Q-Tech’s 1H24 results were a beat overall driven by strong consumer electronics momentum with revenue up 40% YoY and profit up 454% YoY. GPM would have been a beat if adding back negative FX impact. We are positive on Q-Tech’s growing high calibre overseas client base in both smartphone, IoT, automotive and XR, which should generate positive shareholder return in the long term. We review Q-Tech’s valuation and upgrade the stock to BUY with new TP of HK$5.70 (was HK$3.60) based on 16x 2025E EPS (was 17x 2024E EPS).
　　Key Factors for Rating
　　1H24 results: 1H24 revenue was RMB7,675m, up 40% YoY and 9% HoH, mainly driven by strong 32MP+ CCM shipment (+72% YoY) and non- smartphone CCM shipment (+100% YoY). GPM improved 0.7ppt HoH to 5.2%, due to better product mix and utilization but partially offset by negative FX impact. OP turned positive to RMB20m which is still low as Company spent heavy R&D for new products and sales expenses for oversea client expansion. Loss from Newmax (Q-Tech’s associate) decrease 51% YoY to RMB-14m driven by top line growth and better operating leverage. NI increased 454% YoY to RMB115m, in line with the profit alert. Operating cashflow inflow reached RMB691m. Net debt to equity ratio declined to 19.5% (was 30.9% in 1H23) upon bank loan repayment.
　　Smartphone CCM mix improvement: In 1H24, 32MP+ CCM accounted for 49% by shipment, above its 45% mix guidance. OIS and periscope shipment accounted for 12% and 0.7% in total CCM shipment respectively, resulting in +10.5% YoY ASP to RMB32.6 in 1H24. Mgmt. guides flat HoH CCM shipment but expects ASP to further increase driven by spec upgrade in OIS, periscope and variable aperture. While short-term GPM visibility is still low, mgmt. eyes on the long-term structural growth of optical application driven by AI and the current priority is to build closer relationship with domestic and global top tier OEMs.
　　FPM: In 1H24 FPM GPM narrowed to -3.7%, improved by 5.9ppts HoH mainly thanks to strong FPM shipment (+17% YoY) and better cost control. Q-Tech starts the mass production of ultrasonic fingerprint for high end in 2Q24 and expect more domestic OEM smartphone models to adopt ultrasonic in 2H24 and 2025. In July, shipment of ultrasonic fingerprint increase 112% MoM to 465k.
　　Progress in Non-smartphone business: Auto CCM shipment achieved 2m (+1500% YoY) thanks to the long-term orders from key automotive clients from both domestic and overseas tier-1. Per mgmt., Q-Tech wins mass production from top Tier 1 and the supplier qualification from a Japanese-Sino Joint Venture Automakers. Q-Tech targets to enter volume production for at least four global top Tier 1 OEMs by 2026. Regarding IoT, Q-Tech has partnered with top global XR OEM and entered volume production for top drone company.
　　Key Risks for Rating
　　1) Lack of upgrade and demand on fingerprint module; 2) new client and new product qualification progress; 3) economic and geopolitical risk on tech end demand; and 4) intensified price competition.
　　Valuation
　　We fine tune our forecasts slightly to factor in the smartphone market recovery, automotive and IoT project ramp up. We increase 2024/25/26 EPS by 17%/6%/3%.
　　We use 16x 2025 EPS (was 17x 2024E EPS) to value Q-Tech. Our new target price is HK$5.70 (was HK$3.60). Upgrade from HOLD to BUY.