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Daily Commentary

13 Dec 2018

Market Outlook

HSI may fluctuate at around 25,500 to 26,000 pts today.

The HSI opened higher by 282 pts yesterday, breaking through its 50-day MA at approx. 25,953 pts. After that, the market extended its gains and grew 476 pts at most to reach its intra-day high of 26,238 pts. The HSI finally closed at 26,186.71 pts, up 415.04 pts or 1.61%. Market turnover amounted to HKD69.497 bn. The ADR proportional HSI index closed overnight at 25,799 pts with 28 pts or 0.11% than closing price last trading day. Tension between China and the United States has eased, and British Prime Minister Thersea May survives a challenge to her leadership. Dow was up by 157 pts or 0.64% to 24,527 pts. HSI may fluctuate at around 25,500 to 26,000 pts today.

Today’s A-share Snapshot

Company’s Profile:Inno Light (300308.SZ) ranked as the fourth-largest optic component supplier globally with Google/Amazon/Alibaba as its clients.

Brief Comments:According to Cisco research, total number of hyper-scale datacenters globally is expected to increase from about 300 in 2016, to 485 in 2020. High-speed optic module market is expected to benefit. Of note, the Company keeps gaining market share globally.US sales exposure to the company is extremely high at about 60% historically. Given optic module, a major product Inno Light exported, was removed from the recent US tariff hike list, we do not believe there will be a short-term impact on Inno Light business. We think the recent softness in share price has already priced in much trade war impact.

Stock Pick

Sunny recorded strong Nov shipment datasets

Sunny Optical (02382) manufactures components for optical and optical related products, which include glass/plastic lenses, prisms, camera modules for handsets & digital cameras, microscopes, surveying instruments, etc.

Sunny shows a robust shipment data in Nov. Handset lens (HLS)was 91mn, up 59% YoY, while camera module (HCM) was 46mn, up 62% YoY and vehicle lenses was up 54% YoY to 4m. Handset lens, automotive lens, and camera module shipment YTD were up 58%, 23%, and 31% YoY, respectively, compared to full-year guidance of 45-50%, 30-35%, and 20% growth. Given the weak Nov sales growth of a 23% MoM decline/29% YoY drop by Largan, it is clear that Sunny continues its market share gain.

We reiterate that both HLS and HCM will benefit from ramping shipment from new smartphone models launch and market share gain and strong momentum may continue until end-18. Though vehicle lens is picking up, global auto demand weakness could potentially create shipment schedule delays, we see a large possibility that this segment will miss the guidance (Nevertheless, we think it has already priced in).

Going forward, Sunny’s GPM may improve on better mix in 4Q18 while internal restructuring effort is still ongoing, offsetting the negative effect from current market environment and RMB depreciation. We see triple cam and 3D sensing remain the 2019 key investment themes. We suggest investors to buy at or below HKD74, with target price of HKD90 and stop loss price of HKD66.