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Deep-dive 2022-18: Largan Precision
The world's leading optical lens supplier getting ready for an iPhone upgrade
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Largan Precision (3008 TT) is a Taiwan-based global leader in the production of optical lenses for smartphone cameras.
Optical lenses are used to focus light onto an image sensor. For example, Japanese digital cameras (“DSLRs”) typically use large lenses made of glass that can take in an immense amount of light.
In the case of smartphones, however, there is no space to attach such large lenses. Instead, smartphone manufacturers stack plastic lenses on top of each other. And then, they use multiple cameras that all work together to create each photo.
Optical lenses might seem like a commodity product - but they’re not. They’ve long been among the most profitable parts of the iPhone supply chain. The reason is that plastic lenses require extreme precision, with tolerance below 1/500th the diameter of human hair.
Largan is the clear leader in the field. It’s long been the preferred supplier for Apple’s iPhones, which have some of the most advanced cameras of any smartphone. While Apple has more recently tried to diversify among its suppliers, neither can match the quality control of Largan. Scale in R&D also helps Largan maintain a technological lead.
The smartphone market is unfortunately mature. The only growth will come from a greater number of cameras per smartphone or a greater number of lens elements per lens set. Given that Apple represents over half of Largan’s revenues, it’s dependent on upgrades to the iPhone camera, which tend to take place every three or four years.
Then there’s the issue of COVID-19. First, Largan’s major customer Huawei was hit by a US ban, which prohibited it from using US components in its smartphones and providing users access to the Google Play app store. Second, Apple diversified away from Largan in 2020.
Bears claim that Largan has finally lost its advantage vs its Taiwanese and Chinese competitors. But it’s more likely that Apple diversified away from Largan to reduce the risk of supply chain disruption during COVID-19. In fact, Apple has experienced problems with its competitors’ lenses. Its efforts to deal with those problems through advanced software manoeuvres have only been partly successful.
The iPhone camera will most likely get upgraded with the iPhone 15 Pro in September 2023. While no one knows for sure, the new iPhone is likely to have a quad-camera set-up with each camera having up to lens elements per set, and it could also include at least one periscopic lens.
Such an iPhone upgrade would imply a higher average selling price per lens set, a greater number of lens sets sold per phone and a greater market share since Largan leads in technological development.
Assuming a partial recovery from the Huawei ban and a limited loss in market share from Apple, Largan’s would trade at around 10x 2025e earnings with net cash representing 42% of the current market cap. Historically, Largan has traded closer to 18x P/E with a smaller cash position.
The main risk is that Apple diversifies away from Largan to Taichung-based competitor Genius or mainland Chinese competitor Sunny Optical. That has been the worry for many years, but Apple has been reluctant to do so. Also, since Largan enjoys 90%+ production yields vs its competitors’ 70%, Largan should be able to match them on price while maintaining higher profitability.
There’s also a risk that smartphone cameras have become “good enough” thanks to computational photography. On the other hand, why would Apple try to save a few cents on its optical lens supply and risk a deterioration in the quality of its cameras?
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