Sunny Optical Technology manufactures handset camera modules, glass/plastic lenses for mobile phones and digital cameras and other optical instruments.
It’s the largest handset camera module supplier in China and the primary camera lens and module supplier to most handset makers in China: Xiaomi, Samsung, Huawei, Lenovo, Nokia, etc. (ok, Nokia is no longer relevant in mobile phone world). It’s also the maker for digital camera lenses for major digital camera brands: Nikon, Sony, Olympus.
Here’s the revenue breakdown. 80% of the revenue came from handset related products.
Since IPO in June 2007, the share price has risen by 500%. That’s 5-bagger in 9 years. If you bought it at $0.5/share at the bottom during GFC crisis in 2008-2009, you are sitting at 47-bagger in over 7 years! See how irrational the whole market sold off the stocks of good quality companies.
Smartphones market was booming, and there were a growing number of smartphone brands from China that were trying to penetrate the global market. Sunny Optical was in a nice position in the market, making lenses for those smartphones. It’s a clear tailwind for the sector.
Here are the financial results over the past 10 years (in RMB). Revenue grew by 10 folds, while net profit grew by 6.5 folds. Earnings per share grew by 3.5 folds due to new share issuance in 2007. Like Minth (see previous post), the Company is facing margin pressure from the competition. That’s why its gross margin has fallen from 21% in 2011 to 16.5% in 2015. However, with such strong revenue growth, SG&A expenses have become a smaller portion of the revenue, dropping from 11% of the revenue in 2007 to only 3.3% in 2015. Hence, operating margin can be maintained at around 7 – 10% over the years. ROE grew to high teens in 2012, the Company has been maintaining net cash position over the past 10 years (and more).
Look at the strong growth of the sales volumes over the past years. This is important statistics that you can monitor from time to time.
I first discovered this Company in July 2014 during stock screening. Its dominant position in its market, serving major phone and digital camera makers, years of strong growth and further market growth potential, strong balance sheet with net cash, ROE in high teens, captured my attention. I did a SWOT analysis and valuation model and presented it to my fund manager as I thought it’s undervalued at the price of $10-11 that time. It was trading at around 22x P/E at that time, which was fair considering that it was growing its earnings by 20+%. It’s certainly a growth stock with more growth potential ahead and could continue to grow its earnings by 20% per year for next few years. However, Sunny Optical is operating in technology sector, which is beyond what the fund covers.
I made my first mistake of not buying the company using my own personal account or recommending it to my family members at that time. After I left the hedge fund in early 2015 and started paying attention to this Company again, the share price had risen to $16-17. The price dipped to $13 during the August 2015 sell off, and I missed it. That’s my second mistake. I told myself that I could buy again at good price of $16, but it never came. It was close to $16 in January 2016 but just never hit it. That’s my third mistake, and it’s now at $23.8. I will continue to make more mistakes in the future, but I hope the mistakes are less painful. At the current price of $23.8, I don’t think it’s attractive to buy in, so I will hold for the moment. I hope it’s not going to be my fourth mistake in Sunny Optical!