舜宇光学科技(02382) 　　We hosted Sunny Optical at J.P. Morgan’s Global TMT conference in HK. While most investors appear to expect Sunny Optical to miss its annual lens shipment guidance, management reiterated 2016 shipment guidance of 20-30% Y/Y growth in handset lens, 25-35% growth in vehicle lens, and 15-25% growth in camera modules. Most questions were concentrated on dual camera progress, vehicle lens market outlook, and competition. 　　Narrowing technology gap versus Largan: Management indicated that Chinese customers are diversifying lens suppliers. Sunny Optical started to supply dual-lens for varied Chinese customers from October and is narrowing the technology gap between Largan in 6P and 10MPx-plus lens. Kantatsu, on the other hand, is losing marketing share due to management reshuffling. Sunny Optical plans to expand handset lens capacity in 2017 (now: 40mn) by adding new lines and de-bottlenecking e.g. improving molding technology. 　　Maintains dominant position in vehicle lens: Global vehicle lens market is expected to grow by 25-30% Y/Y in the next five years. We expect Sunny Optical will continue to outgrow the market thanks to market share gains (from 25% in 2015 to 30% in 2016). According to management, competitors such as Fujifilm and Maxell mainly focus on rear camera for parking while Sunny Optical is able to offer comprehensive product portfolio �C rear, front, and surround view cameras. 　　Dual camera may see wider adoption in 2017: Sunny Optical is the main supplier for Huawei’s dual camera projects. Other dual camera customers are Vivo and Qiku. Although dual camera contribution might be insignificant this year, management expects several dual camera models to be released in 1H17 with greater volume. Some Chinese brands also consider adopting dual camera in mid-range models. 　　JPM View: Although dual lens shipments kicked off slightly later than our expectation, the company proved that it is capable of matching the first-tier quality requirement. We believe that Sunny Optical is outpacing Largan (N) on handset lens shipment growth, and is a better play for non-handset lens such as vehicle lens, drones, surveillance camera, and VR/AR. Given a clear improvement in product portfolio and solid earnings growth, we retain high-conviction OW on the stock. We believe if the company is able to deliver its annual lens shipment guidance the share price will show meaningful upward momentum. 　　Investment Thesis 　　We maintain our Overweight rating on Sunny Optical. Sunny Optical is the leading compact camera module (CCM) and handset lens maker in China with a 41% net earnings CAGR during 2010-14. We forecast net earnings to grow at 34% from 2016-2018. Our positive thesis hinges on three factors: 　　Market share gains in CCMs and lens sets. 　　Margin expansion through improved product mix (more contribution from lens). 　　Vehicle lens to fuel earnings growth beyond smartphones. 　　Valuation 　　We apply a 24x 2017 P/E to derive our Dec-17 PT of HK$44. Our target multiple reflects a 0.6x PEG, which is in line with the industry median. Risks to Rating and Price TargetDownside risks to our rating and price target include: