Sunny Optical Technology (Group) Company Limited (2382) Earnings Call Transcript

Good morning, everyone. Welcome to our 2025 midyear performance briefing. I'm Christina. Thank you for your long-term support and attention to the company. We have today Mr. Ye Liaoning, the Executive Director and Chairman of the Board; Mr. Wang Wenjie, Executive Director and President; Mr. Ma Jianfeng, Vice President and Company Secretary, Ms. Pui Ling, IR Senior Director and Company Secretary, Mr. Luan Fong, Director of Investors Relationship. We will start the presentation today. The PowerPoint has been published on the official website. Let's have Mr. Wang Wenjie, the Executive Director and President, to start the presentation today.

Dear investors, this is my second time for results announcement, and we have lots of communications recently, and I can see a lot of familiar faces. So first, I would like to thank you for coming to Sunny Optical's interim results announcement miss such busy times. Today, I will present 4 parts. First, performance review; second, business highlights; third, future outlook and ESG achievements. And I know that you have high interest in our performance and the business highlights. First, we will start with the performance review. First, let's take a look at our performance. In terms of the revenue, as we have published last night, it's very clear to all of you from the stock price this morning, I can see that the market recognize our achievements and our share price kept growing. We have seen steady growth for our revenue, and we have seen a drastic growth for our profits. It all thanks to several factors. First, gross profit margin improvement for mobile lens sets and modules have grown significantly. And for the vehicle modules, our revenue also grew at a very high speed. For the detailed contributions, we will share with you the details in the breakdown. The profit attributable to the owners of the company reached 52.6%, reaching CNY 1.65 billion. Here, you can see the financial summaries of the details. Our total operating expenses increased by 6.8%. And in terms of R&D expenditure, we have invested a lot, and we have decreased our S&D expenses. And our net cash from operating activities increased by 14%. So we are very happy with the financial statements. Next, let's take a look at our business highlights. We have published our power points on the website. First, let's take a look at the handset business. In the first half of the year, we have increased our revenue and profitability. In terms of handset lens sets, revenue from 6 piece or higher lens sets increased by more than 9% year-on-year. Revenue from hybrid lens sets grew by over 100%. This trend will continue, which means high demand for hybrid lens sets, and we will also expand our capacity of the related modules. This high-end products significantly improved our gross profit margin year-on-year. For handset lens set, around 20% to 30%. We expect that the gross profit margin for the whole year would fall into this range as well. For handset cameras, the high-end products revenue increased by 20%. Gross profit margin is between 8% to 10% as the guidance we have given. And we believe that the gross profit margin for the whole year will also fall into that range. Next, I would like to share with you our technological capability in the mobile phone cameras. The gross profit margin improvement is not possible without our technological improvements. As you know, handset cameras is moving towards extreme miniaturization. With our optical technical reserve, we continue to build up our technical barrier. And we have mentioned several times, ultra-miniaturized molding packaging technology and ultra-high-precision optical assembly technologies. Those that expand our industrial-leading advantage in mobile cameras. And we expect that the mobile business would increase by 5% to 10% compared to that of last year. As I have mentioned, the revenue of the ultra-miniaturized molding packaging technology would increase by 500%. For Molding Technology, we have been listed in the pipeline for the high-end products of the top companies. This is a good sign. And this is also a proof of our improvement in our overall technology. Next, I would like to talk about our automotive business. The overall situation is quite well we have seen the acceleration of our ADAS penetration, which has driven our global camera market size. And we have seen continuous improvement in our camera specs, and our market share will also continue to improve, thanks to that. Apart from cameras, for LiDAR in L3 above intelligent driving vehicles, we have gained a clear picture of such application. The leading car manufacturers in China are accelerating the deployment of LiDAR. And now we have the total value of LiDAR projects exceeding CNY 1.5 billion. And the car manufacturers would approach us for LiDAR projects. And we thought that LiDAR mainly menu factored by the car OEMs. But actually, the car manufacturers approach us proactively for LiDAR business. The technological structure and road map of LiDAR is very clear, and we have a very clear picture of the logical round for LiDAR. So we believe that LiDAR will be one of our growth point in the future. In terms of vehicle lens set, we continue to lead technological innovation, and we are industrial first in many technologies, which includes ultra-low reflection coating technology, adaptive variable aperture technology and super black stray process technology. These are the core technologies for camera performance upgrades. As you know, for a company to continue to lead in a segment in a low period, especially for vehicle lens sets is not random, it's because we have a lot of technological accumulation, and we have proactively developed many technologies, which include our active cleaning technology, defogging, de-ice technologies. You may think these technologies are not relevant. But when the intelligent driving is developing towards L3, L4, fogging pouring rain, snowy weather would affect the sensors on the vehicle and the autonomous [indiscernible]. That's when the defogging, de-icing and do elimination technologies are very important because all the sensors and cameras are exposed outside the vehicles, and they could be subject to the external situation and conditions. So we should not limit ourselves in the megapixels of the cameras and the cost. We have been proactively developed the technologies that are needed for the future autonomous driving. And this is the responsibility of a leading technological company in this industry. And because of this technological accumulation, we have gained the trust from our clients, and all these are very difficult technologies. And for our vehicles today on the road do not have such technologies. But in 2 to 3 years, these technologies will be applied on the future vehicles. So this is the part that I would like to elaborate on. This one is about our XR business. As shown in this chart, with the improvement of the AI, the smart glass market has entered a fast lane of the development. By 2025, the total volumes better to exceed 10 million units. In the beginning, we have already given this number. It sounded less, but now is already the reality. And our orders has already been approved of such numbers. We will see rapid development in the next decade. Smart glasses would be a field with high potential. The goggles did not last in the past years. And now we have seen the definite future of SR glasses. It's mainly because of the support of AI. The empowerment of AI has stimulated the demand for XR business. So this is very clear to us. This business segment achieved CNY 1.2 billion. And the smart goggles market share has been leading the world. This is a very, very high -- this cannot be a very high percentage. Not many people using them. The highest shipment will be for Meta, which is the largest manufacturer. All the Chinese companies combined are less than 1/10 of Meta. So the battle on smart glasses is actually between Meta and others. We're seeing some other trends. But actually, you haven't seen any real smart glasses. I believe there will be more product of this kind in the next year. On this page, you have seen our business. It has certainly covered the full chain from component parts and the whole devices, software and algorithm, we have been present in every step of the development process. On devices, we have the capability of vertical integration and mass production. Let me talk about how we can produce the whole devices if we are regarded to the company producing parts. Well, look at the product. You may think that it's a simple product, but actually is very complex. There are a lot of other costs involved considering the optical technologies. There are other technologies. For example, we use optical technology to test the distances with the smart glasses. And other electronic companies are not equipped with such capability. And for that reason, and under the guidance of our customers, we have developed relevant products of this kind. This page shows the current status. With the development of smart glasses, AI glasses have seen accelerated development S class glasses are not equipped with display. They are equipped with AI, smart camera and voices, but AR glasses are equipped with a display with waveguide technologies. And in general, we believe that we guide technology would be the mainstream technology, but there are other problems to fix. For example, micro LED. If it's macro LED, we need to think about that if it's 1 color or multiple colors and it cannot be mass produced, then there will be impeding our mass production process. So our task is to improve the efficiency of waveguide, so our process can be optimized and our products can be further compact, and we have different solutions, for example, silicon carbide and other waveguide solutions. But as you know, in order for consumer level AR glasses to be really popular, then we need to overcome a lot of difficulties in software, hardware when it comes to LED and also in ecosystems. So that's why we are keen to establish a more open ecosystem featuring win-win collaboration. So we can integrate resources for the breakthrough in the technologies of AR glasses. Now I will talk about an IoT business. technologies and AR as an enabler are driving economic growth. I'm sure this is a topic that you are very interested in. well, we are actually reusing the technologies that produced for phones on these new emerging areas. And with artificial intelligence, these business segments have grown very fast in 2025. We have seen the fast growth of sport camera, thanks to the booming tourism and the influencer economy, and secondly, hardware and software upgrades are revolutionizing the user experience. In health, imaging functions in predictive quality and deep AI integration makes it possible for amateurs to make their videos. And without any professional skills, people can produce high-quality content. These devices are not any more specialized tools. My daughter bought one of them, and it works pretty well. And when issuing a video, it's very stabilized. And to some extent, it makes up the capabilities that the phone doesn't have. And smartphones are not good in stabilization, at least not as good as this smart AI devices. We -- as we said, we reused technologies. For example, motor and large field of site technologies, this can be reused. And we also work closely with some key clients achieving revenue growth. And we have opened up new resources for profit, and this will be one of the potential growth points in the near term. Meanwhile, the robotics sector is also with attention. We have seen accelerated growth in robotics. Intelligent upgrading of a lawn-mowing and pool-cleaning robots have shown clear growth opportunities. The core upgrades of these robots focus on improving vision sensor accuracy and optimizing algorithms. And these technological advancements will lead to a continuously better user experience. In the last results announcement press conference, we also said that we would make an effort to increase production, and we expect some very good effect. The industry penetration rate is growing very fast. These are handheld household devices. We believe there will be more new categories of products coming up in the future. Maybe we would not go so far as embodied intelligence, but in some professional areas, robots will play a bigger role. So we rely machine vision technology and our vertical integration technology in manufacturing robots and to some extent, we have shifted and expanded our business from vision and sensing technology to integrated system solutions. And I would be also talking about that in my next part of the presentation on future outlook. Next, I will share with you our strategic outlook for the future. We believe that in the era of AI, every industry will have to be linked with AI. If you don't give any thought to your industry, your sector will fall behind the mainstream receptors. So here, we believe the application plus manufacturing will act as a very strong driver. Applications might change, but manufacturing doesn't. And I will be talking about what AI means for manufacturing in a moment. In the AI era, as an enabler is not only a multiplier, it will accelerate growth like a snowball effect. Let me also talk about applications and products. On the product application side, we are focusing on development opportunities in smart hardware based on optical perception. We will continue to strengthen our advantage in optical perception technology while extending into the decision-making and controlled domains to create more complete capability system and product portfolio. So for example, lawn mowing and pool cleaning robots, well, we started producing some modules, but our customers couldn't use them. That's why we developed a control board for them. And after that, we thought it would be good to optimize their performance. This is why sensing decision making and control came into the picture. So with the whole system, this smart device with the optical device system, I mean, other assemblers they have to bring their devices back to our company to configurate the physical space because they cannot make a sensing integrated smart hardware with schools and glues. So our customers said, okay, what do you make whole devices so you can get ready with all the configuration and specifications. It's not to say that we will produce devices are not owned, but AI will definitely be one of the core technologies in the future. So this is how we consider the future development direction. At the same time, we will develop technologies in embodied intelligence. As you know, this is a short thing. We have this smart sensing systems. And in embodied intelligence, we have 4 systems, whereas in low-altitude economy we have technologies that can assist flying object to land and take off and we have sensing technologies for long distance and optical technologies will surely have a chance. We're -- when it comes to health care and medical devices, it's not only about digital medical record or imaging systems, we will develop surgical robots and other areas. So for autonomous driving, I will not talk about the details, but in general, in these areas, in this new and emerging scenarios, we will and make sure that our technologies are present so they can contribute to the future development of the company that will be contributing to the momentum of our growth. And now I will be talking about manufacturing. I always convinced that manufacturing is important as a high-end manufacturer when we are shifting from traditional to smart manufacturing. If we don't have good, smart manufacturing technology, then we don't have a footprint in the future markets, then we would not have any core competitiveness. We are located in [indiscernible]. As we know that we have a very strong manufacturing industry here. But if we don't combine with AI, when we compare to the companies that do, they will catch up with us very rapidly. Sometimes, some clients come to visit us after many years, would be very shocked, of the upgrade of our factories and facilities because we have mastered train of the industry. Sometimes you might be oblivious of the trend. But in 2 to 3 years, if you don't pay attention, you will be lagging behind. For us, we are deeply engaged in the training of small models while deploying large models for vertical fields in the optical electronics industries. The key is to utilize the simulation data for the optical system and the production data. Simulation data is very important. It is just like a digital twin. We need to combine the actual data with the simulation data. If we have a similar simulation data and production data with the empowerment of AI, we can improve the overall performance of our products. That's why we develop and train small models, and at the same time we also deploy large models for vertical fields. It improves our yield, efficiency and agility. Yield should always come first before efficiency. On the basis of yield improvement, we improve efficiency. Otherwise, it would not be meaningful. We do not want too much errors without a good yield. In this way, we can't enhance our processes, our production and our quality management as well as the management of our smart equipment. If we can be more superior in yield and efficiency than our peers, we don't need to worry about our market share. We don't need to worry about our business. And I believe this is what we need to sustain for the future. That is, we must keep ourselves unwavered to our goal as a manufacturing company. And we have also done some organizational optimization. We have consolidated our organization and focus our resources for future development. What do I mean by that? Last time, we have talked about our tactics, and we have simplified the tactics since last time. And we have talked about the Sky, Tree ground improvement, but now we want to improve the capabilities that we share in the group. Without capabilities, it is not sustainable for our future developments. We want to optimize the share capabilities on the group platform. And the main purpose is to consolidate our efforts for major projects. In optical processing, coating, testing and analysis, tooling, processing, design and simulation equipment and encapsulations and developments, we have these common capabilities. For some specific capabilities, we might establish task force for different technologies so that we can combine the empowerment of the platform together with the vertical scenario. We believe that our central institute, we established our 27, as you know, what CTO is, but 1 CTO cannot manage so many scenarios, and that's why we call it S. That means small CTO. And we established small CTOs for our technological personnel so that I can be very targeted and raise their ideas and do innovations for some specific areas. In this way, we can concentrate our resources and improve the reusability of these resources to support the improvement of our core capabilities and expand our industry footprint. And thirdly, we will adopt diverse strategies to capture opportunities. But the first precondition is that we should have those capabilities equipped, and we should spend our presence into different industries so that when the opportunities arise, we can grab them. In the previous pages about the growth curves, handset lens set is moderate and then we have the AR/VR, but for XR and smart hardware the business growth curve has continued to go up. So this is our ideas for our business development. Another thing is about our overseas footprint. We have a very flexible overseas deployment strategies. The current international situations, and our product strategies for international markets are not up to us. For example, the -- our plans for Vietnam might be affected by the international situation. So apart from Vietnam, we might also consider other locations, and we will follow the customers' demands, policies and our market development strategies. All in all, we will adopt a more flexible strategies to respond to our customers' needs. Lastly, I would like to share with you our latest achievements in ESG. Regarding the risk and opportunities posed by climate change, we are completed the identification and assessment work, and we have used scenario analysis models to protect our current and expected financial impacts on the company. And our climate-related disclosure report has shown that our ranking for ESG progress has been alleviated. Here, you can see that it has been upgraded from BB to AA level. That concludes my presentation. Thank you.

Thank you for the sharing. We will now start the Q&A session. [Operator Instructions] The lady from first row.

I'm from Citi, I'm Tina. I have two questions. The first question is from the business structure. Handset lens set Hansa said, 67%, non-cellphone 3%, in terms of the breakdown for revenue is like that, but what about the profitability? For non-handset business, what is the contribution of the profitability of the non-cellphone business? And also several trees that you mentioned in the strategy which trees -- which fruits are more attractive in the future? And the second question is about the guidance for this year. Is there any update?

For the first half of the year compared to the same period of last year, the profitability group were rapidly, as mentioned in the presentation, is mainly driven by the gross margin of the handset lens set and modules, net profit grew by 52%. From the profitability breakdown if you split into handset and non-handset, the contribution from handset is over 50%. The guidance for this year. Let me repeat for handset business, for lens sets, gross profit margin grew compared to that of last year and believe that for the second half of the year, we'll continue to improve for gross profit margin handset is around 20% to 25% last year. And this year has already 25%. And for the second half of the year, it will continue to grow for the whole year, it will be between 25% to 30%. So please give us some time. Next time, let's see if we can exceed the 30% for our handset lens business. For handset module business,, we have seen gross profit margin improvement for the first half of the year. For the second half of the year, we believe that it will maintain stable. The range will be around 8% to 10%. For the handset and set and handset module business for the second half of the year, I believe that the revenue would grow compared to the first half of the year. And from our PowerPoint, as you can see that the revenue for handset grew by 1.7%. From the whole year, I believe the revenue would grow by 5% to 10%. So that's about the handset business. For vehicle business, for the first half of the year is quite ideal. Revenue grew by 8%. Among this 18%, the handset modules and handset lens sets have performed very well in terms of the high-end products for the modules. We have a lot of internally used products. So it did not see 20%. But from the business units, the revenue grew by 20%, for sure. For the second half of the year, the vehicle, including handset lens set and the modules, the revenue is expected to grow for the whole year for the vehicle business, we believe that revenue would grow by 20%. I'm talking about the revenue growth rate. The third one is XR. For the first half of the year, we have seen 21% of growth rate very fast last year. Revenue was around CNY 1 billion. For the whole year, CNY 2.5 billion. That is CNY 1.5 billion for the second half of last year. And in March, we have talked to you about this, our North American clients did not launch a new VR products. Second year of last year, there was a VR product launch. That's why this year, we do not have this one. But why the first year, we have a 21% growth is because we have the smart glass projects. So for the whole year, although we are-related revenue might decrease, the ex machine would increase. So for the whole year, the revenue should grow moderately. Any more questions?

My first question is regarding vehicle revenue. You have seen and 18% growth in vehicle, and your shipments, 21% comes from lens sets and module see a growth of 35% in its revenue. Can you please give us a breakdown of lens, CCM and LiDAR? Mr. Wang said, you work with a lot of OEM customers on LiDAR. So going forward, what will be the momentum? And what be the possible growth rate.

You mentioned a lot of products. The core product should be vehicle lens and vehicle modules. Other products, including what we are working on, LiDAR, HUD, these are all growing. We don't have the plan to give you a breakdown. But going forward, if we have a chance to talk with the investors, we will provide the breakdown. But as I said, there was this part of internal supply, which should be taken into account. The second question is regarding the expectation for LiDAR business, we don't have a specific guideline for that. The reason I gave a lot of updates on LiDAR was because that the development of LiDAR has been more obvious than ever. If that's the case, that's good news to good big companies. If it's not our peers, then it's good news for start-ups because start-ups will come up with a lot of new things, which are properly out of our expectation. You have [indiscernible] solutions LiDAR, like fresh, FMC, there are a lot of different solutions around LiDAR, but now things are much more clearer. That's why we can focus our energy on this vertical with a technological capability in the pipeline and mass production. We have received some figures about we haven't allocated specific space for that in our specifications. Well, in the past, you mentioned there was a number which was CNY 2 billion.

Is there any update?

No on our slides, you can see pure LiDAR was CNY 1.5 billion. Robotics, CNY 2 billion. We didn't mention HUD, but if you look at smart driving, Level 2, Level 3 and Level 4, be it for lens or LiDAR, there's a very clear trend. If the trend is clear, then to such a big company like us, we have very good capabilities and technologies, then it would be more likely to seize this opportunity and make it a pillar for our revenue contribution because we've been making parts and components for LiDAR for many years.

From Huatai Securities. Two questions. First of all, congratulations on your good results. In the first half, we have seen very good growth in ASP and margin. But when it comes to shipment, things have luggish. So could you please talk about your view on how you can balance size margin and profitability going forward? And how do you look at the handset market in the second half of the year? As investors, you focus on numbers, but as management, I focus on revenue. But either way, we are interested in the same thing. I didn't focus on the specific numbers of volume, but I'm interested to know the monthly revenue. And at the same time, I'm keen to know if these products are selling well if they're equipped with our core capabilities. And I'm interested to know how our vertical integration technology is doing, namely, I'm more interested in this technology-enabled products. If they sell well, if they are popular, then there will be no problem. I don't care about the specific numbers.

Of course, regarding the decrease in increase in numbers, we have another KPI in our internal control to control that. Well, the other day, I was wondering why the number decreased a lot. I didn't know the public announcement said that our model were down by 20% something. But our -- but our capacity remains the same. It should be that if we have such a decrease, then our capacity will have we will have more capacity left unused, but this is not the case because our production process has become more difficult and the ASP is increasing. Well, you should know that, if we have a camera if we have this front camera, and it's different from the Periscope camera, the level of difficulty is totally different, and the price gap is huge. And the production process is totally different. The price will be a few times different, because you need to work on motors, you need to work on the lens. And there will be this curve. And the periscope camera will increase a lot in its size. So that leads to a big increase in its workload. So we have less numbers. We have a very high utilization rate of the production lines, and we're even planning to increase production capacity. We may have to rent some production lines. But as you said, the number is decreasing with yet frustrated us, but this is something that we can't wrap our head around, and I'm sure you do. And people say that our shipment is lower, but I cannot explain by saying that our actual sales is not decreasing. Well, I can probably say that now.

Well, if I may supplement some information in the first half, the ASP of had handset lens sets and ASP and vehicle lens sets, the ASP is down by 20%. And -- but I suggest that investors read Page 9 of our slide presentation. This is about the future direction's compact and professional video making. These are the expectations for the future. Globally, smartphone as a market would not increase in size, but the premium market, for example, the main camera, periscope camera and other technologies, these sectors will deliver good revenue growth. And the growth rate would be good. In the future, we need to rely on important platforms to gain more market share and higher revenue.

Very clear. Second question, Mr. Wang mentioned a lot of organizational structure changes. And the picture was impressive. Last time on the -- during the Investor Day event, you said that you will have such a strategy where you will focus on big names like Apple and Meta. So going forward, what's your plan and what are the possible opportunities?

I think a similar question was asked about our organizational structure. I believe the biggest tree comes from handsets. But going forward, I don't know if the tree will grow further because the nutritious continent [indiscernible] might change. I think you mean that I think you're asking about how we think of the future trends regarding the big names. We've been working very well with these big customers. As you know, working with some customers of some projects, like 4G gene, and this is especially true with international customers. It's not the case that we reached the deal today and next month, we'll go for mass production. Good things take time. But I can explicitly say that the collaboration is going very well. Over the years, we've developed new technologies, and we worked closely with our clients, and we became more confident and our technologies were recognized and trusted by our customers. It's fair to say that we made a lot of effort in this regard. As you know, we have changed our business and organizational structure. We have adjusted platform technologies. These efforts are all to respond to our customers' requirements, so everything looks great in our development. But I cannot make it overly clear. Thank you.

I'm from Bernstein. I have two questions. First, regarding vehicle module. And most of your revenue comes from Continental from China and you have received orders from overseas like Europe and Japan. And when will, when will we expect some explosive growth from this overseas customers, if we have overseas customers, is it possible that gross margin gross profit margin for vehicle module will grow?