Sunny Optical Technology Group Co Ltd

HKEX:2382

Earnings Call Transcript 2022-Q2

[Unknown Executive]

Good morning, and welcome to the 2022 interim results announcement of Sunny Optical Technology Group.

I am [ Daisy ] from investor relations. On behalf of the company, I'd like to take this opportunity to thank you for your long-term support. Due to the resurgence of the epidemic, we'll have this announcement by remote through the webinar. Sorry for the inconvenience.

First of all, please allow me to introduce you the management present here today. They are Executive Director and Chairman, Mr. Ye Liaoning; Executive Director and CEO, Mr. Sun Yang; Vice President and Joint Company Secretary, Mr. Ma Jianfeng; IR Director and Joint Company Secretary, Madam Wong Pui Ling; Associate IR Director, Madam Liu Yanfeng.

Next, we'll present to you our interim results. The presentation deck has been uploaded to our website. Please feel free to download it.

Now let's welcome Executive Director and Chairman, Mr. Sun Yang, to brief you the 2022 interim result.

[Yang Sun, executive]

Good morning, investors. I'd like to -- on behalf of the management of the group, to brief you our 2022 first half results.

There are 3 causes contributing to the results. The first is that the smartphones in the first half of the year, especially the Android phones, is facing a very sluggish market. Compared with the same period last year, there is a great drop of the shipment. And the second cause is that the camera modules had a de-spec trend. And thirdly, in the vehicle products there is a great change of the supply chain. And especially there is the structure that -- change of the chips and it did not reach our expectation for its growth. So due to these 3 causes, the revenue, gross margin and profit have been affected.

So the revenue for the first half has reached CNY 16.9 billion, dropped by 14.4% compared with the same period last year. The gross profit was at CNY 3,500 million, dropped by 28.8% year-on-year. Profit before tax was CNY 1.68 billion, dropped by 47.9% year-on-year. Effective tax rate was 18.1%, increased slightly.

Profit for the period attributable to owners of the company reached CNY 1.35 billion, dropped by 49.5%. Earnings per share reached CNY 1.24 cents, dropped by 49.5%, so admittedly, all of the employees of the group had been working very hard in the first half of the year, but due to the macroeconomic situations, the result was not very satisfying.

And now let's take a look at the expenses. So this is the total operating expense, and in the first half of the year, it was 12.3% slightly increased compared with the same period last year. And for the more specifics: The selling and distribution expenses is about 1% and increased by 0.2% year-on-year. R&D expenditure, 8.7%, increased by 2% year-on-year. Administrative expenses, 2.6%, increased by 0.7% year-on-year.

And why there is increase of expense. There are mainly 2 reasons. The first is that, although -- the general economic situation is not very promising, but in -- AR, VR and the emerging strategic products and businesses in the vehicle-related aspect had been increasing. And so we continue the high investment in these segments. And also we had to take a lot of measures to reduce the costs and to develop new businesses in the first half of the year, but we still need to deal with all of the situations around. And we should not lay off a lot of employees. Because of such challenging times, we need to get prepared for the future.

And maybe what you care about is the annual guidance. And annually, these expenses account for about 12% of the revenue. So this is the annual guidance for the expenses. And here you can see some operation indicators: current ratio, 1.8x; and operating cash flow. It's about CNY 1.5 billion. And at present, we have about CNY 14.4 billion cash and cash equivalents. And net cash per share is CNY 7.47. And gearing ratio, similar to that of last year, it's 16.3%. And ROE had been dropped to 6.5%. And CapEx, it's CNY 1.3 billion.

And also give you an annual guidance. And for CapEx, it's about just 3 billion and among which 1 billion will be used for the development of AR, VR and vehicle camera lens and LiDAR and some of the other emerging businesses. And these 3 billion also will be used for the capacity expansion of the vehicle lens sets and also. And also 300 million will be used for the handset lens sets. And we will also get prepared for the capacity building for our American customers, so in total, it's about 700 million. And another 500 million is used for the handset camera modules used for the operation technology upgrade and the expansion of the capacity. And another 500 million is used for the infrastructure construction, including the plants that will be built in Vietnam. So in total, we expect the CapEx of the whole year to reach 3 billion.

And on this slide, you can see the breakdown of the revenue; and the biggest proportion is still related with the handset. The proportion have been dropped a little bit, and here you can see the 3 pie charts, from 88.1% in 2020 to 79.9% last year, to 75.2% this year. And so this is the majority. And the proportion of the handset-related products have been reduced. And another big part is related with the vehicle, and it also varied from 5% and increased to 8.1% and then to 10.2% this year.

And a third part is related with AR and VR products. And in the first half of this year, it account for 3.9%. And it was 3% last year, and 2 years ago, it was only 0.6%, so what I want to say is that, after several years of the evolution, we have arrived at a more balanced level for the breakdown of revenues. And there is an obvious increase of the proportion of the AR, VR-related products.

And on this slide, you can see the gross profit margin. And first, let's take a look at the consolidated gross profit margin. And the reason for this change is very obvious. There are 2 main causes. The first is that the handset lens sets and handset camera modules had faced a de-spec trend in the first half of the year. And also, because of the drop of the shipment, the scale effect and the effect of the scale economy cannot be fully tapped, especially for the handset lens sets which is highly related with scale effect of the economy. And due to these 2 reasons, compared with the same period of the year, there has been a drop of 4.1% (sic) [ 4.1 percentage points ] in gross profit margin and reached 20.8%.

And in different segments. For the Optical Components, it was 35.5%, and the same period last year was 42.9%. And for the optoelectronics, last year, it was 14.8%. And in the first half of this year, it's 11.6%. And for Optical Instruments, there was a slight increase from 44.2% to 44.6%.

And for the whole year, we would also like to share with you our expectations and [indiscernible]. We believe that, first of all, in terms of the smartphones, especially the Android smartphones and specifically for the domestic market, we haven't seen an obvious recovery of the market and we are still facing challenges. This is our first observation. And the second observation is that in the vehicle-related products, with the shortage of the chips and -- we have an elevation of this challenge. And we believe that there will be [ central ] recovery of vehicle-related business.

So we believe that, for the whole year, the gross profit margin of the handset lens sets will be reduced year-on-year. And our guidance is 30% to 35% for the annual gross profit margin. And for the vehicle lens sets, it's around 40%. And for the handset camera modules, it's around 10% for the whole year. So the total gross profit margin, we believe that there will be a drop in the year 2022. And we faced a bit of distress here; and this is about the gross profit margin, the total GPM and the segmented GPM.

And next, let's take a look at the R&D. First of all, let's take a look at Optical Components, and let's first take a look at smartphone-related R&Ds. And we had completed the 1-inch hybrid lens sets R&D. And also the R&D of the 200-megapixel ultra-thin lens sets have been completed. And we also had completed the R&D of the wide-angle, over 100 degrees, front lens sets.

And on the right-hand side, you can see the mass production progress. First of all, the ultra-thin miniaturized head lens sets had entered into the mass production, mainly used for the foldable phones. And there will be a trend for the upgrade for the cameras used for the foldable phones. Foldable phones have been very popular among the consumers, but right now the pixels and qualities of the lens are not so satisfying. And there is great potential for innovation and upgrade, so in the first half of the year, we had mass produced the very thin miniaturized head lens sets. And the second point is that the 200-megapixel ultra-large image size, 1 over 1.22 inch, lens sets had entered into the mass production as well. And also the ultra-wide-angle lens sets with 2 pieces of freeform lenses had entered into the mass production. And so these are the work done for the smartphone-related products. And next, let's introduce you the vehicle-related products.

The first, in terms of the R&D, we had focused on various 5-megapixel hybrid in-cabin monitoring lens sets R&D. And the highlight here is [ DSM and OSM ], the driver and occupancy monitoring system, have been integrated [ within ] 1 lens. And previously, we needed 2 lens sets. And 1 is for [ DSM ] for the driver and the other is for the OMS for the occupancy, but now the highlight is that we have been integrating these 2 lens into 1.

And in terms of the mass production, we have done several things. The first is that a 3-megapixel hybrid side-view ADAS lens sets for testing and sensing had entered into the mass production. And another point is that the 3-megapixel large-aperture, with an f-number of 1.6, hybrid surround-view lens sets had entered into the mass production. So previously, we mainly used glass for the manufacturing, but now we have been using the hybrid lens. And the focus is to solve the problem of temperature excursion. And we can have the fixed focus, and temperature excursion is a big problem for fixed focus. So the temperature excursion performance of the plastic is usually much worse than that of the glass, so we really need to tackle that problem.

And the third one is about our emerging optics. So first of all is that we have made a micro LED-based projection lens for the AR optical engine, and some of our customer selected the solutions. On the right-hand side, in terms of mass production, we can see that we have done a lot of new generation VR positioning lens sets and mainly for better spatial orientation, better stability and accuracy. And also the VR pancake modules, as people are -- what people are focused about, is already rolling into mass production.

So here on this slide we're going to see our optical electronic products and to see what are the BUs doing here. So first of all, let's take a look at smartphone related. And in terms of R&D, first of all, we have the "first in the industry" internal-focusing camera modules. So we use a single lens in terms of not a whole module, but we move a single lens and it's not taking a lot of space. It's been done within the lens itself. It's the first in the industry. We have successfully R&D-ed this one. And the second is that we have a tunable OIS camera module. So these are the 2 R&D highlights. In terms of mass production, here we have mainly done a ultra-large image size, 1 over 1.12 inch, OIS camera modules. So this is smartphone related.

And next is about vehicle-related modules. First, in terms of R&D, we have a -- 8-megapixel A-PHY transmission technology modules because now we are using these chips and chips that's connected each other is very expensive. We don't have enough bandwidth, but by using A-PHY, this new way of transmission -- if you know that we have cooperation with Valens; and by using these ways of transmission, that the cost of the transmission line can -- the cost of it can be -- cost and the bandwidth can be increased by doing so. [ No matter for ] OEM or Tier 1, this is a very good highlight. That's one hand. On the other hand, we have made the 5-megapixel OMS modules to monitor the passengers. In terms of mass production, we have the 3 megapixel, 8 megapixel. All these high megapixel now is for front ADAS to surrounding view, and it's be -- coming into view -- transmitting from view to sensing modules. And also we have the 3 new megapixel -- 3 new 8-megapixel sensing modules for external environment projects.

Next is our robotic vision. In terms of our robotic vision, in the R&D, we have 2 highlights here. One is that we have completed the R&D of the first-generation standardized products of the AI modules. This is the [ MPU ]. And for this [ MPU ], after it's [ packaged ], we will be [ packaged ] on the main board. That's one hand. On the second part, that is mass production. That's based on 3D visual modules based on ToF. And based -- or the structured light solution. This has been already applying to commercial robots like sweeping robots and so. We have -- already have the binoculars solutions as well. So no matter it's about 3D visuals or structured light and so on, we have this very strong capability. This is for the robotic vision.

And let's -- next, let's talk about our optical instruments. In terms of microscopes, we have done a pioneering job in China. One is that we have a mass production of the 25x flat field multiphoton excitation dedicated objectives. This is a very big breakthrough. And second, we have mass production of near-infrared region-II microscope in vivo imaging system. This is to be used in the field of living life sciences and this is one of the pioneering jobs in China. This is for microscopes.

And next in terms of intelligent equipment, we have 2 things. In terms of industry field, one is that we have completed the R&D of patterned of -- wafer automated optic inspection equipment. This is AOI system. We have sold 2 of these systems to our clients. And next is about our medical field. Through visual, through AI, we have mass production of the chromosome karyotype auto microscopic scanner. So by using the [ machinery ] view, we have done all these jobs.

So all these are what we have already done in 3 different BUs, in their R&D and mass production. So here on this slide, we're going to demonstrate our patent. So till June 30, 2022, 363 patents were added; and now the overall patent number is 3,334 patent. So within the newly added patent, 116 of them are invention patents. By the end of June, we have -- 4,064 patents are now pending, so there are still patents underway to secure the security and safety of our business.

Next, let's take a look at 3 of our main product lines. So probably next year, we are going to do some adjustments. And one is -- these are the shipping volumes of our 3 main product lines. So in terms of handset lens sets, our -- we have a Y-o-Y decrease, 9.1%. So in terms of our 6P and above handsets, we have 20% of growth, so this demonstrate that we have a -- better competitive in this product line. And what you're focused about is that our overall situation. In terms of the overall situation, I think that, the balance in our handset lens set in 2022, compared to 2021, we have a Y-o-Y decrease of 15%.

So our next slide. This is about vehicle lens set. Although that we have a supply chain disruption, but -- through our people's effort, our vehicles lens sets shipping volume have a 0.8% of increase. Now we have a 37 million of shipping amount. As we mentioned, that -- in the second half of the year, the interruption of the supply chain will -- now coming to a better situation. This is going to be [ solved as well ], so our overall guidance in vehicle lens set can have a worldwide growth of 10% to 15% growth in terms of shipping volume. That is for our vehicles lens set.

So here on this slide, this is our handset camera modules. So the first half, we have a Y-o-Y decrease of 20.1% in terms of shipping volume. So we have a 288 million of shipping volume. On our right-hand side, in terms of our periscopic modules, we have 56.2% of growth, so our core competitiveness is still competitive. Overall speaking, the shipping volume of handset camera modules will have a 20% of decrease, overall speaking, for the year. That is the -- our vision for the -- our shipping volume for handset camera modules.

So next, we'll briefly talk about our outlook for the future. First of all, let's take a look that, although the smartphone industry is sluggish, however, we think that in the image function of these smartphones, there are still places for innovations, no matter for the leading companies in the world or China's Android brands and so on. In terms of R&D, people never stopped pursuing better image quality and functionality, so we are helping our partners to achieve that.

Overall speaking, although -- we have all these things, we have main cameras, ultra wide, telephotos, front cameras with all these different modules, but we have 2 main opportunities. One is that large-image-size main camera. There is 1 inch, right? [ One image ] size main camera will probably use G-plus-P hybrid solution. And second we think is variable aperture because, as you can see, the larger the image size has become -- and it's going to need that different light scenarios, some higher, some smaller. And also the depth of field is going to be [ shift ] as well, so variable aperture is something that we need to use. And the third direction, we think it's going to be OIS [indiscernible] shift because we have higher quality of the sensors and then OIS will become a need. So in terms of other fields like continuous -- [ I'm thinking of the zooms ] and so on, but we will not go into very deep of that. You can just see that on the PPT.

On the second slide, this is about the vehicle part. I'm not going to go deep in that because we all know about it. We have more and more cameras on our vehicles. And LiDARs, we have great numbers of them in our HUD, smart beams, ground projections and so on. All these will be equipped on our vehicles. We've demonstrated this picture a lot of times, so I'm not going to talk about it.

On the left-hand side is our vehicle camera-related products. So here we have 2 scenarios. One is that the resolution is growing. We have 8 megapixels or even higher; and what it brings is this, a clearer view and a farther view. That's the first direction. And the second direction is the vehicle is running outside, right, so one of its main job is that it needs to be able to defog and defrost, self cleaning. So defog, defrost, automated heating and self-cleaning function. These are important because it helps us to see things very clearly, so this is something that we are focusing. So these are the main directions we're focusing, high resolution and self-cleaning functions.

In terms of radar, this is what people are focusing about as well, in terms of the LiDAR. From this year on to 2025, from -- the LiDAR installation in vehicles will be increased. The amount will be increased. So this is our own forecast and our own feeling for the future, so what we want to reinforce is that -- our strategy in LiDAR. Now Sunny, in LiDAR, we are empowering all the LiDAR partners. We can help them to build their optical components, modules. Both can be done. And also we can finish their OEM job of the LiDARs. Within manufacturing, we will not be selecting what kind of solution is good in terms of NEM (sic) [ MEM ], machinery, 3D flash, all the trendy functions, solutions. These, we can all help our customers, help them to manufacture this -- OEM, to empower all the LiDAR manufacturers.

And on the right-hand side, this is about AR HUD. And this is important part for the infotainment in the [ central stack ] of the automotives, and it helps you to also sense internal and external environment. Adoption rate of AR HUD had also been increased. For example, the PGU optical engines and the freeform images and the [ OEMs ] of the AR HUD is within our capacity. And we're able to empower our partners and ecosystems. So these are the 3 different parts related with vehicle.

And as for the outlook, we hope that, with our efforts, the vehicle camera modules can reach 1 billion revenue this year. And suppose we can reach this goal, 1 billion revenue, then we believe that it will be a category that can be developed independently. And in terms of the LiDAR, we are also doing very well right now. And this year, we have 3 new designated projects. And cumulatively, if I remembered it correctly, we already have 30 designated projects. And on the right-hand side, the AR HUD, in the first half of the year, we have 12 new designated projects. And in total, we have 20 designated projects. So there is a quick expansion of our business in those new businesses. And we hope that, by the end of the year or at the beginning of next year, we can give you more good news.

And so these are about AR and VR business. You are very familiar with those products. On the left-hand side is the fresnel and the pancake solutions, but of course, this is just an image showing you the concept. It's not something that have been launched. We're completely compliant. And it's not the exact form factor for the real products. It's just to show you the concept. And in terms of sensing and interaction, there are more numbers of the cameras, and I have counted. That number had reached [ 16 ]. And one is about spatial orientation and [ plan ]. And the other which is also frequently used is called see through, especially the color for see through. And VR is able to have great interactions and communications with the environment, so see through is critical. And the other is gesture recognition, so -- 6DOF tracking is very important as well.

And on the right-hand side, we also have the different categorizations, including eyeball tracking and facial tracking. So facial tracking is mainly used in avatar 3D models. And the expressions on the avatar will be well recognized and tracked, so I believe that these are products with great potential to grow in the future.

And this slide is about smart eye. And long story short, we have been doing 2 main things. The first is the 3D visual [ MPU ] chips. And I had introduced that we already have the successful tape-out and it's now under shipment. And the second job we have been doing is that, based on the general SoC of the smart eye, we're going to have to tape-out soon as well. And we hope that, once we have the SoC, the smart [ AR-OT ] solution can be better developed with our contribution.

And we look forward to more progresses and to -- hopefully, we can brief you -- more great news to you.

[Unknown Attendee]

Okay, thank you very much, Mr. Sun, for his presentation. And now let's start the Q&A.

[Operator Instructions] First, let's welcome Mark.

[Mark Li, analyst]

I am from Citigroup, Mark Li. I noticed that on your balance sheet the prepaid for the machines have been increased by 80% in the first half, and I'd like to check. Is it related with our customer in North America? And in the future, what will be the direction for the expenses? And when do you think it will reach peak?

[Unknown Executive]

Mark, the prepayment includes the payment towards our customer in North America, but it's more than that. It's not only about the capacity expansion of the customer in North America but also for the preparation for the other imaging businesses. And the second part of your question is very difficult to answer because it is totally based on the development of our business and probably it will be continuously increased. So just now, Mr. Sun had introduced to you the emerging optical businesses, including AR and VR. We will have an expansion of the capacity, so it is also possible that the prepayment will be continuously increased.

[Mark Li, analyst]

Okay. A follow-up question, very quickly. What is the current capacity of the customer in North America? And also just now Mr. Sun had shared with us the development of the Android phone business, and I'd like to ask about the development of the North American customer in August and September.

[Unknown Executive]

First of all, regretfully, we have signed the agreements with the customers and we cannot give you a specific number of the detailed capacity. And what we can tell you is that, this year, we have entered into the second year for the mass production. And we now have more ongoing projects and there are more projects in the pipeline, so the shipment will be increased greatly compared with last year.

[Unknown Attendee]

And next, let's welcome [indiscernible].

[Unknown Attendee]

My first question. Just now Mr. Sun said that the lens set shipment is negative 15%, but in the first half, it's about negative 9%. And does it mean that in the second half of the year the shipment will be further deteriorated? So what about the camera modules? I don't see that [indiscernible] there is a great drop. So how to understand these differences. And in terms of the balance sheet, the long-term debt had been categorized into a short-term payment, so does it mean that you want to reduce the gearing ratio?

And in terms of the expenses of the 3 billion, do you think that it will be maintained in the longer term? And what will be the main direction?

[Unknown Executive]

So your first question is about the development of the guidance of the shipment for the handset lens sets and the camera modules for the vehicles. So the drop for both will be 15% and 20%, and these are related with the macro development of the market. And for these 2 types of the product, there is a difference in terms of the time line and so they are not completely in sync, but they are both affected by the market. And second is about the American dollar debt: because it will reach the maturity in January last year. And according to the requirement of accounting, it has to be transferred into the 1-year maturity debt. And we are considering about the coping mechanism because, as you know, that this year, the market is a bit sluggish. But just now, according to the presentation of Mr. Sun, there are a lot of opportunities for the upgrades and optimization of the products and businesses.

And secondly, for both the lens sets and the camera modules, we are continuously diversifying our customers and having a more balanced division of different segments. So to be more blunt: The share of Apple will be continuously increased. And as for the camera modules, we are focusing on the high spec for Samsung products, and hopefully, our market share in that customer will be increased. And we will have further developments for the handset lens sets and camera modules in coming years. And also we have the new [ tracks ] of AR and VR and some other emerging [ expenses ], so maintaining sufficient finance is very important for us to be fully ready for the future development.

[Unknown Attendee]

And next, let's welcome Andy Meng.

[Andy Meng, analyst]

I have 2 questions. The first question is about the camera -- vehicle camera modules. And first of all, I'd like to ask about, apart from the vehicle lens sets, putting together the LiDAR and HUD and some other vehicle-related products, is there any changes for the guidance as compared with the one you released in March?

[Unknown Executive]

And yesterday, we also have seen that their outlook towards the third quarter is quite conservative. So that NAV company is very conservative of their Q3 guidance. So we had already released our guidance. And for the camera modules, the whole year goal is 1 billion revenue. And I was the one who released this guidance to you in March. So there is no change of the 1 billion revenue goal for the vehicle camera modules. And as for the vehicle lens sets, we also gave you a guidance that is about 10% to 15% of the -- gross profit margin. And for the LiDAR, we didn't provide a detailed MEM target, but according to the situation of the designated projects, we believe that the expectation is the same as that in March. And now we have 30 designated projects, and I'd like to take this opportunity to make a clarification. So these 30 designated projects include [ OEM ], Optical Components and optoelectronical modules, et cetera. So in total, we have 30 designated projects. And we do not change our guidance compared with March.

[Andy Meng, analyst]

Okay. The second question is about the pancake solution in VR. Just now Mr. Sun had mentioned we entered into the mass production of this module. [indiscernible] with us, what is the competitive edge of Sunny in pancake solution? And what is the competition for the industry? So in the second half of the year, what will be the competition in the market? And what will be the market share of Sunny?

[Unknown Executive]

Okay. Around the world, the most leading VR company for pancake is designating their projects to us, so this says something. And it is easy to understand because we believe that there are 3 -- there are 2 core capabilities in pancake solution. So you definitely need a great optical expertise for dealing with polarized lights, and we are an expert in optical solutions. And for those who do not have such expertise, it's impossible for them to live up to the requirement. And also they need some precision technologies like the alignment between 2 different modules, and AA is also a strength of Sunny. So simply put, we have 2 highlights. The first is the AA capacity. The second is optical expertise, and that is why we can win in this competition. And that is why the large companies are choosing us as their vendors.

[Unknown Attendee]

And next, let's welcome [indiscernible] to ask the question.

[Unknown Attendee]

I have 2 questions. The first is about the plan for capacity expansion. Just now Mr. Sun said that we would have the capacity expansion. And I'm not sure whether there is any changes for the capacity plan for the handset lens sets, camera lens sets, vehicle lens sets and vehicle camera modules. So for this year, there had been ferocious competition and some pricing wars for the lower-spec handset lens sets. And I'd like to understand about the pricing of the handset lens sets products of Sunny. And what is your outlook towards the future pricing for the handset lens sets?

[Unknown Executive]

All right, to answer your first question is that -- in terms of capacity, the planning of the capacity. Comparing to the [ previous speaking ], we don't have any change. In the past, we have [ 180,000 ]. And we have [ 10,000 ] for expansion, so by the end of the year, we'll have [ 190,000 ]. The new capacity is for the North American client. That's in terms of our handset camera. In terms of our handset modules, the capacity doesn't change. In terms of the vehicle base, by the beginning of the year, [ it was about 5,000 ]. After expansion, it will reach [ 8,000 ], by the end of the year. That's the capacity. In terms of the handset camera lens, in the first half of the year, because of the environment, the ASP Y-o-Y have a relatively high decrease, 10% to 15%, comparing to first half of the year, but comparing to the second half of the year, it's a slight decrease then. The second half of this year's ASP should be relatively stable.

[Unknown Attendee]

Next, let's welcome Kyna.

[Kyna Wong, analyst]

I have 2 questions. One is that I remember, in June, in the Investor Day, that in terms of the smartphone industry, your company have a sharing in terms of the industry's outlook. And you mentioned that the global smartphone should decrease like 8% of decrease, in China maybe 15% to 16% decrease, but on your guidance what we are seeing is that the guidance have a relatively lower outlook to the industry. Is that because of you want to secure the ASP or gross margin so you are quite selective in the projects? So you tend to secure the market share, on that perspective, to ensure your profitability. Is that one of the reasons? And we can see that in the first half of the year, in terms of ASP and margin, you are performing slightly better than the investors' forecasts for 6Ps and large image size. Is it because you are selective in the projects so you're performing better? So I would just want to know the background when you're offering the guidance.

In terms of AR, VR. First half of the year, you have 11% of growth, so for this year, the whole year, can you reach a 50% of growth like you shared? Can you reach that? And you probably mentioned some adjustment that I missed, so can I know about that, please?

[Unknown Executive]

Let me answer that. First of all, during the Investor Day, we shared some of the data, but now, for each month, our OEM companies, they are -- keep refreshing all these data. It's not that we want to secure the ASP and then we are throwing away some of the market share. It's not like that. The statistics you heard in the Investor Day, we are -- keep renewing them. The OEM manufacturers are renewing them, so what we are seeing is the situation is still very intense for the future. So what we want to share with you is the latest situation. So by holding the market share and [ cling bond ] to R&Ds, this is our main course. So the shift of the statistic in smartphones, especially in the Android players -- they're changing very fast. And second is right: For AR, VR, our guidance is 50%. It's still holding onto that. It's not -- we're not changing that. 50% is our annual guidance for AR and VR.

[Unknown Attendee]

Next, let's welcome [ Tim Zhang ].

[Unknown Attendee]

I have 2 question. First one is about the vehicle lens price. One is we are seeing some of the domestic clients -- so the ASP probably decreased. And also, in terms of the vehicle systems, they are now upgrading their parameters, so I don't know what's the situation going to be like this year. Second is about our handset lens set -- handset modules. For handset modules, we are seeing that our higher-end modules ratio have some increase. And also we all know that in the module industry there are some price war going on, so I don't know what's the gross profit margin like there right now. So can we have a bottom -- guidance for that? It's going to be a very great guidance for us. So that's the 2 question.

[Unknown Executive]

So in terms of the price, competing situation is going to be more fierce. And it offer us some rooms for technology upgrade. One is like the sensing lens, the sensing capabilities like defrost and defog function. And also we have higher resolutions and so on. All these are pulling ASP, going up, but the whole process, because we have higher volume, like more than 70 million and so on -- so it's going to take us some time to increase the ASP. There are rooms [ up there ], but it's going to happen gradually. In terms of first half of this year, our ASP compared to last year should be almost the same, maybe slightly increased. In terms of the second half of the year, compared to first half of the year, it should be relatively stable, but in terms of the major direction, the ASP should be slightly increased. That's in terms of the vehicle lens. And second, in terms of the modules gross profit margin: In terms of spec upgrade, we have already shared with you. If the competing situation in the industry is the same, then I think that the handset modules should be 10% to 12%.

[Unknown Attendee]

Next, let's welcome Fu Tianzi.

[Tianzi Fu, analyst]

Management, a few questions. One is that we are seeing the ASP decrease in the lens and the modules on the handset, [ probably ] de-spec or price competing, so if you can rank the main reasons, how do you rank them? And also, for the second half of the year, how do you see the future in this part?

[Unknown Executive]

Well, you already mentioned why the ASP is decreased and why the gross profit margin is decreasing. If you want to rank them -- and it's really difficult for us to do that. In terms of my perspective, I think de-spec is one of the main reasons. That's one of the main reason, but it's multi reason combining together that causes this, [ right ]. So that's the first one. What's the second question?

[Tianzi Fu, analyst]

So the second question is that, in terms of de-spec and the capacity utilization and the competing in the industry, how do you see this in the second half of the year.

[Liaoning Ye, executive]

In terms of de-spec, I think this is not a long-term issue. Now the volume of smartphones are decreasing, but in terms of camera modules, its functionality, there is still room for improvement. Just like Mr. Sun mentioned, our future forecasts and guidance -- so the camera function in the handsets, there is still rooms for improvement. If we have that room -- and then for companies in the industry that have higher technology competitiveness, there should be opportunities for us. So in terms of the GP margins and so on, there are still rooms for improvement.

[Tianzi Fu, analyst]

Okay. And second is that we are seeing the first half of the camera lens sets and modules. We have a -- for the higher specs, we can see the market share is increasing, right, so how do you say about that?

[Unknown Executive]

So overall speaking, it's de-specing, but it doesn't mean that you don't have some high-spec stuff. So the reason why we're expanding our capacity is in that. This means that in the higher-end modules the competitiveness is still increasing. At the same time, the overall volume, if it stays there or if it decreased, the higher end takes a higher portion. That's the competitiveness that we're increasing.

[Tianzi Fu, analyst]

Okay. And next, I would like to ask about the vehicle-based systems because we're seeing the vehicle lens shipment is decreasing, right? Is it because of lack of the chips? Or is that the demand is just decreasing?

[Unknown Executive]

So the main trend stays there. We all think, we all have a consensus that -- in terms of the intelligent utilization [ and ] the vehicles is increasing, which means it will be -- increase the amount of lenses on the vehicles, but in the first half of this year, due to the supply chain interruptions -- that is the reason why this year, the first half of the year, we only have 0.8% of growth. So in the second half of the year, we have 10% to 15%, right? If we hit 15%, this means that our shipping volume should hit around 30% in order to achieve that, so in the second half of the year should embrace a higher increase.

[Tianzi Fu, analyst]

And also, for your LiDAR, AR, VR, HUD, all these emerging products, will they have some higher expectations than your guidance?

[Unknown Executive]

For VR, we already talked about it for quite a -- years. It takes some times to grow, right, but now this is the real market reflections we're seeing right now. We think that VR is pretty potentialized. And after VR, we have AR, right? AR is what people are talking about, but in terms of commercialization, facing the market, it's still some time, I think, but we look forward for it. It's highly potential; and so we will be investing in this domain, keep investing in it. So this is the reason why we have relatively high R&D expenses, because that -- we think that the future emerging deployment requires our investments like this.

[Unknown Attendee]

Due to time limitations, now we are going to take the last question. The last question is from Frank.

[Fang He, analyst]

So here I would like to ask 2 questions. One is about our LiDAR's competitive advantage because we're seeing a lot of -- you're taking a lot of projects. So how would you comment on communications industries competitors who are doing optic modules, light modules and so on? What are your advantage and disadvantages? And also, for your future projects next year, can you provide us some guidance in terms of how much of income can you provide on these projects?

[Unknown Executive]

Because recently we know that, in terms of light module situation -- now we are thinking about some silicon light, especially in the [ IDCs ] -- now they are using the 400 gigs packaging. And after our research in terms of that, [ new G ] packaging precision is higher than the traditional component makers or players in the industry. So their precision, according to my own understanding, they are lower than us. They're in a lower tier, so I think we have higher competitiveness, comparing to them. In terms of the light modules, that is for optic fiber systems like ToF, mechanical and all these different solutions. We have a very obvious precision advantage in assembly, and the precision of the assembly of ours is very high. For example, the [ CUV ] and AA, we had reached to the micron level or a sub-micron level. So in silicon photonics, they are also seeking for partnership with us.

So maybe this is a superficial-level understanding, but I'd like to introduce you our second advantage. And all these are connected, from the optical elements, devices, to prisms, to assembly, to AA and OEM. So we have all of these capacities, which makes us stand out compared with other competitors, but most importantly we do not have a direct competition with the LiDAR manufacturers. Instead, we are empowering them. If they have certain advantages in certain aspects, we can empower them and support them to develop those businesses. And this is the question -- this is the answer for your question.

[Fang He, analyst]

Okay, my second question is that you talked about the [ HR ] interface chip -- module actually. And as for the technology, can you give us more interactions? Because we usually use [ MIKI ] or LVDS. And how are we using the different technologies compared with them? And do we have the designated projects?

[Unknown Executive]

Well, actually you are very professional. We have the MIPI signal, but the distance is very short for MIPI. And it is [ a better distance ] from [ MCU ], and this is a very complicated process. And then we need to transmit the signals through [ PDS ]. And then the [indiscernible] is required, but the current issue is not -- so this is actually an upgrade of MIPI. We already have the standard now and this is an upgrade of the MIPI. This is the first thing. And the first step is not to solve the issue of the chip. Instead, what we need to do is to lower the costs because we have some Japanese manufacturers manufacturing very expensive cables, but now we can use another type of cable to transmit. And therefore, we can lower the cost. And in the vehicles, the costs can be greatly reduced. And the second step is that we need to think about maybe we no longer need MIPI to transfer the [ LDPS signals ]. Maybe we no longer need such transference of the signals.

And there are some large companies working with us through the designated projects. And you can track more information about this is Israel-based company called Valens. And a lot of the companies are interested in this company because the [ TR ] chip is very expensive. The cable is expensive as well. And the bandwidth can also be increased while lowering the cost of the cables, and this is very appealing to the players. And we should not say that we already have the designated projects, but what we can say is that we have been promoting these businesses with a lot of the partners. And I hope that, in the second half of the year or in the beginning of next year, we can have clearer results. And am I clear? And have I answered your question?

[Fang He, analyst]

Yes.

[Unknown Executive]

Due to the interest of time, we cannot cover all of the questions from the investors. And if you have more questions, I welcome you to contact our IR department. Thank you for your understanding. This is the end of the Sunny Optical 2022 interim results announcement. Thank you again for your participation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]