Pan-IoT business drove Sunny Optical's 1H26 earnings beat, while product diversification is reshaping its growth and profit mix

Overview

The report reviews Sunny Optical's 1H26 results and updates earnings forecasts. Its core conclusion is that the company continued to demonstrate operating resilience despite weakness in the handset industry. A rising contribution from pan-IoT, XR, and automotive products drove the earnings beat and should improve the growth and gross-margin mix over the medium to long term, while the handset business will continue to face demand and margin pressure over the next 12 months.

Core views

The 1H26 results demonstrated strong operating resilience. Revenue increased 11% year over year, 4.4% above market consensus; gross margin declined 33 basis points year over year to 19.5%, but remained 51 basis points above consensus. Tight expense control drove a 26% year-over-year increase in operating profit, while EPS exceeded consensus by 16%. The report therefore concludes that the company's execution was better than the market had feared amid handset supply-chain destocking and weak end demand. Product diversification was the main reason for the earnings beat. Revenue from “other businesses,” primarily pan-IoT products, increased nearly 90% year over year, with a gross margin of 34%. The segment accounted for 18% of company revenue and 33% of gross profit, indicating that its profit contribution was significantly greater than its revenue share. Its products include optical components and modules for handheld imaging devices, robotic lawn mowers, warehouse robots, and microscopy instruments. Bernstein expects this business to grow by more than 45% in 2026 and by approximately 10% in 2027–2028. The company is also exploring optical interconnect products for AI data centers; the report expects timelines for sample testing, customer qualification, and mass production to become clearer by the second half of 2027, with revenue contribution beginning in 2028 at the earliest. The handset business may remain under pressure over the next 12 months. Industry shipments declined only by a mid-single-digit percentage in 1H26, but inventory digestion caused component suppliers to experience a more pronounced decline. Leveraging new Apple and Huawei projects, Sunny Optical kept 1H26 handset-business revenue broadly flat, and Bernstein expects it to remain generally stable in 2H26. However, the report lowers its 2026 smartphone-module gross-margin forecast to 7.3% and its overall handset-business gross-margin forecast to 12.5%. After the near-term pressure subsides, new Apple products are expected to drive annual growth of 10%–15% in handset-module revenue during 2027–2028. The model update further reflects the changing business mix. Bernstein raises its 2026 revenue forecast due to stronger pan-IoT growth and better-than-expected XR revenue; it now forecasts revenue of RMB47.6 billion, RMB52.4 billion, and RMB59.6 billion for 2026–2028, representing year-over-year growth of 10%, 10%, and 14%, respectively. Compared with the previous forecasts, the three-year revenue estimates have been adjusted by 2%, 0%, and -1%, respectively; compared with consensus, they are 2%, 1%, and 2% higher. The report forecasts revenue and operating profit CAGRs of 11% and 24%, respectively, from 2025 to 2028. Operating profit is expected to grow faster than revenue, mainly due to expense control and a rising contribution from high-margin businesses. Profitability is expected to decline before recovering. The report forecasts that the company's overall gross margin will fall by 70 basis points in 2026 and rebound by 120 basis points in 2027, corresponding to gross margins of 19.0%, 20.2%, and 20.7% for 2026–2028; operating margins are forecast at 8.3%, 10.0%, and 11.2%, respectively. Although weakness in the handset market could push smartphone-related gross margins down to the mid-single digits, gross margins of approximately 30% for automotive and pan-IoT products, together with their rising revenue contribution, should support the company's overall gross margin at around 20% in the following year. A normalization of memory-price inflation could also improve sentiment and the margin environment in the consumer-electronics industry. EPS is forecast at RMB3.6, RMB4.5, and RMB5.6 for 2026, 2027, and 2028, representing year-over-year changes of -15%, 23%, and 26%, respectively; compared with consensus, these estimates are 5% lower, 1% higher, and 4% higher. The 2026 EPS forecast is raised by 5% from the previous model, while the 2027 and 2028 forecasts are each reduced by approximately 1%, with the 2027 estimate essentially unchanged. Excluding the RMB919 million one-off investment gain in 2025, the report forecasts an EPS CAGR of 18% through 2028; the chart also shows an EPS CAGR of approximately 9% over the same period including the one-off factor. The difference between the two measures primarily reflects the high base in 2025. On valuation, Bernstein applies an 18x target P/E multiple to 2027 EPS of RMB4.5 and assumes an RMB/HKD exchange rate of 1.17, maintaining its HK$94 target price and Outperform rating. The current price stated in the report is HK$64.30, while the P/E multiples for actual 2025, forecast 2026, and forecast 2027 are 13.0x, 15.2x, and 12.3x, respectively. The report also notes that Sunny Optical's P/E relative to the Hang Seng Index is near the low end of its five-year range and therefore considers its long-term upside attractive.

Analysis framework

The report first compares 1H26 revenue, gross margin, operating profit, and EPS with year-earlier figures and market consensus to determine the magnitude of the earnings beat. It then breaks down growth and gross-profit contributions across the handset, automotive, XR, and pan-IoT businesses to assess how changes in the product mix affect the company's overall margins. On this basis, the report updates its 2026–2028 forecasts for revenue, gross margin, operating margin, and EPS, comparing them with the previous model and consensus, before deriving the target price from 2027 EPS and a target P/E multiple.

Methodology notes

• Valuation methodologyP/E and PEG valuation

  P/E valuation based on forward EPS

  The report multiplies 2027 EPS of RMB4.5 by an 18x target P/E multiple and converts the result at an RMB/HKD exchange rate of 1.17 to derive a target price of HK$94.

• Industry/value-chain analysis frameworkUpstream, midstream, and downstream value-chain transmission

  Transmission of end-market shipments, inventory digestion, and upstream costs to component suppliers

  Starting with declining handset shipments, supply-chain inventory digestion, and rising memory prices, the report explains why component suppliers face greater pressure on revenue and gross margins than the end market.

• Corporate fundamentals and financial frameworkOperating/financial leverage analysis

  Interaction among revenue growth, cost control, and operating-profit growth

  Revenue grew 11% in 1H26, while expense control drove a 26% increase in operating profit; over the forecast period, the operating-profit CAGR is also significantly higher than the revenue CAGR, reflecting operating leverage and an improved product mix.

• Corporate fundamentals and financial frameworkEarnings quality analysis

  EPS growth excluding one-off investment gains

  The report excludes the RMB919 million one-off investment gain in 2025 and uses an 18% CAGR to measure underlying earnings growth through 2028, avoiding distortion of the trend by a one-off item.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Sunny Optical Technology (Group) Company Limited (02382.HK)

  Growth and a rising contribution from pan-IoT, XR, and automotive products support medium- to long-term improvements in the company's revenue, gross margin, and operating profit.

  Strengths

  Broad business mix; other-business gross margin reached 34%; new Apple and Huawei projects help stabilize the handset business; expense control enables operating profit to grow faster than revenue.

  Weaknesses

  The handset business remains affected by weak end demand, inventory digestion, and low module margins, while 2026 EPS is forecast to decline 15% year over year.

  Comparison

  The report forecasts 2026–2028 revenue at 2%, 1%, and 2% above consensus, respectively, while EPS is forecast at 5% below, 1% above, and 4% above consensus; the company's P/E relative to the Hang Seng Index is near the low end of its five-year range.

  Risks

  Margin pressure from rising memory prices, weaker-than-expected Android handset demand, slower-than-expected global ADAS penetration and automotive-camera technology upgrades, and slower-than-expected global AR/VR adoption.

Key data

• 1H26 revenue growthUp 11% year over year4.4% above market consensus
• 1H26 gross margin19.5%Down 33 basis points year over year, but 51 basis points above consensus
• 1H26 operating-profit growthUp 26% year over yearPrimarily driven by tight expense control
• 1H26 EPS performance16% above consensusA key indication of the earnings beat
• Other-business performanceRevenue up nearly 90% year over year, with a 34% gross marginAccounted for 18% of company revenue and 33% of company gross profit
• Pan-IoT growth forecastGrowth of more than 45% in 2026; approximately 10% growth in 2027–2028The report considers it a key driver of product diversification and profit growth
• 2026 handset-business gross-margin forecastSmartphone modules: 7.3%; overall handset business: 12.5%Lowered because the handset market and supply-chain margins are expected to remain under pressure over the next 12 months
• 2025–2028 CAGRRevenue: 11%; operating profit: 24%Operating-profit growth is supported by expense control and a rising contribution from high-margin businesses
• 2026–2028 revenue forecastsRMB47.6 billion, RMB52.4 billion, and RMB59.6 billionCorresponding to year-over-year growth of 10%, 10%, and 14%
• 2026–2028 gross-margin forecasts19.0%, 20.2%, and 20.7%Expected to decline by 70 basis points in 2026 and rebound by 120 basis points in 2027
• 2026–2028 operating-margin forecasts8.3%, 10.0%, and 11.2%Expected to rise as the business mix and operating leverage improve
• 2026–2028 EPS forecastsRMB3.6, RMB4.5, and RMB5.6Corresponding to year-over-year changes of -15%, 23%, and 26%
• Adjusted EPS CAGR18% through 2028Excluding the RMB919 million one-off investment gain in 2025
• Target-price valuationHK$94Based on 2027 EPS of RMB4.5, an 18x P/E multiple, and an RMB/HKD exchange rate of 1.17

Impact & implications

The report believes that Sunny Optical's sources of growth are gradually expanding from handset optics to automotive, XR, and pan-IoT products. A rising contribution from high-margin new businesses can offset weakness in the handset business and enable operating profit to grow faster than revenue over the forecast period. However, pressure in the handset supply chain means that earnings improvement in 2026 will not follow a straight upward path, with a more meaningful recovery in overall gross margin expected only in 2027. Optical interconnects for AI data centers could become a longer-term incremental growth driver, but are not expected to contribute revenue until 2028 at the earliest.

Risks

• Rising memory prices could create greater-than-expected margin pressure.
• The Android handset market could be weaker than expected.
• Global ADAS penetration and automotive-camera technology upgrades could proceed more slowly than expected.
• Global AR/VR adoption could proceed more slowly than expected.

What to watch

• Monitor whether pan-IoT products can achieve the forecast growth of more than 45% in 2026.
• Watch whether new Apple and Huawei projects can support broadly stable handset-business revenue in 2H26 and drive annual handset-module revenue growth of 10%–15% in 2027–2028.
• Watch whether timelines for sample delivery, customer qualification, and mass production of optical interconnect products for AI data centers become clearer in the second half of 2027.
• Monitor whether the rising contribution from high-margin automotive and pan-IoT products can lift the company's overall gross margin back to approximately 20% in 2027.
• Watch whether memory-price inflation normalizes and how it affects consumer-electronics demand sentiment and handset-business margins.