Cooling Ardor for Flashy Smartphones Spells Trouble for Suppliers

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Cooling Ardor for Flashy Smartphones Spells Trouble for Suppliers


Fewer people are willing to pay more for flashier smartphones. That is bad news for many of Asia’s component makers.

Smartphone shipments haven’t really been growing globally since 2015, and could even decline this year for the first time, analysts at Nomura reckon. Despite the stagnant market backdrop, many component suppliers have done very well over the past two years—as have their share prices.

The reason? Smartphone manufacturers have been packing ever more features into their devices, and charging higher prices for them. The most prominent example is Apple’s iPhone X, which features an edge-to-edge screen and a three-dimensional camera system for facial recognition—and costs a hefty $999.

These feature upgrades have been a big boost for component suppliers. Take Hong Kong-listed

Sunny Optical
,

2382 -0.09%

which makes camera lenses for smartphones. Its share price has jumped sixfold over the past two years.

The company has benefited from the trend to add an extra lens at the back of a phone to produce better images. It shipped 69% more handset lenses in the first 11 months of 2017 than it did in the same period a year earlier. Taiwanese lens maker

Largan Precision


3008 -0.85%

has likewise seen its share price double in the past two years. Shares in Hong Kong-listed AAC Technologies, which makes smartphone speakers, have tripled over the same period.

But the bright weather may be coming to an end. The iPhone X hasn’t been selling as well as hoped. In China, the world’s largest smartphone market, domestic smartphone makers are also seeing weak demand, with consumers balking at paying higher prices for new phones. Sunny, which supplies Chinese phone makers such as Oppo and Vivo, has already seen shipments of its handset lenses slow in recent months.

The shares of Sunny, Largan and AAC have pulled back since November, but still trade at elevated levels. Sunny, for example, trades at 25 times this year’s expected earnings, and based on market forecasts its profit will grow by nearly 50%.

It’s time for investors to look at Sunny and its peers through a new lens.

Write to Jacky Wong at JACKY.WONG@wsj.com



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