Pengyuan International Affirms Sunny Optical Technology (Group) Company Limited at ‘BBB+’ Rating; Outlook Stable


15 Jul 2022

    HONG KONG, 15 July 2022. Pengyuan International has affirmed the global scale long-term issuer credit rating (LTICR) of ‘BBB+’ for Sunny Optical Technology (Group) Company Limited (Sunny Optical), with a stable outlook.

    Sunny Optical’s rating is derived from its leading market position in the global optoelectronic industry, an exceptional financial profile with a net cash position and its involvement in the promising markets for vehicle lenses and augmented reality/virtual reality (AR/VR)-related products. On the other hand, Sunny Optical’s rating is constrained by its high business concentration risk as well as high exposure to the cyclical smartphone industry.

    KEY RATING RATIONALES

    Credit Strengths

    Leading market position in the global optoelectronic industry. Sunny Optical is one of the leading manufacturers of optical components and products in the world. The Company is the largest supplier of handset lens sets and vehicle lens sets in the world in terms of shipment volume. Furthermore, we estimate that Sunny Optical has surpassed its major peer and become the largest supplier of handset camera modules in terms of shipment volume in 2021. We expect the Company to continue gaining market share in handset-related products and to strengthen its leading position in the vehicle lens sets market on the back of its leading technologies and integrated capabilities.

    Benefiting from the rise of vehicle lenses and AR/VR-related demand. With the increasing adoption of advanced driver assistance systems (ADAS) on vehicles and the development of autonomous driving, we believe that the number of cameras per vehicle will continue to increase, thus supporting the global demand for vehicle lens sets in the near future. Sunny Optical, as the leading vehicle lens sets supplier, is expected to benefit from the aforementioned trend, as the Company continues to gain recognition from global automobile manufacturers. Furthermore, according to Sunny Optical’s latest annual report, AR and VR-related products became the Company’s third largest product segment in terms of revenue in 2021. We, therefore, believe that Sunny Optical will be a key beneficiary of the booming AR/VR market in the near future.

    Exceptional financial profile. Sunny Optical has been maintaining a net cash position with a deleveraging trend since 2019. Buoyed by the strong operating cash flow and prudent financial policy, the Company’s gross debt to total capitalisation ratio continuously decreased to 22.9% in 2021 from 29.9% in 2019. We expect Sunny Optical to maintain its net cash position in the next few years, and we believe that the operating cash flow generated by the Company should be sufficient to fund its capital expenditure and its cash and cash equivalent on hand should be sufficient to repay the majority of its USD debt due in 2023. Despite the headwind of the handset market, we expect Sunny Optical’s profitability to remain resilient with forecast EBITDA margin and return on invested capital (ROIC) of 17.9% and 18.5%, respectively, in 2022.

    Credit Weaknesses

    High business concentration.  Despite having a diversified product portfolio covering various optical components and products, Sunny Optical is subject to high geographic, customer and supplier concentration risks. The majority of the Company’s revenue is generated in China. Besides, Sunny Optical also has a concentrated customer and supplier base. The aggregate sales attributed to the Company’s five largest customers amounted to 61.1% of its total sales and the aggregate purchase attributed to the five largest suppliers was 52.4% of its total purchases in 2021. While Sunny Optical has a stable relationship with major smartphone manufacturers and automobile manufacturers, the slowed-down procurement from main customers or changes from main suppliers might impact the Company’s profitability and cash flow generation capability.

    High exposure to the cyclical smartphone industry. The optical components and optoelectronic products businesses rely heavily on the well-being of the smartphone industry. The technological changes and cyclicality of downstream demand might therefore have a substantial impact on the demand for Sunny Optical’s products. Nevertheless, we believe that the Company’s strong research and development capabilities create product differentiation and help to mitigate the corresponding industry risks.

    RATING OUTLOOK

    The stable outlook for Sunny Optical reflects our expectation that the Company will continuously maintain its leading market position in the global optoelectronic industry given its extensive track record of technological innovation in the development of optical and optoelectronic products such as handset lens sets, vehicle lens sets and handset camera modules.

    We would consider upgrading Sunny Optical’s issuer credit rating if its credit profile improves substantially, which could be caused by: 1) a remarkable increase in operating scale due to a significant increase in market share in optical products; and/or 2) a significant improvement in business diversity through successful overseas business expansion or business diversification to non-smartphone related business.

    We would consider downgrading Sunny Optical’s issuer credit rating if its credit profile deteriorates substantially, which could be caused by: 1) a contraction in its EBITDA margin to below 8% on a sustainable basis; 2) a rapid decrease in market share in optical products; and/or 3) a deteriorated financial profile, which might be caused by aggressive financial investment.

    Note: Ratings mentioned in this press release are unsolicited.

    ANALYSTS CONTACT

    MEDIA CONTACT

    OTHER ENQUIRIES

    Primary Analyst

    Vincent Ha, CFA

    +852 3615 8307

    vincent.ha@pyrating.com

    Secondary Analyst

    Leon Li

    +86 755 2348 3867

    leon.li@pyrating.com

    Committee Chair

    Ke Chen

    +852 3615 8316

    ke.chen@pyrating.com

    media@pyrating.com

    contact@pyrating.com

    Date of Relevant Rating Committee: 30 June 2022

    Additional information is available on www.pyrating.com

    Related Criteria

    General Corporate Rating Criteria (15 March 2018)

    Corporate Financial Adjustments and Ratio Definitions (7 May 2018)


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