascend D2 K900 Find 5 Vega R3

OS Android 4.1 Android 4.1 Android 4.1 Android Android 4.1 Android 4.0

Screen size 5.0" 4.7" 5.0" 5.5" 5.0" 5.3"

Resolution 1920x1080 1280x720 1920 x1080 1920 x1080 1920 x1080 1280x720

Snapdragon S4 Pro Nvidia Tegra3 HiSilicon K3V2 Intel Atom Z2580 Snapdragon APQ8064 Snapdragon APQ8064

Quad-core, 1.7GHz Quad-core, 1.5GHz Quad-core, 1.5GHz Dual-core, 2.0GHz Quad-core, 1.5 GHz Quad-core, 1.5GHz

Rear camera 13MP 13MP 13MP 13MP 13MP 13MP

Front camera 2MP 1.3MP 1.3MP 2MP 2MP 2MP

Processor

Mid-end Chinese

smartphones upgrading to

8MP rear cameras in 2013

Sunny is a key supplier of

13MP cameras in China

supply chain

06 March 2013


Pixel migration driving volume growth and better mix

Sunny’s handset camera unit shipment growth is increasingly driven by higher resolution

cameras. We forecast Sunny’s handset camera shipment will continue to grow

29%/22%/20% to 124.4 mn / 151.5 mn / 182.4 mn units in 2013-15E, respectively.

■ 0.3MP fading away. Sunny Optical’s 0.3MP cameras are mainly front facing solutions.

Due to cannibalisation by HD front camera, we project Sunny Optical’s 0.3MP volume to

fall from 29 mn in 2012E to 9.8 mn / 4.5 mn / 2.3 mn units in 2013-15E, respectively.

■ 1.3MP and 2.0MP front camera increasing. Driven by HD video, we forecast 1.3MP

720p camera to grow significantly from 3.2 mn units in 2012E to 18.8 mn / 21.6 mn /

18.6 mn in 2013-15E. While demand for 2.0MP rear-facing cameras should decline as

feature phones fade away, we estimate 2.0MP 1080p front-facing cameras will drive

volume from 9 mn in 2012E to 10.2-18.3 mn in 2013-15E.

■ 3.0MP falling but 5.0MP thriving. As entry-level smartphones migrate to 5.0MP, we

expect 3.0MP volume to decrease from 29.1 mn units in 2012E to 18.4 mn / 5.2 mn /

2.7 mn in 2013-15E. We estimate 5.0MP camera will ramp up from 21.0 mn in 2012E

to 36.6 mn in 2013E before declining to 27.8 mn / 18.2 mn in 2014-15E.

■ 8.0/13.0MP growing fast. With 8.0MP/13MP camera migration as a multi-year growth

driver, we look for Sunny’s 8.0MP shipments to grow from 4.7 mn in 2012E to 36.6 /

27.8 / 18.2 mn units in 2013-15E and 13.0MP to reach 8.7 mn / 30.5 mn / 59.8 mn in

2013-15E. We expect 50% of Sunny’s 13.0MP handset camera shipments to be for

Pantech and the remaining for Chinese handset customers.

■ 16.0/20.0MP starting in 2H14E. Due to higher complexity, we do not expect

16MP/20MP camera modules to start production until 2H14E, and start ramping up in

2015E.

As Chinese smartphones migrate towards 5.0MP / 8.0MP / 13.0MP camera modules, we

estimate Sunny’s 5MP and above camera volume mix will increase from 28%% in 2012E

to 78% in 2015E. While competition in 5MP cameras is rising with new entrants such as

O-Film, Truly, BYD and others, the expanding market is ample for Sunny to maintain its

share. Beside, most of its new competitors are tapping the white-box and low-tier handset

makers which Sunny Optical avoids to keep its blended pricing healthy.

Figure 34: Sunny’s 5.0MP and above handset cameras growing from 26.2 mn in 2012E to 140.6 mn in 2015E


Sunny's handset camera module shipment by resolution Sunny's handset camera module shipment mix

(mn units) 2011 2012E 2013E 2014E 2015E

0.3MP 32.8 29.3 9.8 4.5 2.3

1.3MP 2.4 3.2 18.8 21.6 18.6

2.0MP 20.9 8.9 10.2 12.5 18.3

3.0MP 9.9 29.1 18.4 5.2 2.7

5.0MP 2.9 21.0 36.6 27.8 18.2

8.0MP 0.7 4.7 21.8 46.4 41.3

13.0MP - 0.5 8.7 30.5 59.8

16.0MP - - - 3.1 21.3

Total 69.6 96.6 124.4 151.5 182.4

Growth 59% 39% 29% 22% 20%

Entry-level Mainstream High-end

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012E 2013E 2014E 2015E

0.3MP 1.3MP 2.0MP 3.0MP

5.0MP 8.0MP 13.0MP 16.0MP

>5MP28%

>5MP78%

Sunny to ship 124.4 mn /

151.5 mn / 182.4 mn

handset cameras in 2013-

15E

Leadership in high-

resolution cameras and

rapid market expansion

allow Sunny to maintain

shares

06 March 2013


Improving mix supporting rising blended ASP

Smartphone camera pixel migration is driving better sales mix and lifting blended ASP. An

8MP handset camera is typically 1.5-2 times higher in dollar value versus a 5MP module.

Even in the case of camera modules similar to HTC’s 4MP UltraPixel camera (larger

sensors but lower pixel count offering better light capturing capability), ASP is higher than

for a 13MP module, due to higher complexity. Sunny can start producing UltraPixel

cameras in March/April but wide adoption by Chinese customers is unlikely near term

given the inferior appeal of lower-resolution cameras.

Although constant price erosion at each resolution is typical, we expect Sunny Optical’s

blended average selling price (ASP) to increase from Rmb23.9 in 2012E, to Rmb32.2 in

2013E and towards Rmb41.1 in 2015E, driven by rising 8MP/13MP mix. We assume

annual ASP decline of 20-30% for rear-facing cameras. Specifically, we forecast 5MP/8MP

camera ASPs to fall 27% in 2013E, due to competition and fast ramp-up of fixed-lens 5MP

cameras that are of lower ASP. As HD front-facing cameras demand surges, we project its

1.3MP 720p and 2MP 1080p cameras to see only 10-15% ASP erosions in 2013-15E.

Figure 35: Blended ASP is rising on better mix driven by migration to 8MP cameras


Revenue mix is improving as sales contribution of 8.0MP and above products is surging

from 18.5% in 2012E to 55.3% / 77.6% / 88.6% in 2013-15E, according to our estimates.

With our unit shipment forecast of 124.4 mn / 151.5 mn / 182.4 mn and rising blended

ASP, we expect sales growth of 74%/42%/32% in handset cameras in 2013-15E, with

sales rising to Rmb3.9 bn / Rmb5.6 bn / Rmb7.4 bn in 2013-15E. We expect 16/20MP

cameras to deliver meaningful revenue contribution only after 2014E.

Figure 36: Sunny’s 8MP/13MP sales ramping up sharply Figure 37: Improving mix driving blended ASP higher


15.4

23.9

32.2

37.6

41.1

8.3%

54.7%

34.9%

16.7%

9.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2011 2012E 2013E 2014E 2015E

AS

P in

Rm

b

Blended ASP (Rmb) ASP Growth

72%

115%

74%

42%32%

0%

20%

40%

60%

80%

100%

120%

140%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2011 2012E 2013E 2014E 2015E

(Rmb mn)

0.3MP 1.3MP 2.0MP3.0MP 5.0MP 8.0MP13.0MP 16.0MP YoY growth

Sales contribution 2011 2012E 2013E 2014E 2015E

0.3MP 20.5% 9.2% 1.5% 0.4% 0.1%

1.3MP 3.6% 2.5% 7.8% 5.5% 3.1%

2.0MP 33.0% 5.9% 4.5% 3.4% 3.2%

3.0MP 22.7% 25.6% 7.1% 1.1% 0.4%

5.0MP 13.8% 38.0% 27.8% 11.4% 4.4%

8.0MP 6.4% 15.7% 30.3% 34.9% 18.4%

13.0MP 0.0% 3.0% 20.9% 36.4% 41.5%

16.0MP 0.0% 0.0% 0.0% 6.9% 28.9%

Total 100.0% 100.0% 100.0% 100.0% 100.0%

8.0MP and above 6.4% 18.7% 51.3% 78.2% 88.8%

2011 2012E 2013E 2014E 2015E

Volume (mn units) 69.6 96.6 124.4 151.5 182.4

ASP (Rmb) 15.4 23.9 32.2 37.6 41.1

Revenue (Rmb mn) 1,073.7 2,306.9 4,005.4 5,692.4 7,504.5

Growth (YoY)

Volume 59.0% 38.9% 28.7% 21.8% 20.4%

ASP 8.3% 54.7% 34.9% 16.7% 9.5%

Revenue 72.2% 114.9% 73.6% 42.1% 31.8%

8MP handset camera is

typically 1.5-2 times higher

in dollar value versus 5MP

Despite ASP erosion at

individual camera resolution,

blended ASP is rising on

rising sales mix of higher-

resolution products

Rising sales mix of 8MP /

13MP is driving robust sales

growth

06 March 2013


Largan saw similar growth due to pixel migration

A closer look at Sunny Optical’s peers in the handset camera supply chain shows that our

bullish estimate of multi-year growth trajectory, driven by pixel migration, is not

unachievable. As a leading handset lens set supplier, Largan registered a similar growth

rate in 2008-11 as the company saw rapid expansion in its high-resolution lenses. Most

notably, Largan achieved about 50% sales growth YoY in its handset lens business in

2010 when its 5.0MP and above products reached 50% of its sales.

As sales mix of Largan’s high-resolution lenses (3MP or above) increased from 9% in

2007 to 12% / 55% / 80% / 90% in 2011, blended ASP grew steadily, at 11% / 9% / 10% /

12% over 2008-11. Chinese smartphone brands are largely still one generation behind in

camera resolution, at 3MP/5MP versus overseas smartphones that already at 5MP/8MP.

As such, Sunny Optical should see robust sales growth over the next few years as

Chinese smartphone vendors such as Huawei, Lenovo, Coolpad and Oppo aggressively

migrate to higher-resolution camera modules.

Figure 38: Rapid growth driven by pixel migration can be achieved as shown by Largan


Revamp of in-house lens stabilising gross margins

While we expect its handset camera module blended ASP to increase over the next few

years, its gross margin profile should remain stable at about 14-15% level. This is mainly

because cost of raw materials is also increasing on camera resolution migrations. More

than 70% of its COGS in handset camera modules are raw materials such as CMOS

image sensors, VCMs and lenses. As the cost of these components increases in tandem

with resolution upgrades, gross margins are likely to remain stable.

We estimate that gross margin of Sunny Optical’s handset camera module is typically 1-2

pp higher than its peers mainly due to its in-house lens production capability. Sunny

Optical’s in-house lens production fell over 2010-12E while its high-resolution camera

modules unit shipments increased. A closer look at handset lens set production shows that

only 36% of its camera modules in 2012 were based on in-house lenses, much lower than

the in-house adoption rate of 75%/64% in 2010/11. This is mainly because Sunny Optical

has fallen behind in plastic injection moulding production for high-resolution handset lens

set and the company has to source a majority of 5MP and above lenses from Largan and

Kantatsu.

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011

VGA 1.3MP 2.0MP 3.0MP 5.0MP

8.0MP Volume growth ASP growth Sales growth

Largan saw a similar growth

trajectory in 2008-11 driven

by pixel migration in handset

lenses

Sunny Optical should see

robust sales growth as

Chinese smartphones

upgrade camera resolutions

Gross margin profile should

remain stable at about 15%

level as COGS rises in pixel

migration

In-house lens adoption has

been decreasing as Sunny

Optical is behind in high-

resolution lens production

06 March 2013


Nevertheless, Sunny Optical recently resolved the issue through external partnership and

by hiring some key new talents from overseas. As the company improves its high-

resolution lens (5MP/8MP) production capability, the company targets 40%/20% of its

5MP/8MP camera modules to be equipped with its in-house lenses in 2013E. We expect a

rebound in its in-house lens productions in early 2Q13. With that, we see its lens

insourcing increasing from 36% in 2012E to 43-46% in 2013-15E. As in-house lens lowers

camera module production cost, we expect mix improvement (enabled by pixel migration)

and revamp of lens insourcing to stabilise its handset camera module gross margins at

14.9%/15.0%/15.1% in 2013-15E.

Any further increase in the adoption of in-house lens provides potential gross margin

upside for its handset camera module business. Based on our assumption that lens sets

are 15% of COGS and that 40% cost savings can be achieved with in-house lens, we

estimate that every 10 pp increment in internal lens set adoption would contribute to about

4% decrease in overall camera module COGS. This implies that for every 10 pp rise in

internal lens adoption, we should see 0.5 pp increment in its handset camera module

gross margins. Our sensitivity analysis shows that our 2013E EPS estimate could increase

by 3.3% for every 10 pp increase in handset lens insourcing.

Figure 39: In-house lens set adoption re-expanding Figure 40: Better mix stabilising handset gross margins


75%

64%

36%

43% 44% 46%

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

20

40

60

80

100

120

140

160

180

200

2010 2011 2012E 2013E 2014E 2015E

Uni

t shi

pmen

t (m

n)

Handset camera modules (mn units)

Internal lens (mn units)

Lens insourcing %

14.6%

14.8%

14.9%

15.0%

15.1%

14.3%

14.4%

14.5%

14.6%

14.7%

14.8%

14.9%

15.0%

15.1%

15.2%

2011 2012E 2013E 2014E 2015E

Blended GM

Problem resolved. Improved

8MP/13MP mix and lens

insourcing is stabilizing GM

at around 15% level

Every 10 points incremental

in-house lens adoption

raises camera module GM

by about 0.5 points

06 March 2013


Specialty products providing upside In addition to growth in handset cameras, Sunny Optical is also targeting multiple new

products as growth drivers, including vehicle / infrared lenses, smart TV video cameras,

tablet cameras and specialty cameras (gesture control, array cameras), with potential

penetration in global tier one customers. While sales may be small, these high-margin

products will contribute 30-35% of total gross profit in 2013-15E by our forecast.

Figure 41: 2011-15E gross profit growth also driven by emerging high-margin products


(1) Vehicle lens: Automotive cameras expanding fast

Multiple new applications are driving the automotive camera market. These include rear /

side cameras for back-over and parking assistance, front cameras for drive recorder and

obstacle detection, grill cameras for day/night vision, interior cameras for passenger

monitoring and smart airbags. While automotive camera modules typically require only

low-resolution (1-2 MP) lenses, ASPs are typically 10 times higher than handset lens set

due to higher quality and reliability (and lifespan) requirements. As such, we estimate

vehicle lens offers gross margins of 35-40% vs corporate level of ~18%. Sunny Optical is

a key supplier alongside competitors such Fujinon and Konica Minolta.

Figure 42: Multiple cameras (rear, front, side, interior, grill) expanding market size

Source: Omnivision

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

Digitalcameralenses

Handsetlenses

Vehiclelenses

Otherlenses


Othercameramodules



Gro

ss p

rofit

(R

mb

mn)

2011 2012E 2013E 2014E 2015E

Driven by automotive and Infrared cameras

Driven by tablet camera, Smart TV

camera, 3D camera

High-margin specialty

products emerging as

growth drivers

Multiple vehicle cameras

(rear, front, side, interior,

grill) expanding addressable

market in vehicle lens

06 March 2013


As the global market of automotive cameras expands from 17 mn units in 2012E to 48 mn

in 2015E, we expect Sunny Optical’s vehicle lens set volume to increase from about 4.4

mn units in 2012E to 7.7 mn / 11.9 mn / 16.6 mn units in 2013-15E. Orders from European

automotive camera makers, such as Continental, and Japanese automobile makers are

likely key volume growth drivers. This implies Sunny Optical’s market share could ramp up

rapidly from 26% in 2012E to about 30%/33%/35% in 2013-15E. We estimate a CAGR of

48% in Sunny Optical’s vehicle lens revenue over 2012-15E.

Figure 43: Sunny’s vehicle lens unit shipment increasing

to 16.6 mn as its unit market share rises to 35% by 2015E

Figure 44: Sales likely to see 48% CAGR and gross profit

contribution rising from 9% in 2012E to 12% in 2015E

Source: Omnivision, TSR 2011, Credit Suisse estimates Source: Company data, Credit Suisse estimates

(2) Infrared lens: A long-tail growth opportunity

An infrared camera is a thermal system that converts IR radiation into a visible image. The

main components of an IR camera include camera core, IR lenses and detectors—UFPA

(Uncooled Focal Plane Arrays) IR sensors. Due to high reliability requirements, we

estimate that Sunny Optical’s IR lens business offers gross margin of about 50%, the

highest among all product segments.

Figure 45: Main parts of an IR camera include camera core and detectors

Source: Yole Development

Infrared spectrum ranges from NIR to LWIR wavelengths. Each IR spectrum provides

different information and targets different market segments. LWIR (Long Wave IR) or FIR

(Far IR) is adopted for thermography and passive vision enhancement (as it does not

require light sources). NIR (Near IR) enables active vision enhancement (such as for

gesture control or night vision). SWIR (Short Wave IR) and MWIR (Medium Wave IR)

target active vision enhancement and material analysis. Initially developed by US defence

companies for the military market, LWIR uncooled camera is now the largest and fasting

growing market in the overall IR camera business and are increasingly emerging in

commercial applications, especially in automotive and video surveillance.

12.9%

18.3%

25.8%

29.7%

33.4%34.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

-

10.0

20.0

30.0

40.0

50.0

60.0

2010 2011 2012E 2013E 2014E 2015E

Uni

t shi

pmen

ts (

mn)

Global automotive camera unit shipment (mn)

Sunny unit shipment (mn)

Sunny market share

5%

10%

9%

10%11%

11%

0%

2%

4%

6%

8%

10%

12%

-

100.0

200.0

300.0

400.0

500.0

600.0

2010 2011 2012E 2013E 2014E 2015E

Sal

es (

Rm

b m

n)

Sunny vehicle lens sales (Rmb mn)

as % of total gross profit

Sunny’s high-margin vehicle

lens business could see a

48% CAGR over the next

three years

LWIR uncooled camera is

the hottest market segment

06 March 2013


Figure 46: LWIR is the largest and fastest growing market

due to emerging commercial applications ….

Figure 47: … with key growth drivers being automotive

and surveillance

Source: Yole Development Source: Yole Development

Cost-driven price reduction (-15% / year) is rapidly broadening the use of Infrared cameras

in many commercial markets, especially in the thermography and surveillance markets. In

thermography, ultra-low-end cameras have been introduced with success by FLIR in 2010,

and Dewalt will introduce a new model in 2012 at the breakthrough price of US$999. In

surveillance, FLIR and Axis are competing on pricing while DRS introduced a mid-end

camera at $2,000 in 2012, 50% of what has been the typical price.

According to Yole Development, the rapid cost reduction enabling IR cameras priced

below $1,000 should boost sales to grow from 320,000 units in 2011 to 1.18 mn units in

2016E. The IR camera market should grow from US$2.1 bn in 2010 to $3.4 bn in 2016E.

The growth is largely driven by commercial applications in thermography and vision

enhancement, which should see CAGRs of 21.7% and 44.3%, respectively, reaching

about 1 mn units, collectively, in 2016E. Automotive and surveillance are the key volume

growth drivers within the commercial vision enhancement market of IR cameras.

The automotive IR camera market is concentrated at only one player, Autoliv, which has

seen 30% volume growth in 2011. IR camera sales for automotive should reach almost

300,000 units in 2016, with penetration in cars likely remaining below 1% in the long term.

Sunny Optical’s key customer includes Autoliv.

Figure 48: LWIR uncooled IR camera volume seeing CAGR

of 29% in 2010-16E, driven by commercial application

Figure 49: LWIR uncooled IR camera market likely to see

8.5% CAGR in 2011-16E to US$3.4 bn in 2016

Source: Yole Development Source: Yole Development

-

200

400

600

800

1,000

1,200

2009 2010 2011 2012 2013 2014 2015 2016

Thermography Commercial vision enhancement Military

-

500

1,000

1,500

2,000

2,500

3,000

3,500

2009 2010 2011 2012 2013 2014 2015 2016

Thermography Commercial vision enhancement Military

Accelerating cost reduction

stimulating growth

The IR camera market likely

to grow from US$2.1 bn in

2010 to $3.4 bn in 2016E

06 March 2013


(3) Smart TV video module market growth continues

Smart TVs, often equipped with Internet connectivity and browsers, are rapidly gaining

share. Smart TVs are increasingly becoming a mainstream technology as consumption is

shifting towards Internet. TV makers are adding more functionality to Smart TVs, including

video cameras, especially in the higher-end models. Such cameras, typically attached

right on top of the Smart TV, allows users to run video conferencing on the big screen and

enables advanced user interaction such as gesture control and face recognition. Smart TV

camera with face recognition technology allows users to log on to the Smart TV console or

personal accounts without IDs or passwords.

Figure 50: Built-in camera allows video chat on Smart TVs Figure 51: … as well as face recognition and gesture control

Source: Samsung Source: NCIX

According to DisplaySearch, unit shipment of Smart TVs is estimated to grow 15% globally

in 2012. Specifically, DisplaySearch expects consumer controlled Smart TVs to grow from

about 10 mn in 2011 to 43 mn in 2012 and to 95 mn by 2016E. We estimate about 15% of

Smart TVs shipped in 2012E had built-in cameras. While we see competition from other

user interface technologies such as voice control and gyroscope, we forecast the

penetration to increase to 20%/23%/25% in 2013-15E as more TV brands add video and

gesture recognition features to their Smart TVs.

Figure 52: Smart TVs to grow from 43 mn in 2012 and to 95 mn by 2016E

Source: DisplaySearch

Smart TV cameras add

video conferencing, gesture

and face detection features

We see camera penetration

rising in Smart TVs as more

TV brands add video and

gesture control features to

their products

06 March 2013


Sunny Optical is a key supplier of the built-in video camera modules for Samsung’s Smart

TVs. It started ramping up productions in 2H12. We estimate that the company generated

sales of about Rmb95 mn by shipping about 2.7 mn Smart TV video modules in 2012E,

mainly to Samsung. With its leading position at Samsung, we estimate Sunny Optical has

about 42% share in the Smart TV video camera module market in 2012E. The company is

also trying to penetrate other TV makers entering the Smart TV market. Lenovo, TCL, and

Changhong are among some potential customers in China the company could penetrate in

2013. We expect Sunny Optical to maintain its share in Smart TV video modules, as it

increase its unit shipments to 5.5 mn / 7.2 mn / 9.6 mn in 2013-15E by shipping to

Samsung and potential new customers in China. We look for its revenue in Smart TV

video camera modules to increase from about Rmb95 mn in 2012E to Rmb163 mn /

Rmb198 mn / Rmb244 mn in 2013-15E.

Figure 53: We expect Sunny to maintain 42-47% volume share in Smart TV cameras


(4) Tablet cameras and emerging specialty cameras

Given several R&D projects with potential US customers since early-2012, we expect

Sunny Optical to start making inroads at top tier OEM brands in tablet camera modules

and emerging specialty cameras in 2013. We expect the company to start ramping up on

tablet camera modules for top-tier brands in late 2013. We estimate the company will ship

about 3 mn tablet cameras in 2013E and increase its volume to 8.4 mn / 11.8 mn in

2014/15E. Sunny Optical should generate sales of Rmb161 mn / Rmb378 mn / Rmb491

mn in 2013-15E in tablet camera modules, by our estimates. We expect the company’s

growth in specialty cameras to be driven by emerging and disruptive: (1) gesture

recognition 3D cameras and (2) array cameras.

Figure 54: Other than Smart TVs, growth is driven by tablet and specialty cameras


(Unit shipments in mn) 2011 2012E 2013E 2014E 2015E

Global Smart TV unit shipment 10 43 58 72 84

Built-in camera penetration 5% 15% 20% 23% 25%

Smart TV camera module shipment 0.5 6.5 11.6 16.2 21.0

Sunny Smart TV camera unit shipment - 2.7 5.5 7.2 9.6

Sunny unit shipment share 0% 42% 47% 44% 45%

Sunny Smart TV sales (Rmb mn) - 95 163 198 244

YoY growth 72% 22% 23%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2011 2012E 2013E 2014E 2015E

Rev

enue

in R

mb

mn

Smart TV camera Tablet camera Specialty cameras Other camera Growth

Already a key supplier of

Samsung’s Smart TV

cameras, Sunny could gain

new customers in 2013

We expect Sunny Optical to

start ramping up on tablet

camera modules in late

2013 for overseas customer

Specialty camera – 3D

cameras and array cameras

06 March 2013


Gesture recognition broadening addressable market

Beyond traditional inputs from keyboards, mice and touchscreens, gesture recognition is

now viable to allow users to control compute devices. 3D gesture detection technology first

entered the consumer market in 2010 when Microsoft launched the Kinect game console.

Now, gesture control can easily be implemented either on specialty 3D depth sensing

cameras or with software-based solutions that leverages existing 2D-based front-facing

cameras. While motion detection has been mainly focused on game consoles and

controlling larger screens like TVs, it is also gaining traction in mobile computing devices.

Touchless gesture control, when users are in a “lean back” mode, is appealing for mobile

gaming and other day by day usages. We expect 3D gesture detection based on multiple

cameras to start making inroads in the tablet / laptop / all-in-one PC market in 2013E.

We forecast a penetration rate of 3D gesture detection in the tablet / PC market of 1.1% /

3.3 % / 6.2% to drive an addressable market with 5.8 mn / 19.7 mn / 41.3 mn 3D gesture

controllers in 2013-15E. We expect Sunny Optical to have 5% market share as the

company has been working on R&D projects with leading gesture control companies in

Israel and the US. Sunny Optical should generate revenue of Rmb87 mn / Rmb 227 mn /

Rmb 343 mn from 3D gesture detection cameras in 2013-15E, based to our forecasts.

Figure 55: We expect Sunny Optical’s sales from gesture recognition 3D cameras to rise

2013E 2014E 2015E

Tablets/laptop/desktop PCs (mn units) 540.3 599.9 666.5

3D gesture recognition penetration 1.1% 3.3% 6.2%

Addressable market of 3D gesture (mn units) 5.8 19.7 41.3

Sunny shipment share 5.0% 5.0% 5.0%

Sunny shipment (mn units) 0.29 0.98 2.07

ASP (Rmb) 300.0 230.3 166.2

Sunny revenue (Rmb mn) 87.3 226.8 343.4


We are already seeing implementation of 2D-based gesture control in tablets and

smartphones, such as the Lenovo’s Yoga (Windows 8 based convertible tablet PC) and

Pantech’s Vega LTE (smartphone), which use the built-in front-facing camera to detect

gestures for activities such as flipping through slides/pages. The technology behind is

basically a software based on image processing solution that allows hardware makers to

transform the front-facing cameras into motion detectors and allows users to employ pre-

programmed gestures to control the device. The 2D-based gesture technology market is

currently dominated (>90% share) by two Israeli start-ups, namely PointGrab and eyeSight.

■ PointGrab: According to our checks, PointGrab is the world leader in 2D gesture

technology with more than 80% market share in the 2D-based gesture control market

with customer spanning across Lenovo, Fujitsu, Acer, Toshiba, Asus, and Haier. An

announcement by PointGrab at CES 2013 indicates that the company’s solution will

be integrated into Samsung’s next generation Smart TVs.

■ EyeSight: EyeSight’s gesture detection technology has been included in a new range

of Lenovo Ultrabooks (ideaPad Yoga) and Pantech’s Vega LTE smartphones. During

CES 2013, AMD announced that its upcoming APUs (“Richland” and “Temash”) will

feature built-in gesture control technology (software pre-integration) provided by

EyeSight, intended primarily for desktop, laptop and tablet PCs.

2D camera based gesture recognition offers low price points as the solution can be easily

deployed in software as computation is light on current multi-core mobile processors and

leverages existing standard front-facing cameras that are already built in many tablets and

smartphones. While standard cameras are cheap and well-suited for capturing images and

videos, they have certain limitations when applied to gesture control.

We expect gesture

recognition based on 3D

cameras to start making

inroads in 2013

We expect Sunny Optical to

start generating revenue in

3D gesture detection

cameras in 2013

Gesture detection based on

standard 2D cameras

already exist

However, 2D cameras have

its limitations in gesture

recognition

06 March 2013


3D versus 2D in gesture detection

3D cameras offer tangible advantages over standard 2D cameras. 3D sensors perform

under a wider range of environmental and lighting conditions, and offer the ability to detect

fine movements, which 2D cameras might find difficult to detect. The following are the

reasons why 3D cameras are better equipped to handle gesture recognition:

■ 3D cameras provide depth information. A 3D depth sensing camera provides a 3D

image that shows the distance between the camera and every point within the field of

view. A standard RGB camera provides a 2D image that depicts colour but lacks depth

data. Depth is required for gesture detection to separate objects from the background.

■ Differences in lighting conditions. Different light intensities and angles can radically

change the appearance of an object. This can make it difficult to separate objects from

the background. This is a case where it would also be difficult to collect depth data,

unless the sensor has an independent light source. Most 3D sensors come with their

own light source, usually infrared light or lasers.

■ Interpreting size. In 2D camera solutions, interpreting the actual size of an object is

very challenging without depth information. Size interpretation is important to

differentiate between users and track each user continuously.

What are the 3D camera technologies available?

Today, there are three common technologies to acquire 3D depth maps, each with its own

strengths: stereoscopic vision, structured light pattern, and time of flight.

■ Stereoscopic vision: This is a technology based on two or more cameras (or multiple

2D image sensors) to provide stereoscopic vision for depth mapping. This technology

is widely adopted for 3D movie capturing. Its software complexity is high for precise

3D depth mapping, but offers small form factor and consumes low power.

■ Time-of-Flight (TOF): TOF camera resolves distance based by measuring the time-

of-flight a light signal between the camera and the object for each point of the image.

The technology is based on an infrared projector and a camera.

■ Structured light patterns: Structured light illuminates patterns to measure depth.

With a light source (Infrared or laser), structured-light-based technology exploits the

same triangulation as a stereoscopic system does to acquire the 3D coordinates of the

objects. Microsoft’s Kinect is based on structure light enabled by PrimeSense in Israel.

While time-of-flight and structured light have made good success in game consoles and

home entertainment systems, the technologies face several challenges being integrated

into mobile devices. The main issue is the high power consumption, mainly due to the

complexity of computation and near-field infrared projectors. A hybrid technology based on

stereoscopic vision and TOF systems (requiring multiple cameras) should enable 3D

gesture recognition cameras to be low power enough for mobile devices.

Figure 56: 3D imaging technology and comparison

Stereoscopic vision Structured light Time of flight (TOF)

Software complexity High High Low

Cost Low High Middle

Response time Medium Slow Fast

Low light Weak Light source dep (IR or visible) Good (IR, laser)

Outdoor Good Weak Fair

Depth accuracy cm um-cm mm-cm

Range Mid-range very short range (cm) to mid-range (4-6m) Short range (<1m) to long range (~40m)

Power consumption Low High Medium

Source: Texas Instruments, Credit Suisse

3D cameras offer several

advantages over standard

2D cameras

Three common 3D camera

technologies for gesture

detection

Hybrid stereo vision and

TOF should enable low

power sensors for 3D

gesture recognition

06 March 2013


Intel and Qualcomm supporting gesture control in Ultrabooks and tablets

At IDF 2012 in September, Intel announced the support of gesture recognition in the next

generation Ultrabooks. Gesture recognition is part of what Intel refers to as “Perceptual

Computing”, a personal computing experience that provides the devices the ability to

interpret voice and gestures. An SDK has been launched in October 2012 to allow

developers to create apps that can take advantage of gesture recognition. This SDK is

based on a camera designed by SoftKinetics and Creative Technologies. This USB-

powered depth sensor camera includes a camera (720p), an infrared projector, a dual-

array microphone, and a 3D sensor to detect gestures. Initially, the camera will be

mounted on top of a laptop and will be part of Ultrabooks eventually.

Qualcomm has also implemented gesture control in its Snapdragon processor and has

recently launched an SDK for Android based touch-free gesture control. This should allow

next-generation smartphones or tablets based on Qualcomm chipsets to offer gesture

recognition. We expect touch-free gestures Apps to continue to evolve over time to include

additional features such as facial recognition, head tracking and various other motions.

Figure 57: Qualcomm supports 2D gesture control in SDK Figure 58: Gesture detection 3D camera from Creative

Source: Qualcomm Source: Creative

3D camera gesture recognition devices commercialising in 2013

We are seeing commercialisation of miniaturised 3D camera-based gesture controllers in

2013. Leap Motion, a US based start-up, is launching a matchbox-sized gesture controller

that comprises two cameras and multiple infrared LEDs. Placed on physical desktop and

facing upwards, the device can track finger motions in a hemispherical space within 1m

above it. Unlike Kinect, Leap Motion’s technology is likely a hybrid solution based on

stereo vision and TOF. The device connects to a host computer via USB and contains two

simple circuit boards, one with the cameras / LEDs and one with a USB controller chip. All

gesture detection processing is done by the software installed on a user’s computer,

making it low-power and low in bill of materials. Leap is already working with several

consumer electronics and PC OEMs and is taking pre-orders of the device at $79.99, with

shipping due on 13 May 2013. The gesture controller will also be launched at Best Buy

stores across the US on 19 May 2013. Asus has announced that it will bundle Leap

Motion’s gesture controller in high-end notebooks and premium AiO PCs in late-2013.

Figure 59: Leap Motion gesture control device Figure 60: The device consists of 2 cameras and IR LEDs

Source: Leap Motion Source: Leap Motion

Intel supporting gesture

recognition for Ultrabooks

Snapdragon SDK for

Android Touch-free

Gestures

Leap Motion’s 3D gesture

controller is shipping in

2Q13, and ASUS will bundle

the device in their premium

products later this year

06 March 2013


Array cameras: Potentially taking off in 1H14E

While smartphones are becoming thinner, camera modules are increasing in thickness

due to the vertical stacking of lenses as camera resolution migration continues. Array

cameras, an emerging camera technology that employs an array of lenses to form images

via super-resolution, are promising to halve the height of conventional camera modules

and offer the ability to provide a wide range of new features including all-in-focus 2D

image and 3D imaging. Early implementation of array cameras (based on 2x2 lenses) has

been found in tablets and laptop PCs. We expect array cameras to start gaining traction in

smartphones in 1H14 when the hardware supply chain and software technology improves.

We believe Sunny Optical has partnership with OEMs for array cameras, and we forecast

the company will generate sales of Rmb137 mn / Rmb373 mn in 2014-15E (2.2% / 4.3%

of total sales) when the technology takes off a year from now.

Figure 61: Sunny Optical’s sales in array cameras

2013E 2014E 2015E

Smartphones (mn units) 975.5 1,218.5 1,424.8

Penetration in smartphones 1.9% 6.2% 13.8%

Addressable market (mn units) 18.4 75.5 196.6

Sunny shipment share 1.0% 4.0% 4.8%

Sunny shipment (mn units) 0.15 3.02 9.49

ASP (Rmb) 40.9 45.4 39.4

Sunny revenue (Rmb mn) 7.5 137.3 373.0


Unlike traditional cameras that use a single lens, an array camera is based on an array of

lenses and uses software computation to combine them into a final image. An array

camera with an array of 4x4 low resolution lenses captures 16 images, each slightly

different from the other since it is captured from a slightly different angle. Leading array

camera companies include start-ups such as Pelican Imaging and Lynx Imaging.

Key added features of an array camera

■ Thinner form factor: Instead of stacking 4-6 pieces of lenses in a conventional

camera, array cameras are based on 2 layers of 4x4 array of low-resolution (~1.0MP

each) lenses. This can reduce camera module height from 5.2–5.7 mm to 2.7-3.0 mm

by removing VCM auto-focus component and reducing the number of lenses.

■ 3D imaging: As each image is taken from a slightly different angle, the data can be

processed by the mobile processor to provide a 3D depth map of the scene. Array

cameras can serve as a lower power solution for 3D-based gesture recognition.

■ Re-focusing and imaging quality enhancement: With multiple images, re-focusing

can be achieved on any object within the distances of 20 cm to infinity. Array camera

promises better image quality through super-resolution computation that fuses the

array of low resolution images to synthesize a higher resolution image.

Figure 62: Array camera may help shrink phone thickness Figure 63: Final image formed by super-resolution

Source: Pelican Imaging Source: Pelican Imaging

Array cameras promise to

halve the height of

conventional camera

modules and offer new

features

What is an array camera?

06 March 2013


Since an array camera can be deployed on existing lens technologies (either plastic

injection moulding or wafer level optics) and CMOS image sensors that are mature and

low cost, production yields should not be too much of an issue. However, the technology

may take another 9-12 months before it takes off as computational imaging software is still

under development.

Apps processor starting to support mobile computational imaging

Array camera technologies rely heavily on the computationally intensive software

processing to form a final image, 3D depth map, image enhancement and re-focusing.

While mobile applications processors with multi-core ARM CPUs and powerful GPUs are

now capable of handling the heavy image processing tasks, software enablement work

has only just started. Qualcomm and Nvidia are readying their processors and software for

array camera computational imaging. Most notably, Nvidia’s Tegra 4 will include the

Chimera Computational Photography Architecture that fuses the performance of its GPU

cores, quad core ARM CPU, and advanced ISP core to deliver significantly higher

performance for compute-intensive image processing applications. Qualcomm is also

supporting array cameras in its upcoming chipsets and reference designs. With software

enablement coming through and the hardware supply chain getting ready for productions,

array cameras may start making inroads in smartphones in 1H14, in our view.

Figure 64: Nvidia Tegra mobile apps processors now support computational imaging

Source: Nvidia

New products offset digital still camera weakness

While sales contribution from specialty lens for vehicle and infrared applications is small,

their profit contribution exceeds that of digital camera lenses due to much higher gross

margins. Rapid growth in specialty cameras for Smart TV, tablets and array cameras,

should more than sufficient to mitigate the weaknesses in digital camera-related products.

While Sunny Optical may benefit from more lens outsourcing from Japanese digital still

camera makers, we expect sales to be flattish over the next few years as the overall

compact camera market shrinks in size. According to IDC, global unit shipment of digital

still cameras will decrease by 11.6% in 2012 to 121.5 mn units, mainly due to compact

camera decline. The digital still camera market is increasingly being cannibalised by the

swift uptick of smartphones and tablets. While Interchangeable Lens Camera (ILC) unit

shipment, particularly DSLRs, is seeing growth, it is unlikely to be sufficient to offset the

volume declines in compact cameras.

DSC-related products form the most labour intensive production line at Sunny Optical. To

overcome the rising labour costs, Sunny Optical is moving the labour-intensive DSC lens

production line to Xinyang in Henan province where labour supply is abundant and

average wage is still relatively low at about 50% of that in tier one cities. We believe the

relocation should help to stabilise the margins by mitigating the trend of wage hike.

Array cameras may still

need 9-12 months to

develop, mainly on the

software front

Software enablement is

coming through to allow

array cameras in 1H14

Growth in specialty lens /

cameras should mitigate the

weaknesses in DSC

We expect sales in DSC

lenses to be flattish despite

rising outsourcing from

Japan

Mitigating rising labour cost

in DSC lens production line

by relocating to Xinyang

06 March 2013


Street’s estimates look too light We initiate coverage on Sunny Optical with an OUTPERFORM rating and target price of

HK$10.00. Our positive view is based on the company’s: (1) dominant position in camera

modules in branded China smartphones, (2) sustainable growth driven by camera pixel

migration, (3) penetration at global tier one customers, and (4) upside from specialty

products. Our 2013-14E EPS of Rmb0.53/Rmb0.72 is about 16%/33% is above IBES.

Earnings outlook

We forecast total revenue of Rmb3,982 / Rmb6,191 / Rmb8,643 / Rmb11,238 mn in 2012-

15E. While rising handset camera module contribution (from 43% in 2011 to 66% in

2014E) is gross margin dilutive, given the lowest gross margin profile of all products, we

expect blended gross margins to stabilise at 18.9-18.3% in 2012-15E on better sales mix.

With OPEX assumption of ~10% (~4% in R&D, ~6% in selling and admin), we forecast

earnings of Rmb328 mn / Rmb509 mn / Rmb700 mn / Rmb907 mn in 2012-15E.

Optical components: Driven by handset / vehicle / infrared lenses

We expect revenue in optical components to increase from Rmb1,128 mn in 2011 to

Rmb1,250 mn / Rmb1,453 mn / Rmb1,712 mn / Rmb1,987 mn in 2012-15E. Driven by

increasing mix of higher-margin vehicle lenses and infrared lenses, we expect the gross

margin profile to expand from 25.4% in 2011 to 25.3%/27.6%/29.9%/31.3% in 2013-15E.

■ Digital camera lenses: While Sunny Optical is likely to gain more outsourcing DSC

lens orders from Japanese customer, we expect its sales contribution to decline as its

sales should remain flattish in 2012-15E due to slower growth in digital camera

market. We estimate its gross margin will decline on production plant relocation (to

Henan) and expect it to gradually re-expand as scale improves.

■ Handset lenses: With improvements in high-resolution (>5MP) lens productions and

new orders ramping up starting 2Q13, we forecast sales will increase in 2013-15E.

■ Vehicle lenses: Driven by robust growth in the automotive camera market, we

estimate a CAGR of 48% in its vehicle lens revenue in 2012-15E.

■ Other lenses: Driven by the infrared camera market, we expect sales of other lenses

to be lifted by infrared lenses with steady growth at about 20% in the next few years.

Optoelectronic products: Driven by handset camera pixel migration

We expect revenue from handset cameras and other camera modules to increase by

114.9%/78.2%/48.0%/34.3% in 2012-15E. We expect the gross margin profile to remain

stable at 15% level given over 70% of its COGS are raw materials such as CMOS image

sensors, VCMs and lenses, which also increase with camera resolution migration.

■ Handset camera modules: With our handset camera module unit shipment forecast

of 124.4 mn / 151.5 mn / 182.4 mn and blended ASP rising to Rmb32.2 / Rmb37.6 /

Rmb41.1 (driven by rapid pixel migration), we expect Sunny Optical to deliver YoY

growth of 74%/42%/32% in 2013-15E, increasing revenue from Rmb2.3 in 2012E to

revenue of Rmb4.0 bn / Rmb5.7 bn / Rmb7.5 bn in 2013-15E.

■ Other camera modules: With new growth drivers in tablet camera modules, array

cameras and 3D cameras, we look for revenue to increase to Rmb257 mn / Rmb563

mn / Rmb1,069 mn / Rmb1,577 mn in 2012-15E. We expect new specialty products to

enable stable gross margins at 15-16% over the next few years.

Optical Instruments: A stable base

We expect sales of optical microscopic and analytical instrument products to remain

flattish in 2012-15E with gross margin of ~33%.

We expect robust sales

growth and blended GM

stabilising at 18.9-18.3%

Rising sales mix of vehicle /

infrared lenses expands

optical component GM

Expecting strong sales

growth but stable GM in

camera module business

06 March 2013


Figure 65: Revenue and gross margin outlook, 2011-15E


Balance sheet analysis

ROE expanding

We expect Sunny Optical’s ROE to expand from 12.6% in 2012E to 17-25% levels in

2013-15E, driven by strong top-line growth, stable margins owing to better product mix,

and better asset turns and financial leverage (equity multiple ratio).

Figure 66: Dupont analysis on Sunny Optical

2008 2009 2010 2011 2012E 2013E 2014E 2015E

Net margin 6.2% 7.0% 7.9% 8.6% 8.2% 8.2% 8.1% 8.1%

Asset turnover (x) 0.79 0.72 0.88 1.05 1.27 1.43 1.56 1.61

Leverage (x) 1.20 1.29 1.34 1.39 1.60 1.83 1.90 1.93

ROE 5.8% 6.5% 9.3% 12.6% 16.7% 21.4% 23.9% 25.1%


Stable working capital management

Sunny Optical has a stable working capital management with cash conversion cycle

(CCC) days of 50-68. Inventory days rose from 56 in 2010 to 87 in 2011 but remain

manageable as the company grows its handset camera business. We expect its CCC

days to remain at 50-60 days in 2012-15E.

Figure 67: Working capital management analysis

2008 2009 2010 2011 2012E 2013E 2014E 2015E

AR turnover days 74 105 91 92 90 88 86 84

AP turnover days 45 52 56 87 80 78 77 76

Inventory turnover days 68 104 102 111 110 110 110 110

Cash conversion cycle 51 53 46 68 60 56 53 50


Capex plans points to capacity builds to support growth

According to the company, capex in 2012 is about Rmb350 mn, of which Rmb250 mn was

spent on expanding handset lens and camera modules capacity, while the remaining

Rmb100 mn on spherical lens production line in Xinyang, Henan. In 2013, the company

expects to spend Rmb350-400 mn in capex, mainly for capacity expansion in camera

modules and vehicle/IR lens.

Ample cash position and stable dividend payout

Sunny Optical has a solid financial position with net cash of about Rmb500 mn as of end

June 2012, about 7% of its current market capital. With its ample cash position and

growing business profile, the company has maintained a stable cash dividend payout of

22-33% since 2009. Based on the company’s operating conditions, we expect the

company to maintain a ~30% payout ratio in 2013-15E.

2011 2012E 2013E 2014E 2015E 2011 2012E 2013E 2014E 2015E

Optical components 1,128 1,250 1,453 1,712 1,987 45.1% 31.4% 23.5% 19.8% 17.7%

Optoelectronic products 1,193 2,564 4,569 6,762 9,081 47.7% 64.4% 73.8% 78.2% 80.8%

Optical Instruments 178 169 169 169 169 7.1% 4.2% 2.7% 2.0% 1.5%

Total revenue 2,499 3,982 6,191 8,643 11,238 100.0% 100.0% 100.0% 100.0% 100.0%

2011 2012E 2013E 2014E 2015E 2011 2012E 2013E 2014E 2015E

Optical components 24.8% 10.8% 16.3% 17.8% 16.1% 25.4% 25.3% 27.6% 29.9% 31.3%

Optoelectronic products 65.7% 114.9% 78.2% 48.0% 34.3% 14.7% 14.8% 14.9% 15.1% 15.2%

Optical Instruments -8.7% -5.2% 0.4% 0.0% 0.0% 34.5% 33.3% 32.9% 32.9% 32.9%

Total revenue 37.4% 59.4% 55.5% 39.6% 30.0% 20.9% 18.9% 18.4% 18.3% 18.4%

Revenue growth Gross margin assumptions

Revenue (Rmb mn) Revenue mix

Rmb350-400 mn capex in

2013 for camera modules

and lenses

06 March 2013


Figure 68: Since 2009, Sunny Optical has held stable cash dividend payout of 22-33%


CS estimates versus consensus

Our 2013-14E EPS estimates of Rmb0.53 / Rmb0.72 are 16% / 32% above the street. Our

2013-14E revenue estimates are ahead of consensus by 17% / 36% as we are more

bullish on blended ASP expansion, driven by camera module pixel migration and growth in

specialty camera products. While we are aggressive on our revenue outlook, our gross

margin assumptions of 18.4% / 18.3% in 2013-14E are conservative versus street at

19.0/18.9%. Our opex assumptions are also slightly lower to reflect the better operating

leverage as the company’s scale increases. We believe the ongoing handset camera pixel

migration and rising high-resolution lens insourcing will drive sustainable gross margins.

Figure 69: Our 2013-14E EPS is 16%/33% above the street as we are bullish on blended ASP

Source: IBES, Credit Suisse estimates

Sensitivity analysis

China smartphone brand unit shipment growth and Sunny Optical’s camera-module-

blended ASP growth can swing our earnings estimates and the stock price. We conducted

a sensitivity analysis on our 2013E earnings estimates based on unit shipment growth and

ASP/gross margins.

Sensitivity on branded China smartphone unit shipment growth vs Sunny’s share

We are assuming Sunny Optical to ship 124.4 mn handset camera modules in 2013E,

based on our assumptions of China smartphone brand (ex-whitebox) unit shipment growth

of 55% YoY and Sunny Optical’s implied market share of about 51.2% in 2013E. Our

sensitivity analysis, with all other factors (ASP, margins) remaining constant, shows that

every point-change in share gains/losses would increase/decrease our 2013E earnings

estimate by about 1.9%. Each 10-points change in China smartphones brand unit growth

in 2013E would drive up/down our earnings estimates by about 6.3%.

0%

5%

10%

15%

20%

25%

30%

35%

0.00

0.05

0.10

0.15

0.20

0.25

2008 2009 2010 2011 2012E 2013E 2014E 2015E

Rm

b m

n

Cash dividend per share Dividend payout %

Consensus CS Diff Consensus CS Diff Consensus CS Diff

Revenue 3,853 3,982 3.3% 5,274 6,191 17.4% 6,340 8,643 36.3%

Gross profit 737 751 1.9% 1,001 1,138 13.7% 1,198 1,586 32.4%

Net Profit 329 328 -0.5% 442 509 15.2% 530 700 32.1%

EPS 0.34 0.34 0.4% 0.45 0.53 16.3% 0.54 0.72 33.5%

Gross margin 19.1% 18.9% 19.0% 18.4% 18.9% 18.3%

Net Margin 8.5% 8.2% 8.4% 8.2% 8.4% 8.1%

2012E 2013E 2014E

Aggressive on blended ASP

but conservative on margins

06 March 2013


Figure 70: 2013E earnings sensitivity on branded China smartphone unit growth vs Sunny Optical’s market share


Sensitivity on handset camera ASP growth vs handset camera gross margins

We expect handset camera pixel migration acceleration to drive Sunny Optical’s handset

camera blended ASP growth of 35% and gross margins to stabilise at 14.9% in 2013E.

Based on these assumptions and holding all other factors constant, our sensitivity analysis

indicates that for each 10-point change in blended ASP growth, our 2013E earnings

estimates would move by about 7.3%. The test also shows that our 2013E earnings

estimates would swing by 6.6% for every point-change in handset camera gross margins.

We expect Sunny Optical to increase its handset lens insourcing from 36% in 2012 to 43%

in 2013, especially in 5MP and above cameras, allowing its handset camera business

gross margins to stabilise at 14.9% in 2013E. Any further increase in the adoption of in-

house lens provides potential gross margin upside. Since each 10-point increase in

internal lens adoption may add an incremental 0.5 point in handset camera gross margins,

our 2013E earnings estimate could increase by 3.4% for every 10-point increase in

handset lens insourcing.

Figure 71: 2013E earnings sensitivity on handset camera blended ASP growth and handset camera gross margins


Valuations may expand as growth continues

We initiate coverage on Sunny Optical with an OUTPERFORM rating given our positive

views on: (1) Sunny Optical’s dominant position in the fast-growing China smartphone

supply chain and robust unit shipment growth, (2) camera pixel migration driving

sustainable earnings growth, (3) penetration in global Tier 1 customers and (4) upside

from specialty products. Our target price of HK$10.00, implying 24% potential upside, is

based on 15x 2013E P/E, the upper-end of 5-year range and in line with peers. The stock

is trading at 12.2x/8.9x our 2013-14E EPS, and is largely in line with Asian peers of the

range of 10-15x. Valuation is still undemanding given its strong earnings growth and is still

a discount to handset component leaders like Largan and AAC, which exhibit a similar

growth trajectory on product migrations. We believe Sunny Optical deserves a richer

valuation multiple, given its robust earnings growth, improving ROE and potential global

Tier-1 OEM penetration, and on our view that Sunny Optical can monetise on the China

smartphone unit growth much better than peers due to its >60% sales exposure and

leadership in camera modules. Essentially, until last year, the stock was not big or liquid

enough for an institutional holding and hence historical multiples were probably too low.

We also expect a further re-rating as the coverage of the stock expands and as the

company continues to deliver strong growth.

2013E China smartphone brand unit growth 2013E China smartphone brand unit growth

35% 45% 55% 65% 75% 35% 45% 55% 65% 75%

509 211.6 227.3 243.0 258.7 274.4 211.6 227.3 243.0 258.7 274.4

41.2% 359 385 411 437 463 41.2% -29.4% -24.3% -19.2% -14.1% -9.0%

46.2% 402 431 460 489 518 46.2% -21.0% -15.3% -9.6% -3.9% 1.9%

51.2% 444 476 509 541 573 51.2% -12.7% -6.3% 0.0% 6.3% 12.7%

56.2% 487 522 557 593 628 56.2% -4.3% 2.6% 9.6% 16.5% 23.5%

61.2% 529 568 606 645 683 61.2% 4.0% 11.6% 19.2% 26.8% 34.3%Sunny's

share

Sunny's

share

2013E handset camera blended ASP growth 2013E handset camera blended ASP growth

25% 30% 35% 40% 45% 25% 30% 35% 40% 45%

509 29.8 31.0 32.2 33.4 34.6 29.8 31.0 32.2 33.4 34.6

13.9% 441 458 475 492 510 13.9% -13.4% -10.0% -6.6% -3.2% 0.2%

14.4% 456 474 492 510 528 14.4% -10.3% -6.8% -3.3% 0.2% 3.7%

14.9% 472 490 509 527 546 14.9% -7.3% -3.6% 0.0% 3.6% 7.3%

15.4% 487 506 525 545 564 15.4% -4.2% -0.5% 3.3% 7.0% 10.8%

15.9% 503 522 542 562 582 15.9% -1.2% 2.7% 6.6% 10.5% 14.3%Gro

ss m

arg

in

Gro

ss m

arg

in

06 March 2013


Figure 72: Robust earnings growth and rising ROE Figure 73: Five-year 12-month forwarding P/E band

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse

Figure 74: Peers valuation comparison

Source: Company data, IBES, Credit Suisse estimates (N/C – Not Covered, N/A – Not Applicable, # - No Rating)

Key risks to our call

(1) Lower-than-expected growth in branded China smartphone builds

We expect branded China smartphone builds to grow 55% YoY to 243 mn units in 2013.

Shortfall in the expected growth could have a negative impact on Sunny Optical’s volume

and scale, as well as on its earnings.

(2) Shortage in VCM or 8MP/13MP CIS may lower production

For handset camera module production, Sunny Optical sources: (1) voice coil motors

(VCM for autofocus) mainly from TDK and Mitsumi, (2) CMOS imager sensors (CIS)

mainly from Omnivision, Aptina, Sony and Samsung, and (3) high-resolution lenses from

Largan. The supply of such components has seen tightness, particularly in high resolution.

Shortage of such components may impede Sunny Optical’s volume growth and blended

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2010 2011 2012E 2013E 2014E 2015E

EPS growth (LHS) ROE (RHS)

-

2.0

4.0

6.0

8.0

10.0

12.0

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

5x

10x

15x

20x

CS Current Target Mkt Cap

Company RIC Rating Currency Price Price (US$Mn) 12E 13E 14E

Sunny Optical Technology Group Co., Limited 2382.HK O HKD 8.05 10.00 1,038 52.1% 55.3% 37.5%

Largan Precision 3008.TW N TWD 772.00 850.00 3,498 7.3% 22.4% 10.2%

Lite-On Technology 2301.TW O TWD 47.50 48.00 3,685 0.9% 20.3% 13.7%

Catcher Technology 2474.TW N TWD 128.00 155.00 3,246 -18.6% 12.3% 6.3%

Foxconn Technology Corp 2354.TW N TWD 81.50 95.00 3,405 -4.1% 25.0% 5.2%

AAC Technologies Holdings Inc 2018.HK O HKD 32.75 36.00 5,186 67.6% 27.3% 18.0%

Truly International 0732.HK U HKD 3.30 0.98 1,177 29.6% 16.0% N/A

BYD Electronic International Co Ltd. 0285.HK # HKD 2.81 N/C 816 85% 129% 117%

Foxconn International Holdings 2038.HK # HKD 3.33 N/C 3,198 -369% -14% 400%

Company 12E 13E 14E 12E 13E 14E 12E 13E 14E

Sunny Optical Technology Group Co., Limited 19.0 12.2 8.9 3.2 2.6 2.1 16.7 21.4 23.9

Largan Precision 18.6 15.2 13.8 4.5 3.7 3.2 24.2 24.7 23.2

Lite-On Technology 15.1 12.5 11.0 1.6 1.5 1.4 10.5 12.0 13.0

Catcher Technology 11.1 9.8 9.3 1.7 1.6 1.4 15.7 15.8 15.1

Foxconn Technology Corp 13.1 10.5 9.9 1.6 1.4 1.2 12.6 13.6 12.5

AAC Technologies Holdings Inc 18.6 14.6 12.4 5.6 4.6 3.8 30.2 31.5 30.7

Truly International 20.1 17.3 N/A 2.0 1.9 N/A 10.0 10.9 N/A

BYD Electronic International Co Ltd. 10.2 7.9 6.8 4.6 4.8 5.0 6.2 7.4 8.3

Foxconn International Holdings -11.6 85.9 21.5 3.6 3.7 3.8 -7.6 0.8 2.3

EPS growth

P/E (X) P/B (X) ROE

06 March 2013


ASP growth pixel migration. Nevertheless, given its leading handset camera supplier

position and its rising internal lens supply, we believe this risk is not threatening.

(3) Intensified pricing pressure or competition in handset camera modules

Sunny Optical is faced with competition from both domestic (BYD Electronics, Truly, Kerr,

and Q-Tech) and international players, such as Lite-On Technologies. Pricing competition

in the 5MP handset camera module is intensifying, and this could impact Sunny’s gross

margins. However, its strength in 8MP and strong customer relationships in China should

allow the company to sustain stable margins.

(4) Slower-than-expected ramp-up of specialty lens and cameras

There are uncertainties over the timing of the ramp-up of specialty products, especially in

gesture control and array cameras. Such emerging technologies may take longer than

expected to take off or could even not make it to the market at all.

(5) Impact from joint venture of LOT, Largan and TDK

Lite-On Technology, Largan and TDK are forming a joint venture company for vertical-

integrated production of high resolution handset camera modules. Such an alliance may

impact the relationship of Sunny Optical with its suppliers such as Largan and TDK if there

are conflicts of interest with the joint venture. Nevertheless, we do not expect a meaningful

earnings impact, given the target customer base is different (Sunny focuses on China

customers, while the joint venture is likely to target global brands).

06 March 2013


Appendices Company background

Founded in 1984, and with its headquarters in Yuyao, Sunny Optical is a leading

integrated optical components and products manufacturer in China. the company

successfully listed on the main board HKSE on 16 June 2007. Sunny Optical designs and

manufactures optical-related products, which include optical components (such as glass

spherical and aspherical lenses, plane products, handset lens sets, vehicle lens sets and

other various lens sets), optoelectronic products (such as handset camera modules, Smart

TV video modules, security cameras and other camera modules) and optical instruments

(such as microscopes, optical measuring instruments and various optical analytical

instruments). Accounting for 33% of its 1H12 sales (handset camera modules), its top four

customers are leading Chinese smartphone brands–Huawei, Lenovo, Coolpad and Oppo.

Figure 75: Company background

Source: Company data, Credit Suisse

Employees and production bases

As of 30 June 2012, the company had a total of 10,896 full-time employees, including

8,521 production staff, 2,168 management and administrative staff, and 207 operations

supporting staff. Majority of its labour forces are based in China.

Sunny Optical currently has four main production bases in China, which are located in

Yuyao in Zhejiang province; Zhongshan in Guangdon province; in Shanghai; and in

Tianjin. The company plans to relocate certain labour-intensive manufacturing lines for

digital-cameras-related products to its new base in Xinyang, Henan.

Sunny Optical management team profiles

Mr Wang Wenjian, Honorary Chairman

Mr Wang (64) is one of the founders of the group, and currently is a Non-Executive

Director and the Honorary Chairman of the Board. Mr Wang joined Yuyao County

Chengbei Optical Instruments Factory in 1984 as the factory manager and had been its

general manager since 1994 when it was transformed to a joint stock limited liability

company. He obtained his qualification as a senior economist in 1996 from Ningbo

Municipal Government.

Mr Ye Liaoning, Chairman

Mr Ye (46) is one of the founders of the group, and currently is an Executive Director, the

Chairman of the Board, and the Chairman of the Strategy and Development Committee.

He is responsible for formulating the group’s policy and making decisions. Mr Ye joined

Yuyao County Chengbei Optical Instruments Factory in 1984 and had been its deputy

general manager since 1995. Mr Ye obtained the qualification of senior economist issued

by the Personnel Bureau of Yuyao in 2004. He obtained a diploma from Zhejiang Radio &

TV University in 1999.



Sales contribution 64.4% 31.4% 4.2%






06 March 2013


Mr Sun Yang, CEO

Mr Sun (39) is an Executive Director and the Chief Executive Officer of the company. He is

responsible for the overall operation and management of the Sunny Optical Group. Mr Sun

graduated from Ningbo University in 1995 with a bachelor’s degree in economics. He then

obtained a master’s degree in economics from Shanghai University of Finance and

Economics in 2005. He joined Zhejiang Sunny (Group) Joint Stock Company Limited,

originally known as Yuyao County Chengbei Optical Instruments Factory, as chief officer

of its investment management centre in 2002. In 2008, Mr Sun was granted the

qualification of senior economist by Personnel Bureau of Ningbo.

Mr Liu Rui, Vice President

Mr Liu is responsible for the strategic planning, R&D and information management. He

graduated from the University of West Sydney with a master’s degree in business

administration in 2005. He obtained a bachelor’s degree in chemistry engineering from

Zhejiang University in 1989. Prior to joining the group in February 2006, Mr Liu worked

with Olympus (Shenzhen) Industrial Ltd. as a planning manager.

Ms Wong Pui Ling, Joint Company Secretary

Ms Wong is the joint company secretary, authorised representative and agent of the

company. She is primarily responsible for company secretarial matters and financial

management. Ms Wong joined the Group in 2007 and has nine years of experiences in

financial reporting, accounting and auditing. She is a qualified accountant and is a member

of the Association of Chartered Certified Accountants and the Hong Kong Institute of

Certified Public Accountants. She holds a bachelor’s degree in Business Administration

from the Chinese University of Hong Kong and a postgraduate diploma in Finance and

Law from the University of Hong Kong.

Ms Hu Yanyu, Joint Company Secretary and Head of Investor Relations

Ms Hu is responsible for company secretarial matters and investor relation management.

She joined the Group in 1999 and was part of various departments of the Group such as

administration, marketing & sales and investor relationship. Ms Hu is an affiliated person

of the Hong Kong Institute of Chartered Secretaries. She holds a master’s degree in

Business Administration from Shanghai University of Finance and Economics and a

bachelor’s degree in Administration from Zhejiang University. Ms Hu has also obtained the

qualification of economist issued by Personnel Bureau of Hangzhou.

Appendix II: Handset camera lens and modules

A handset camera module comprises lenses, IR filter, barrel and an assembly housing . In

a typical handset camera module, light enters an opening (aperture) and is directed to an

image sensor by the lenses.

The image sensor consists of pixels that generate signals upon receiving light via the lens.

Commonly used image sensors in handset cameras are CMOS (complementary metal-

oxide-semiconductor) sensors.

In most camera modules, one or more layers of lenses are placed between the aperture and

the image sensor to focus light onto the image sensor. This is typically called a lens barrel or

lens train. High-quality optics typically requires glass-based lenses due to higher index of

refraction. Today, most handset camera modules are made of plastic lenses. A typical 5MP

camera lens contains four pieces of lens elements while an 8MP has five pieces.

The most common manufacturing processes of handset camera modules are COB (Chip-

on-Board) and CSP (Chip Scale Packaging). COB is a technology that utilises wire

bonding to connect ICs directly to printed circuit boards, mainly adopted for high-resolution

handset cameras.

06 March 2013


Figure 76: Schematic of a handset camera module Figure 77: Camera module CSP manufacturing steps

Source: Tessera Source: Truly Semi

Figure 78: CSP structure Figure 79: COB structure

Source: BYDIT Source: BYDIT

Figure 80: Sunny’s 5MP/8MP handset camera modules Figure 81: Sunny’s 5MP fixed focus camera modules

Source: BYDIT Source: Company data

Loading

Printing

SMT

Inspect

Reflow

Cleaning

Holder/

lens assembly UV Curing

Appearance

Inspect

OQC

Packing

Focus

Separate

SMT Process

Curing

Assemble Process

Testing Process

Drop glue

06 March 2013


Companies Mentioned (Price as of 06-Mar-2013)

AAC Technologies Holdings Inc (2018.HK, HK$32.75) Acer Group (2353.TW, NT$27.0) Advanced Micro Devices, Inc. (AMD.N, $2.43) Apple Inc (AAPL.OQ, $431.17) Asia Optical (3019.TW, NT$30.9) Asustek (2357.TW, NT$368.0) Autoliv Inc (ALV.N, $66.44) BYD Electronic International Co Ltd. (0285.HK, HK$2.81) Catcher Technology (2474.TW, NT$128.0) Changhong (600839.SS, Rmb2.1) Continental (CONG.DE, €92.17) Creative Tech (CREA.SI, S$2.97) Foxconn International Holdings (2038.HK, HK$3.33) Foxconn Technology Corp (2354.TW, NT$81.5) Fujitsu (6702.T, ¥418) Haier (600690.SS, Rmb12.86) Hisense Kelon (000921.SZ, Rmb7.32) HOYA (7741.T, ¥1,822) HOYA (HOCPY.PK, $19.25) HTC Corp (2498.TW, NT$255.5) Intel Corp. (INTC.OQ, $21.51) Kinko Optical (6209.TW, NT$37.9) Konica Minolta Holdings (4902.T, ¥713) Largan Precision (3008.TW, NT$772.0) Lenovo Group Ltd (0992.HK, HK$8.54) LG Electronics Inc (066570.KS, W77,200) LG Innotek (011070.KS, W74,500) Lite-On Technology (2301.TW, NT$47.5) Microsoft Corporation (MSFT.OQ, $28.35) Mitsumi Electric (6767.T, ¥557) Motorola Mobility Holdings, Inc (MMI.N, $39.98) Nikon (7731.T, ¥2,044) Nokia (NOK1V.HE, €2.728) NVIDIA (NVDA.OQ, $12.8) O-Film Tech (002456.SZ, Rmb57.6) OLYMPUS (7733.T, ¥2,094) OmniVision TECH (OVTI.OQ, $13.26) Panasonic Corporation (6752.T, ¥672) Pantech Group (PNTE.KL, RM0.75) QUALCOMM Inc. (QCOM.OQ, $67.97) Research In Motion Limited (BBRY.OQ, $12.58) Samsung Electro-Mechanics (009150.KS, W97,300) Samsung Electronics (005930.KS, W1,560,000) Samsung Techwin (012450.KS, W65,600) Sharp Corp. (6753.T, ¥341) SK Hynix Inc. (000660.KS, W28,000) Sony (6758.T, ¥1,462) STMicroelectronics (STM.PA, €6.221) Sunny Optical Technology Group Co., Limited (2382.HK, HK$8.05, OUTPERFORM, TP HK$10.0) TCL Corp (000100.SZ, Rmb2.58) TDK (6762.T, ¥3,195) Texas Instruments Inc. (TXN.OQ, $35.0)Toshiba (6502.T, ¥439) Truly International (0732.HK, HK$3.3) ZTE Corporation (0763.HK, HK$14.14)

Disclosure Appendix

Important Global Disclosures

Yan Taw Boon and Manish Nigam, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and

06 March 2013


Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (54% banking clients) Neutral/Hold* 38% (47% banking clients) Underperform/Sell* 16% (39% banking clients) Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Sunny Optical Technology Group Co., Limited (2382.HK)

Method: Our target of HK$10.0 is based on 15x FY13E P/E, the upper-end of 5-year range and in line with peers.

Risk: Key risks include: (1) lower-than-expected growth in China smartphone builds, (2) shortage in VCM and 8MP/13MP CIS that may impede volume growth and pixel migration, (3) intensified pricing pressure in camera modules

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (2382.HK) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

06 March 2013


Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Taiwanese Disclosures: This research report is for reference only. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. Reports may not be reprinted without permission of CS. Reports written by Taiwan based analysts on non-Taiwan listed companies are not considered recommendations to buy or sell securities under Taiwan Stock Exchange Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse (Hong Kong) Limited ......................................................................................................................... Yan Taw Boon ; Manish Nigam

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683.

06 March 2013


References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link: https://www.credit-suisse.com/who_we_are/en/.This report may contain material that is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients of this report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy or completeness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. CS may, to the extent permitted by law, participate or invest in financing transactions with the issuer(s) of the securities referred to in this report, perform services for or solicit business from such issuers, and/or have a position or holding, or other material interest, or effect transactions, in such securities or options thereon, or other investments related thereto. In addition, it may make markets in the securities mentioned in the material presented in this report. CS may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment. Additional information is, subject to duties of confidentiality, available on request. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate of CS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority ("FSA"). This report is being distributed in Germany by Credit Suisse Securities (Europe) This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited regulated by the Securities and Exchange Board of India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Any services CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to the municipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial, accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining or retaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than Credit Suisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clients of the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

Copyright © 2013 CREDIT SUISSE AG and/or its affiliates. All rights reserved.

Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.

When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

TC1828

https://www.credit-suisse.com/who_we_are/en/

Sunny Optical Technology Group Co., Limited

Documents

Transcript of Sunny Optical Technology Group Co., Limited