Principally engaged in the production of optical components, optoelectronic products and optical instruments.

Business Review - For the year ended December 31, 2009

For the year under review, the global economy was sluggish in the first half of the year due to the financial crisis. Against the adverse operational environment, the Group implemented a number of measures with an aim to maintain its profitability at certain level during the period, including aggressive expansion of customer base and tightening internal cost control. First half of the year was the most difficult period the Group ever experienced since its inception. However, driven by recovery of macro economy and coupled with improvement in the internal control measures including “Lean Production” promotion in the second half of the year, the Group’s performance showed a strong rebound and recorded a profit growth for the whole year.

In 2009, the Group’s revenue was approximately RMB1,309.6 million, representing an increase of approximately 3.4% as compared with the previous year. The increase was mainly due to the strong growth in the optical components business. The Group will grasp various opportunities with an aim to maintain the growth trend in the coming years. Specific strategies are detailed in the section “Outlook and Future Strategies”.

Our three major business segments, namely optical components, optoelectronic products and optical instruments, have upgraded their respective existing products. These efforts strengthened our technological leadership in the industry of existing products. The research and developement (“R&D”) of new products will also lay a solid foundation for broadening of the Group’s revenue sources in the future. For optical components business segment, we have started the development of an 8-mega pixel 3X zoom handset lens set; two types of micro-projectors were awarded “Nation-Supported Development Projects” by the Korean government; a newly developed 2-light emitting-dioded (“LED”) flash module has commenced batch delivery; a 12-mega pixel handset lens set with auto-focus function has accomplished its development process with a utility model patent obtained; Glass Molding Press (“GMP”) projects have entered into small batch production process; a variety of infrared lens sets for vehicles have also accomplished their respective development process; great breakthrough has been made in automated production process, leading to further costs reduction. For optoelectronic products business segment, an 8-mega-pixel handset camera module has accomplished its development process; certain types of security surveillance cameras have accomplished their development process; the Group has established its Security Surveillance Business Unit which will focus on the marketing of security surveillance products; the development of medical endoscopes has been completed and a medical license from the State Food and Drug Administration (“SFDA”) and a utility model patent have been obtained. The Group also made achievements in the development of optical instruments: the time-of-flight mass spectrometer, quadrupole mass spectrometer and SHP8400PMS automatic on-line mass analyzer have completed their research process. The latter has become China’s first sampling and gas pressure mass analyzer within a wide range of pressure process, forwarding China’s development and production of on-line mass analyzer to step further.

During the year under review, several of our newly established subsidiaries performed well. The Group’s Korean subsidiary – Power Optics Co., Ltd. began generating profits while a domestic subsidiary – Ningbo Sunny Automotive Optech Co., Ltd. also started to generate profit. Ningbo Sunny Infrared Technologies Company Ltd. increased its sales gradually. Sunny Instruments Singapore PTE. Ltd. completed the research and development stage and began the production and sales of 3D optical vision measuring instrument and microscopic interferometer.

Optical Components

Thanks to the rapid growth of DSLR and the strategy of sourcing in China adopted by Japanese digital camera manufacturers, the revenue of optical components increased and contributed a sales income of approximately RMB637.3 million, representing an increase of approximately 9.9% as compared with the corresponding period of last year. This business division accounted for approximately 48.7% of the Group’s revenue as compared with approximately 45.8% in the corresponding period of last year.

During the year under review, the Group successfully started mass production of 2-, 3- and 5-mega pixel handset lens sets with auto-focus function. These lens sets have enabled the Group to grasp opportunities present in the 3G and smartphone market effectively. Meanwhile, for spherical lens business, shipment for small and medium sized spheric lenses was surpassed by medium and large ones, most of which were applied in DSLR; the percentage of handset lens sets volume with 1.3 mega pixel resolution or above has increased to approximately 41.4%. We have strengthened the relationship with some of our existing major customers, such as Panasonic, Nikon and Samsung. We have also started the business relationship with a US customer which possesses an advanced solar energy generation technology to provide the coating of aspheric glass lenses and prisms during the year.

This business segment has obtained 17 patents, of which 9 are invention patents, 8 are utility model patents, and another 34 patents are in the process of application.

“Lean Production” was fully promoted in this business segment and was successful, which was substantial in increasing our gross margin.

This business segment flexibly reacted to market demands and secured 14 new reputable customers. In particular, Zhejiang Sunny Optics Co., Ltd. and Sunny Japan Co., Ltd. jointly won a number of customers, including Sharp. Sunny Optics (Zhongshan) Co., Ltd. had successfully entered into the Changwon LG supply chain, it also was listed as Olympus’s first supplier in terms of lens and Nikon’s first supplier in terms of DSLR lens.

Optoelectronic Products

Due to the decline in growth of demand and average selling prices of handsets, revenue from optoelectronic products business segment for the year ended 31 December 2009 amounted to approximately RMB545.6 million, representing a slight decrease of approximately 2.1% over the corresponding period of last year. Such decrease was mainly due to the fact that most of the Group’s purchasers for handset camera modules were manufacturers of domestic brands, which are dominantly with camera modules of low resolution. Such products are under fierce competition, leading to a decrease in average selling prices and smaller shipment volume. This business segment accounted for approximately 41.7% of the Group’s revenue compared with approximately 43.9% in the corresponding period of last year.

During the year, the Group had successfully commenced mass production of the 2-, 3- and 5-mega pixel camera modules for handset use with auto-focus function, which enhanced the Group’s supply position in the eyes of domestic 3G handsets and smartphone manufacturers. The proportion of handset camera modules volume with 1.3-mega pixel or above increased to approximately 32.0%. The business relationship with our existing major customers, such as ZTE, Huawei, Lenovo, K-Touch and Yulong, was further strengthened. In addition, we have secured 4 new major customers, such as Sharp and Panasonic. At the same time, the Group has successfully developed extended depth-of-field (“EDOF”) handset camera modules, which possess very similar functions but are more cost-effective as compared with ordinary auto-focus modules. Furthermore, reflow handset camera modules have been successfully developed. As high temperature resistance materials are applied to all components of reflow handset camera modules, handset manufacturers are allowed to directly weld such modules to the motherboard of handsets using surface mounted technology (“SMT”), leading to higher production efficiency, better quality and lower costs. The 3-mega pixel camera modules with auto-focus function, which was designed using chip on board (“COB”) techniques, have been recognised by the Ministry of Science and Technology as one of the national key and new products. Such camera modules can be applied not only in the handset industry, but also in fields such as portable media play (“PMP”) and household surveillance. Currently, the Company has mastered the relevant core technology of such modules and has commenced mass production.

This business segment has obtained 17 patents, of which 1 is invention patent, 13 are utility model patents and the remaining 3 are exterior design patents. Another 12 patents are in the process of application.

During the year under review, the handset camera modules and the visual doorphone modules of Ningbo Sunny Opotech Co., Ltd. became part of the supply chain of some internationally renowned brands such as Sharp and Panasonic and had maintained a steady monthly shipment volume.

Optical Instruments

Affected by the financial tsunami, the revenue from our optical instruments business segment further declined in 2009 to approximately RMB126.6 million, representing a slight decrease of approximately 2.6% over the corresponding period of last year. However, this business segment concentrated its efforts in exploring the domestic market during the year, and certain achievements were attained. It is expected that this business segment will achieve growth in domestic sales because there is a strong domestic demand on mid-and high-end instruments. This business segment accounted for approximately 9.6% of the Group’s revenue compared with approximately 10.3% in the corresponding period of last year.

During the year, the Group completed the R&D of various mid to high-end optical instruments, including drugs detectors, time-of-flight mass spectrometers, quadrupole mass spectrometers, 3D optical vision measuring machines and microscopic interferometers, and some of these products have even entered to small batch production phase. At the “Annual Conference of China Scientific Instruments 2009”, the AD04-03 detector for narcotic drugs and psychotropic substances, which was developed by Shanghai Sunny Hengping Scientific Instrument Co., Ltd. was recognised as an “Excellent New Product of Scientific Instruments for 2008”. AD04-03 detector is able to complete on-site analysis within 5 minutes. It is designed with a number of core technologies owned by the Group and is protected by 3 patents. It is so far the first detector developed based on the micro multi-dimensional gas chromatography theory, and has reached a domestically leading and internationally advanced level. The widened product range will have a positive impact on the Group in the future.

This business segment has obtained 44 patents in total, of which 10 are utility model patents and 34 are exterior design patents, and another 9 patents are in the process of application.

Production

The Group currently operates four production bases in Yuyao city of Zhejiang Province, Zhongshan of Guangdong Province, Shanghai and Tianjin in the PRC respectively.

In May 2009, the Group invested RMB30.0 million for the establishment of Sunny Optics (Tianjin) Co., Ltd., its fourth production base, with a view to provide more convenient and superior services to its customers in Bohai Bay Area. In June 2009, Power Optics Co., Ltd., a subsidiary of the Group in Korea, completed the construction of its new building in Seoul. The new building has a floor area of 5,269.12 sq.m. with separate office and production areas. The construction of the new building will also facilitate the localized production of partial products to cater for the needs of the regional market.

Source: Sunny Optical (02382) Annual Results Announcement