Q-Tech’s 2H23 results were weak with mere RMB61m net income, slightly worse than its previous profit alert. While Android especially high-end is in gradual recovery, we believe Company’s fingerprint business and low exposure in Huawei and Xiaomi drag relative performance, temporarily offsetting its diversification progress in non- smartphone business including remarkable automotive CCM order gain of global tier-ones. Maintain HOLD with new TP of HK$3.60 (was HK$3.90) based on 17x 2024E EPS, awaiting stronger buying signal.
Key Factors for Rating
2H23 results: Q-Tech reported 2H23 revenue of RMB7,054m, up 6% YoY and 29% HoH, with GPM improved 1.1ppts HoH to 4.5%, mainly thanks to the increase in 32MP+ CCM volume (+41% YoY), ASP and utilisation. OP loss narrowed to -RMB10m and NI increased to RMB61m, slightly missed its mid- point negative profit alert of RMB82m due to the gap in government subsidy and DTA. Though net debt to equity ratio has increased to 30.9% upon increasing bank loan, the group is in net cash position.
Smartphone CCM mix improvement: Mgmt. guides 32M+ CCM volume mix to 45% in 2024, driven by high end demand and Q-Tech’s high-end strategy.
Per mgmt., Q-Tech took 45% domestic OIS market share in 2023, and the penetration of OIS, periscope and variable aperture will further benefit Q-Tech’s ASP and margins. Mgmt. believed the AI smartphone will bring a positive CCM momentum in shipment and ASP in 2024.
FPM: In 2H23 FPM GPM enlarged to negative -9.5%, worsened by 5ppts HoH mainly due to the weak demand and USD appreciation. We continue to view this a dragging segment without meaningful spec upgrade.
Non-smartphone business guides +50% volume growth in 2024: Non- smartphone CCM volume decreased 1% YoY but grew 80% HoH to 4.9m in 2H23 thanks to the long-term orders from key automotive clients from both domestic and overseas tier-1. We expect 2025 automotive CCM will start to have more impact on growth as Company won multiple projects in 2023 and 2024 will be year of ramping up production.
Key Risks for Rating
1) Lack of upgrade and demand on fingerprint module; 2) new client and new product qualification progress; 3) economic, political and pandemic risk on tech end demand; and 4) intensified competition.
Valuation
We trim our shipment volume and margin forecasts of CCM to reflect the slow market, competitive pricing and negative impact from RMB depreciation. We cut 2024/25 EPS by 46%/39% as a result.
We use 17x 2024E EPS to value Q-Tech. Our new target price is HK$3.60 (was HK$3.90). Maintain HOLD.