欧菲光(002456)

Positive results/guidance, but fairly priced; Sunny is our top pick in CCM

O-Film delivered strong 2Q17 results and positive outlook for 2H17 and 2018,driven by dual-cam and rising contribution from Apple. We raise our targetprice to RMB20.5 but maintain Hold. Trading at 26x PER (0.8x PEG), we think itis fairly priced. In the CCM space, we prefer Sunny Optical to O-Film. Bothcompanies enjoy a similar growth outlook (30%+ EPS CAGR for 2017-2020),largely driven by the same story (dual cam), but Sunny outperforms O-Film inEPS quality (positive free cash flows for Sunny since 2015 vs negative cashflows for O-Film since 2009) and ROE (48% vs 18% in 2017E).Strong 2Q17 results: ramp-up in dual cam and new Apple businessesO-Film reported EPS of RMB0.16 (+125% YoY; +70% QoQ) and operatingprofit of RMB549mn (+124% QoQ; +54% YoY) on sales of RMB8.9bn (+44%QoQ; +31% YoY). Sales and operating profit came in 6% and 16% higher thanour estimate, owing to rising contribution from Apple (touch panel for newiPads, as well as iPhone front cam via the acquisition of Sony’s Guangzhouplant) and strong CCM business (sales up ~100% YoY, shipment up ~60%).Dual-cam shipment reached 10mn+ in 1H17 (mostly in 2Q17) from almost nilin 2H16, which helped in increasing ASP.3Q17 outlook and key Q&As (page 3 for details)

O-Film expects 3Q17 net income to fall in the range of RMB400mn (+101%YoY) to RMB630mn (+216% YoY) with GPM up slightly, powered by the rampup in dual cam, a better product mix, and improving profitability from thenewly acquired Guangzhou plant. On dual cam, O-Film has reiterated its 2017shipment target of 50mn units (mainly for Chinese clients), and estimates thedual cam penetration on China smartphones is ~20% in 2017 and will exceed40% in 2018. On the new business �C automotive electronics �C sales reachedRMB128mn in 1H17. It has developed an ADAS solution (comprising 6 to 8cameras and a central control unit) and sampled out to clients.

Valuation and investment risks

We raise 2017-19 EPS forecasts by 7%-22% (dual cam and Apple biz) andincrease TP from RMB14.4 to RMB20.5, based on 26x 2018 EPS or 0.8x PEG(2017-2020 EPS CAGR of 33%). Earlier, our TP was based on 22x 2017 EPS, or0.8x PEG (EPS CAGR of 28%). 0.8x EPG is in line with the trading average ofregional tech peers. Risks: market-share losses, ASP erosion, and FX.