We believe Q-Tech’s 1H23 profit warning is within market expectation given 1H23 CCM shipment decline of 20% YoY, while 60-80% earnings decline is below our/ market estimates, due to lower GPM and higher R&D expense for non-smartphone business. Looking into 2H23E, we are positive on supply chain restocking for demand recovery and product launches in 3Q23E, and we believe Q-tech is set to benefit from spec upgrade and industry recovery in 2H23E. We lowered our FY23-25E EPS by 16-31% to factor in 1H23 results and improving outlook in 2H23E. Trading at 8.7x/5.5x FY23/24E P/E, we think the stock is attractive, considering the worst is behind with business recovery in 2H23E. Maintain BUY with new TP of HK$3.59, based on same 10x FY23E P/E.
　　1H23 profit warning on industry weakness and lower GPM. Q-Tech preannounced 1H23 net profit decline of 60-80% YoY （RMB33.1-66.2mn）， below our/consensus expectations, mainly due to: 1） CCM shipment decline on weak smartphone demand; 2） GPM pressure on lower UTR and unfavourable FX; 3） higher R&D expense for auto CCM and domain controllers’ business. 1H23 mobile CCM shipment dropped 21% YoY, driven by 30% YoY decline in below 32MP CCM, partly offset by 3% YoY growth in 32MP+ CCM shipment. Overall, we estimate revenue/net profit decline of 18%/65% YoY in 1H23.
　　2H23E Outlook: Expect CCM ASP/margin recovery on spec upgrade and better utilization. We believe the worst is likely over for Chinese smartphone market and supply chain will start restocking for Android product launches in 3Q23E. In addition, we are positive on spec upgrade trend in 2H23E （larger resolution, OIS and periscope）， driving ASP/GPM recovery. As such, we expect higher mix of 32MP+ CCM of 37% （vs. 28.5% in FY22） and mobile CCM revenue growth of 13.8% YoY in 2H23E driven by spec upgrade across high/mid/low-end model. We also expect GPM to improve to 8.5% in 2H23E （vs. 5.5% in 1H23） given rising utilization and less FX headwinds.
　　IoT and auto CCM the bright spots. Despite sluggish smartphone demand, we are positive on non-smartphone CCM （IoT and auto） to drive growth in 2H23/FY24E. We expect non-smartphone revenue in FY23E to grow 108% YoY （vs. mgmt. guidance of 50%+） given IoT products （DJI drone, smart watch and sweeping robots） shipment ramp-up and strong auto CCM demand.
　　Worst is likely behind; Maintain BUY with new TP of HK$3.59. We believe Q-tech will benefit from inventory restocking and spec upgrade across all models in 3Q23E. The stock is currently trading at 8.7x/5.5x FY23/24E P/E （close to 1- sd below 10-year avg. fwd. P/E）， which is attractive in our view. We maintain BUY with new TP of HK$3.59, based on same 10x FY23E P/E.