Company Reports

Largan Precision’s first-quarter earnings were on track with our full-year projections, suggesting continued strong demand and camera upgrades for high-end smartphones. Accordingly, we maintain our earnings forecasts for Largan and our fair value estimate of TWD 3,000 per share. We continue to believe that Largan’s shares are undervalued as the company’s margin expansion from improving product mix and production yield is not fully priced in. Larger wins in high-end Chinese smartphones and faster progress in its newly formed lithium-ion battery venture could provide further upside to our fair value estimate.

We retain our fair value estimates on Taiwanese technology companies in our coverage following a powerful earthquake and multiple strong aftershocks near the eastern city of Hualien on April 3, namely: Advantech at TWD 337; Delta Electronics at TWD 331; GlobalWafers at TWD 710; Largan at TWD 3,000; MediaTek at TWD 1,400; Sino-American Silicon at TWD 281; Taiwan Semiconductor Manufacturing Co at TWD 950 (USD 151 per ADR); United Microelectronics Corp at TWD 70; and Win Semiconductors at TWD 245 per share.

Based on the better-than-expected December quarter results, we raise our fair value estimate for narrow-moat Largan Precision to TWD 3,000 from TWD 2,500. We were concerned that competitors would catch up while Largan struggled to improve its periscope lens production yield, but with solid revenue growth and impressive margin expansion from the previous quarter, we now have more confidence that Largan can stay well ahead of the competition and maintain its market share.

Largan Precision is the world's largest producer of optical lenses by value. Its core competency lies in the production of plastic lenses, which are widely used in smartphone cameras. Largan has accumulated 30 years of experience in plastic lens design and has been a key beneficiary of the boom in smartphone demand since the first iPhone was launched in 2007. Specializing in new products, Largan is able to become a key contributor to the miniature camera development road map and foster deep relationships with top smartphone brands. As the main supplier of high-end camera lenses, we believe Largan boasts leading lens design technology, allowing it to introduce various camera lens designs years ahead of its peers.

We hold our fair value estimate for Largan Precision at TWD 2,500 as demand for smartphone lenses is improving as expected on the back of a solid reception for the Apple iPhone 15 series, which features the most significant camera upgrades in 3 years. Although September-quarter profitability disappointed us as the new periscope lens sets faced teething problems, Largan should improve its manufacturing yield in the coming quarters. Looking to 2024, we believe that camera upgrades will stimulate smartphone replacement demand and benefit the incumbent lens suppliers including Largan, especially with the reemergence of Huawei, which differentiates itself with its superior camera performance. Largan’s shares are currently fairly valued in our view and further upside may require a greater commitment to supply fast-growing verticals such as automobiles.

Largan Precision is the world's largest producer of optical lenses by value. Its core competency lies in the production of plastic lenses, which are widely used in smartphone cameras. Largan has accumulated 30 years of experience in plastic lens design and has been a key beneficiary of the boom in smartphone demand since the first iPhone was launched in 2007. Specializing in new products, Largan is able to become a key contributor to the miniature camera development road map and foster deep relationships with top smartphone brands. And as the main supplier of high-end camera lenses, we believe Largan boasts leading lens design technology, allowing it to introduce various camera lens designs years ahead of its peers.

Following Apple’s launch event, we make no change to our forecasts and fair value estimates for Apple's suppliers like TSMC (TWD 850), Sunny Optical (HKD 107), Luxshare Precision (CNY 41.50), Largan (TWD 2,500), and AAC Technologies (HKD 17). We think the launch is slightly negative to the supply chain. This is due to possible renewed fears that Apple is increasing pressure on its suppliers to maintain its profitability, at the latter's expense. No-moat Luxshare and AAC should bear the brunt of such pressure, in our view. Sentiment may worsen further as China says it has noticed “security incidents" concerning Apple's iPhones, reinforcing worries that China may extend its iPhone usage ban to groups beyond civil servants.

We trimmed our fair value estimate for Largan Precision to TWD 2,500 from TWD 2,600 following its second-quarter earnings call due to the weaker-than-expected outlook in Android sales and profitability of periscope lenses for Apple. Largan alluded that shipments of its midend lenses would outperform its higher-end lenses in the second half, but we doubt if it is enough to compensate for the disappointing first-half revenue as the overall smartphone market outlook for 2023 has declined further. We view Largan’s shares as fairly valued as the upside from its periscope lenses, highly likely to be released in the iPhone 15 Pro Max telephoto camera, has already been fully priced in.

Largan Precision is the world's largest producer of optical lenses by value. Its core competency lies in the production of plastic lenses, which are widely used in smartphone cameras. Largan has accumulated 30 years of experience in plastic lens design and has been a key beneficiary of the boom in smartphone demand since the first iPhone was launched in 2007. Specializing in new products, Largan is able to become a key contributor to the miniature camera development road map and foster deep relationships with top smartphone brands. And as the main supplier of high-end camera lenses, we believe Largan boasts leading lens design technology, allowing it to introduce various camera lens designs years ahead of its peers.

Despite sluggish first-quarter results, we kept our fair value estimate for narrow-moat Largan Precision unchanged at TWD 2,600. While we were somewhat disappointed by the extent of the iPhone demand weakness, we believe our 2023 forecasts remain achievable given the adoption of periscope lenses in iPhone 15 Pros and the plausible earlier recovery of Android smartphones (the latter may serve as a catalyst for Sunny Optical’s shares). Over the long term, Largan remains one of the key beneficiaries of smartphone camera upgrades as the structural demand for improving image and video quality is unchanged, as with our fair value estimate.

We fine-tuned Largan’s earnings forecasts and maintained our fair value estimate of TWD 2,600. We retain our long-term expectation of a modest gross margin recovery to 58.8% in 2027 from 54.7% in 2022 due to the company’s ability to maintain its leading position in supplying advanced smartphone camera lenses. We think its strategy of prioritizing cutting-edge smartphone lenses should prevail, ceding some lower-value shipments of iPhone lenses but continuing to capture the largest share in dollar amount. As the primary supplier of main rear lenses and Pro lenses, we posit Largan can maintain high profitability. We slightly lifted our gross margin assumption while cutting our revenue growth forecasts, leaving our fair value estimate unchanged. We also maintain our view that Largan’s shares are undervalued as the market is overlooking its long-term resiliency. Meanwhile, we think that Android-heavy peers like Sunny Optical may outperform Largan in the short run as we expect China’s consumption to rebound after the reopening following a prolonged Android weakness. Sunny should announce its full-year results later in March, and we expect results to be unsurprisingly lackluster but guiding toward an improving smartphone outlook.

Largan Precision is the world's second-largest producer of optical lenses by volume. Its core competency lies in the production of plastic lenses, which is widely used in smartphone cameras. Largan has accumulated 30 years of experience in plastic lens design and been a key beneficiary of the boom in smartphone demand since the first iPhone was launched in 2007. Between 2011 and 2021, Largan’s revenue grew at an impressive CAGR of 11.3%, enabling it to build a commanding market share of about 25%. The company has been able to maintain a strong hold on clients by focusing on new products. And as the main supplier of high-end camera lenses, we believe Largan boasts leading lenses design technology, allowing it to introduce 7P, or 7 Plastic, 8P, and 9P lenses set ahead of peers.

We maintain our fair value estimate for Largan Precision at TWD 2,600 per share as its business continues to be resilient due to greater exposure to Apple, whose demand held up better than other smartphone brands. As well as a strong USD, better-than-expected demand for ultra-premium smartphones translates to better pricing, driving Largan’s revenue in TWD terms. We think Largan will ramp up sales in lower-margin voice coil motors, and we reduced our revenue forecasts for nonsmartphone businesses. Still, we find Largan’s shares undervalued as we are confident in its long-term profitability recovery. It is an attractive defensive play with high USD exposure, an attractive dividend yield, a resilient customer portfolio, and relatively limited downside risk compared with other smartphone lens makers.

We maintain our fair value estimate for narrow-moat Largan Precision at TWD 2,600 following solid June quarter results. While we think the sparse upgrades in smartphone lenses would cause the incumbent technological leader, Largan, to lose its share of the lower-end smartphone market, we expect that the negative impact is smaller than its peers, and the shortfall would mostly be offset by a stronger USD against TWD. We view Largan’s shares as undervalued as the company is more resilient to the ongoing weak smartphone demand and upgrades as it has more exposure to Apple. It is an attractive defensive name with a limited downside, and we believe sentiment may improve once smartphone demand rebounds when China’s economic stimuli take effect as the region accounts for one quarter of worldwide smartphone sales.

We trimmed our fair value estimate for narrow-moat Sunny Optical to HKD 180 from HKD 190 as it experiences more significant headwinds from having greater exposure to the Android and Chinese market than we had expected in March. Sunny’s recent shipment data underperformed its peers that either have more exposure to the iPhone, which is currently more resilient; or to lower-end handsets. Sunny may possess greater risk in the near term as Chinese middle-class consumers’ appetite for electronic goods vanishes due to the recession concerns. Therefore, we cut our 2022 handset lens sets and handset camera modules shipment estimate for Sunny Optical on fewer cameras per phone and market share loss.

We trim our fair value estimate for Largan Precision to TWD 2,600 per share as 2022’s first-quarter results were lackluster due to challenging smartphone environments. Mobile phone players, including Largan, suffered from more significant delays in shipments and upgrades as tepid demand continued. While the tough environment should continue throughout 2022, we expect the company to experience meaningful recovery beginning in 2023, which is the reason to believe Largan's shares are undervalued. Management is cautiously optimistic about smartphones as it ramps up investment in its Dongguan facility to be operational in mid-2023.

Largan Precision is the world's second-largest producer of optical lenses by volume. Its core competency lies in the production of plastic lenses, which is widely used in smartphone cameras. Largan has accumulated 30 years of experience in plastic lens design and been a key beneficiary of the boom in smartphone demand since the first iPhone was launched in 2007. Between 2011 and 2021, Largan’s revenue grew at an impressive CAGR of 11.3%, enabling it to build a commanding market share of about 25%. The company has been able to maintain a strong hold on clients by focusing on new products. And as the main supplier of high-end camera lenses, we believe Largan boasts leading lenses design technology, allowing it to introduce 7P, or 7 Plastic, 8P, and 9P lenses set ahead of peers.

We trim our fair value estimate on Largan Precision to TWD 2,700 per share on a weaker outlook for smartphone shipment, but we remain less pessimistic than the market. Although we reduced our revenue and operating income estimates for the next two years due to short-term demand headwinds, the company should still possess steady sales from high-end smartphone and vehicle lenses in later years. We think Largan can maintain its gross margin of 60% and accelerate its average selling price, or ASP, growth in Android lenses as it remains the leader in cutting-edge technology, ready to capture the specification upgrade recovery. An unexciting 2022 earnings outlook has led Largan to trade at 15.0 times market price to our 2022 EPS estimate, lower than Sunny’s 26.4 times. It is also lower than its three-year historical average P/E of 19.8 times. After the fourth-quarter earnings, the post-earnings pullback in market price provides a much more attractive entry point to capitalize on our long-term thesis for the company as a value stock. We believe Largan should trade at 19.4 times price to our 2022 earnings estimate due to the solid margin outlook, and its stable and high cash flows while sitting on a large cash pile, 31% of its current share price.

Largan Precision is the world's second-largest producer of optical lenses by volume. Its core competency lies in the production of plastic lenses, which is widely used in smartphone cameras. Largan has accumulated 30 years of experience in plastic lens design and been a key beneficiary of the boom in smartphone demand since the first iPhone was launched in 2007. Between 2010 and 2020, Largan’s revenue grew at an impressive CAGR of 16.3%, enabling it to build a commanding market share of about 25%. The company has been able to maintain a strong hold on clients by focusing on new products. And as the main supplier of high-end camera lenses, we believe Largan boasts leading lenses design technology, allowing it to introduce 7P, or 7 Plastic, 8P, and 9P lenses set ahead of peers.

Largan Precision is the world's second-largest producer of optical lenses by volume. Its core competency lies in the production of plastic lenses, which is widely used in smartphone cameras. Largan has accumulated 30 years of experience in plastic lens design and been a key beneficiary of the boom in smartphone demand since the first iPhone was launched in 2007. Between 2010 and 2020, Largan’s revenue grew at an impressive CAGR of 16.3%, enabling it to build a commanding market share of about 25%. The company has been able to maintain a strong hold on clients by focusing on new products. And as the main supplier of high-end camera lenses, we believe Largan boasts leading lenses design technology, allowing it to introduce 7P, or 7 Plastic, 8P, and 9P lenses set ahead of peers.