Sunny Optical Delivered Revenue and Earnings Growth in 1H26, but Margins in Traditional Businesses Remained Under Pressure and a Re-rating Still Requires Faster Growth in 2H26

Overview

This report reviews Sunny Optical's 1H26 results and assesses whether the company can achieve a valuation re-rating in 2H26. Morgan Stanley believes the rapid expansion of new businesses has alleviated market concerns that smartphone industry headwinds could weigh on earnings, but growth in traditional businesses and gross margins across most segments remain insufficient. It therefore maintains its Equal-weight rating and HK$62.00 target price.

Core views

Sunny Optical's 1H26 revenue increased 11.5% YoY to RMB21.9 billion, while net profit rose 9.9% YoY to RMB1.81 billion, representing relatively positive overall results. The main incremental contribution came from new businesses such as robotics, smart imaging, and optical instruments, whose revenue increased from RMB2.1 billion to approximately RMB4.0 billion, nearly doubling and gradually turning the Other/Pan-IoT business into a new earnings engine. The vehicle and XR businesses also maintained double-digit growth, indicating that the company's growth structure is expanding from handsets into a broader range of applications. These incremental contributions alleviated market concerns that smartphone industry headwinds could create greater pressure on earnings. The improved growth mix did not translate into broad-based margin expansion. Overall gross margin declined from 19.8% in 1H25 to 19.5% in 1H26. Gross margin in the handset business fell from 14.3% to 12.3%, the vehicle business from 33.4% to 30.3%, and the XR business from 17.3% to 13.0%. Only the Other/Pan-IoT business improved, with gross margin rising from 33.1% to 34.4%. The report therefore views the slight gross-margin decline as a negative factor: contributions from new businesses are increasing, but the profitability of major segments such as handsets, vehicles, and XR has yet to demonstrate a concurrent recovery. Even with an improved product mix, handset revenue continues to face industry demand headwinds. Morgan Stanley believes a re-rating in 2H26 will require stronger evidence of growth and margin improvement. In addition to a seasonal recovery in handset demand, an acceleration in vehicle business growth to 15% or above could strengthen market confidence in medium-term growth. A material breakthrough in the optical communications business could also provide an additional catalyst. Other potential upside factors include improving gross margins for smartphone camera modules (CCM) and lenses, faster-than-expected growth in automotive lenses and modules, faster-than-expected share gains among new international customers, and breakthroughs in the MR and smart-glasses businesses. Conversely, if traditional businesses slow further and margins continue to decline, the valuation could be de-rated. The report specifically cautions that weak industry demand may continue to weigh on gross margins, intensifying competition in the smartphone CCM and lens markets may undermine profitability, and growth in automotive-related businesses may fall short of expectations. Although optical communications represent a potential new growth area, if development remains confined to mature products, the market may continue to question the business's growth potential and margin outlook. The financial series presented in the report for 2025 through 2028 shows projected net revenue of RMB43.229 billion, RMB42.747 billion, RMB49.763 billion, and RMB54.362 billion, respectively, and ModelWare net profit of RMB4.468 billion, RMB3.102 billion, RMB3.768 billion, and RMB4.374 billion, respectively. The two sets of EPS figures in the table are RMB4.11, RMB2.85, RMB3.46, and RMB4.02, and RMB3.48, RMB3.68, RMB4.27, and RMB5.33, respectively. Over the same period, P/E ratios are 14.3x, 18.8x, 15.5x, and 13.3x; ROE is 17.7%, 10.4%, 11.5%, and 11.7%; and dividend yields are 0.8%, 2.0%, 1.1%, and 1.3%. These figures reflect a projected trajectory in which earnings and returns come under pressure in 2026 before gradually recovering. The valuation uses a sum-of-the-parts (SOTP) approach derived from a residual income model (RIM). The report discounts at an 11% cost of equity and applies differentiated growth assumptions to different businesses: medium-term growth rates of -6%, 11%, and 16% for the handset, vehicle, and AR/VR businesses, respectively, and long-term growth rates of 3%, 5%, and 5%, respectively. This approach reflects significant differences in growth rates and return-on-capital characteristics across the segments. The final rating is Equal-weight, the industry view is In-Line, and the target price is HK$62.00. The share price was HK$62.60 on August 26, 2026, indicating that the report is awaiting clearer signals of growth and margin improvement.

Analysis framework

The report first assesses overall 1H26 performance based on revenue, net profit, and contributions from new businesses, and then breaks down growth and gross-margin changes across the handset, vehicle, XR, and Other/Pan-IoT segments. It subsequently identifies operating catalysts that could support or weigh on the valuation in 2H26. For valuation, it uses a residual income model combined with a sum-of-the-parts approach, applying different medium- and long-term growth assumptions to the handset, vehicle, and AR/VR businesses and discounting them at an 11% cost of equity.

Methodology notes

• Valuation MethodRIM Residual Income Model

  Residual Income Model (RIM)

  This model bases valuation on residual income generated above shareholders' required return. The report assesses Sunny Optical's value using an 11% cost of equity and medium- and long-term growth assumptions for each business.

• Valuation MethodSOTP Segment Valuation

  RIM-derived Sum-of-the-Parts Valuation

  The report separately values the handset, vehicle, AR/VR, and other businesses before aggregating them, thereby reflecting significant differences in growth rates and return characteristics across segments.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Business-level Breakdown of Revenue Growth and Gross Margin

  The report examines not only total revenue and net profit but also compares growth and gross margins across the handset, vehicle, XR, and Other/Pan-IoT businesses to assess growth quality and earnings contributions.

• Company Fundamentals and Financial Framework

  Morgan Stanley ModelWare Framework

  The report states that, unless otherwise specified, financial metrics and forecasts are based on the Morgan Stanley ModelWare framework and are distinguished from Refinitiv consensus data.

Asset mapping & comparison

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

• Sunny Optical (2382.HK)

  Growth in new businesses, vehicles, and XR provides support, but handset business headwinds and declining gross margins across major segments result in mixed overall performance.

  Strengths

  Revenue from new businesses such as robotics, smart imaging, and optical instruments nearly doubled; the vehicle and XR businesses maintained double-digit growth; and gross margin in the Other/Pan-IoT business increased to 34.4%.

  Weaknesses

  Handset revenue remains affected by industry headwinds, overall gross margin declined, and gross margins in the handset, vehicle, and XR businesses all contracted YoY.

  Comparison

  The report compares the company's internal businesses, with Other/Pan-IoT being the only segment to achieve gross-margin improvement; it does not provide an operating comparison with specific peers.

  Risks

  Weak industry demand, intensifying competition in smartphone CCM and lenses, weaker-than-expected growth in the vehicle business, and optical communications remaining confined to mature products.

Key data

• 1H26 RevenueRMB21.9 billionUp 11.5% YoY
• 1H26 Net ProfitRMB1.81 billionUp 9.9% YoY
• New Business RevenueIncreased from RMB2.1 billion to approximately RMB4.0 billionRevenue from businesses such as robotics, smart imaging, and optical instruments nearly doubled
• 1H26 Overall Gross Margin19.5%19.8% in 1H25
• Handset Business Gross Margin12.3%14.3% in 1H25
• Vehicle Business Gross Margin30.3%33.4% in 1H25
• XR Business Gross Margin13.0%17.3% in 1H25
• Other/Pan-IoT Business Gross Margin34.4%33.1% in 1H25, making it the only segment to improve
• Net Revenue Forecast (2025/2026e/2027e/2028e)RMB43.229 billion/42.747 billion/49.763 billion/54.362 billionFinancial forecast series presented in the report
• ModelWare Net Profit (2025/2026e/2027e/2028e)RMB4.468 billion/3.102 billion/3.768 billion/4.374 billionDeclines in 2026, followed by a gradual recovery
• First EPS Measure (2025/2026e/2027e/2028e)RMB4.11/2.85/3.46/4.02Labeled EPS (Rmb)** in the table
• EPS Refinitiv Consensus Measure (2025/2026e/2027e/2028e)RMB3.48/3.68/4.27/5.33Labeled S in the table, indicating consensus data provided by Refinitiv Estimates
• P/E Ratio (2025/2026e/2027e/2028e)14.3x/18.8x/15.5x/13.3xValuation series presented in the report
• ROE (2025/2026e/2027e/2028e)17.7%/10.4%/11.5%/11.7%Expected to decline significantly in 2026
• Dividend Yield (2025/2026e/2027e/2028e)0.8%/2.0%/1.1%/1.3%Forecasts presented in the report
• Cost of Equity11%RIM-SOTP valuation assumption
• Medium-term Growth Rate AssumptionsHandset -6%, Vehicle 11%, AR/VR 16%Business-specific valuation assumptions
• Long-term Growth Rate AssumptionsHandset 3%, Vehicle 5%, AR/VR 5%Business-specific valuation assumptions
• Target PriceHK$62.00Equal-weight rating
• Reference Share PriceHK$62.60As of August 26, 2026

Impact & implications

The report believes that the near-doubling of new businesses and double-digit growth in the vehicle and XR businesses demonstrate that Sunny Optical is developing growth engines beyond handsets, but declining gross margins across most major segments constrain valuation upside. If vehicle business growth reaches 15% or above in 2H26, handset business margins recover, or breakthroughs occur in optical communications, MR, and smart glasses, market assessments of the company's growth and profitability could improve. If traditional businesses continue to slow and margins decline, however, the company could face a valuation de-rating.

Risks

• A further slowdown in traditional businesses could weaken overall growth and lead to a valuation de-rating.
• Weak industry demand may continue to weigh on overall and segment-level gross margins.
• Intensifying competition in the smartphone CCM and lens markets could further erode profitability.
• Growth in the automotive lens and module businesses may fall short of expectations.
• If the optical communications business develops only mature products, its growth potential and margin outlook may continue to be questioned.

What to watch

• Monitor whether handset demand experiences a seasonal recovery in 2H26 and whether CCM and lens gross margins improve.
• Monitor whether growth in automotive-related businesses accelerates to 15% or above.
• Monitor whether growth in automotive lenses and modules exceeds expectations.
• Monitor whether the optical communications business achieves a product or technology breakthrough rather than remaining confined to mature products.
• Monitor the pace of the company's share gains among new international customers.
• Monitor whether the MR and smart-glasses businesses achieve breakthroughs.
• Monitor whether growth in traditional businesses and overall gross margin continue to decline.