While 1H23 result is slightly below profit warning earlier due to FX/fair value changes, mgmt. guided stronger-than-expected client demand and better shipment mix in 2H23E. Despite slower 1H23 revenue, we are encouraged to see 32M+ CCM mix of 37.1% above guidance (35%+) and non-smartphone CCM shipment (e.g. auto) of 64% YoY (vs guidance 50%+ YoY). Looking forward, we expect 2H shipment/earnings recovery backed by inventory restocking and spec upgrade (OIS/Periscope), improving UTR and alleviating competition. Trading at 9.2x/5.6x FY23/24E P/E, we think the stock is attractive. Maintain BUY with new TP of HK$3.60, based on 10x FY23E P/E.
　　1H23 results slightly below; Higher 32M+ mix and auto CCM the bright spots. 1H revenue decline of 22.8% YoY was 5%/8% below our/consensus estimates, but 32M+ CCM shipment mix increased 8.9ppts/5.3ppts YoY/QoQ to 37.1%, above prior guidance of 35, reflecting Q-Tech’s competitiveness in high-end CCM market. As for non-smartphone CCM, shipment climbed 64.3% YoY, above prior guidance (50%+ YoY) thanks to stronger auto CCM (100%+ YoY), better customer base and product mix. GPM declined 1.9ppts YoY to 3.4% due to smartphone weakness, fierce competition, falling UTR and unfavourable FX. NP dropped 86.9% YoY on revenue/GPM decline.
　　Bullish guidance on 2H23E recovery; better sales mix, spec upgrade, improving UTR and easing competition. We believe the worst is over for Chinese smartphone market and Android smartphone restocking is well under way driven by product launches in 3Q23E. Mgmt. guided better 2H23E shipment than 1H, and revised up FY23E 32M+ CCM shipment mix to 40%+ (vs. prior 35%+). In addition, Q-tech remains positive on spec upgrade on OIS and periscope, driving ASP upside in 2H23E/2024.
　　Non-smartphone CCM growth to accelerate. Mgmt. guided strong auto CCM growth driven by top NEV customers and domestic Tier-1 customers’ product volume production in 2H23E. ARVR products’ mass production for major customer Pico is well on track. In addition, we are also positive on IoT products including DJI drone, smart watch and sweeping robots. Overall, we expect non-smartphone CCM shipment to grow 100% YoY in 2H23E.
1H23 weakness priced in; Maintain BUY with new TP of HK$3.60. We believe 1H23 weakness has already priced in, and Q-tech is set to benefit from Android inventory restocking and spec upgrade in 2H23E. The stock is currently trading at 9.2x/5.6x FY23/24E P/E (close to 1-sd below 10-year avg. fwd. P/E), which looks attractive. Maintain BUY with new TP of HK$3.60.