1H24 in-line with profit alert, thanks to GM improvement and stable OPEX ratio
　　QT’s 1H24 net profit arrived at near the mid-point of the profit alert (issued in mid-Jul), revenue and net profit each soared 40.1%/453.9% Yoy to RMB7,675mn/RMB115mn, and reached 51%/38% of market FY24E consensus. The robust 1H24 result was attributed to i) improvedsmartphone demand led to CCM shipment volume and QT’s market share increase in global smartphone OEMs; ii) Though GM a slight miss (market consensus :5.6%), blended GM was up 1.8ppts Yoy to 5.2%, thanks to higher utilization rate and better product mix; iii) Non- smartphone segment ramp-up and iv) share of Newmax loss narrowed by 51% to RMB14mn. QT did not declare interim dividend.
　　FY24E shipment guidance maintained; Improved competitive landscape and product mix to drive ASP; Non-smartphone CCM (automotive+ IoT) shipment volume growth continue to outperformQT’s CCM revenue soared 44.5% Yoy to RMB7,215mn mainly driven by both ASP and smartphone CCM shipment volume growth (+10.5% Yoy /+30.8% Yoy). Improved smartphone demand and product mix (i.e. higher mix of. ≧ 32MP and other CCM) drove CCM GM rebounded 2.0 ppt Yoy/0.7 ppts QoQ to 5.6% (vs. 5.7%/3.6%/3.6%/4.9% in 1H22/2H22/1H23/2H23) A recap that QT has reclassified its CCM shipment data from FY22 (which currently includes <32MP, ≧32MP and other CCM). In 7M24, QT’s total CCM shipment (incl both smartphone + non-smartphone) was up 26.8% Yoy to ~255mn units and smartphone CCM contributed ~249mn units (+25.8% Yoy).
　　We model QT’s FY24E total CCM shipment would be ~430mn units (+15.0% Yoy), in which non-smartphone CCM (IoT+ auto CCM) shipment would contribute ~3% (>10mn units) of total CCM shipment.
　　In 1H24, ≧32MP CCM shipment rocketed 71.4% and took up 49.2% of total CCM shipment, in which the contribution further reached 52%/51% in May and Jun, Management also shared during the result that OIS and periscope CCM each accounted for 12.0%/0.7% of total CCM shipment and expect increasing contribution going forward. QT did not provide any update on its previous guidance (i.e. >5% Yoy shipment growth for smartphone CCM, ≧ 32MP CCM to account for >45% of total CCM shipment in FY24E), but feel comfortable that ≧32MP CCM contribution would continue to stay ahead of guidance in 2H24E and FY24E Management continued to spend quite some time during the result, striving to deliver message to investors that new replacement cycle and faster CCM upgrades. CCM’s ASP showed back-to-back Yoy/HoH increase since 2H19, and reached ~RMB32.6 in 1H24 (+10.5% Yoy /+1.3% HoH), We expect the end demand and GM recovery pace would be gradual.
　　QT doubled their non-smartphone CCM shipment in 1H24 at 5.5mn units and accounted for ~2.5% of total CCM shipment, QT previous guidance on non- smartphone CCM shipment would grow by >50% Yoy. This reflects QT continued to make good progress in non-smartphone segment. In IoT, QT has successfully obtained qualification from renowned US Internet giant in 1H24, as well as a leading wearable camera company, while continue to supply CCM modules to DJI, ECOVACS (603486 CH), Roborock (688169 CH).
　　For automotive CCM products, sales volume was up 15x Yoy in 1H24 (~2mn units, >30% of non-smartphone CCM shipment volume, with total capacity reaching 1mn units/month. QT has already obtained qualifications from >20 customers and with >10 projects under mass production, which includes 6 of the top 15 automobile enterprises (by NEV sales volume). Q tech not only has shipped CCM used in ADAS/ in-Cabin systems to renowned clients including SGMW, Geely, XPeng, but also passed the qualification certification from other automotive Tier-1 supplier (both overseas and domestic) and OEMs namely Continental, BYD, Nio, Aito and Aion etc. These mark QT initial success to diversify CCM product mix and exploring business opportunities in non-smartphone segment, which include other segments of automotive intelligent vision industry chain, e.g. automotive lens, LiDAR module, HUD and millimeter wave radar.
　　QT target themselves as Tier -1.5 player provide both hardware and software solutions to Tier-1. With reference to Truly (732.HK), automotive CCM would enjoy both higher ASP and GM in the long run. However, as QT’s non-smartphone arm, it is still ramping up and takes time to achieve economy of scale, we expect non-smartphone GM would stay below company average in FY24E-25E.
　　FPM GM improved HoH on better product mix, ultrasonic FPM to drive ASP and marginIn 1H24, FPM segment revenue growth was flattish Yoy at RMB395mn (5.1% of total revenue), on the back of 14.3% Yoy drop in ASP and 16.7% Yoy increase in shipment volume at 50.6mn units. Segment GM though remained at negative territory at -3.7%, but significantly improved 5.8ppt HoH on higher UGFP volume mix (71.6% vs. 58.5% in 1H23) and initial shipment of ultrasonic FPM in 2Q24. QT began to ship ultrasonic FPM in Apr 24 and currently accounted for <1% of total FPM shipment, based on our previous channel check, ultrasonic FPM was adopted on OEM’s flagship smartphone.
　　As YTD (as of end -Jul) shipment volume took up ~50% on average of full year shipment in FY18-FY23, we expect the progress would be similar in FY24E with shipment at ~120mn units, in which UGFP and ultrasonic FPM would account for >70%/low single digit of FPM shipment. With increasing ultrasonic FPM contribution in 2H24E and FY25E, we see both ASP and GM still have room to improve.
　　Expect FY24E-26E earnings to grow 31% CAGR, quality growth to drive earnings; Non-smartphone segment still takes time to bear fruit; Upgrade to BUY with new TP HK$5.44We expect QT’s FY24E-26E sales and net profit to grow 13.0%/31.5% CAGR, driven by gradual sales and GM recovery, as management continue to focus on long term quality growth, while non-smartphone segment is still ramping up and contribution would be minimal in FY24E/25E. Our latest FY24E-26E net profit forecasts are 3.4%/4.5%/0.2% lower than latest Bloomberg consensus.
　　QT is trading at FY25E 12.0x PE (~30% discount to its average since its listing in 2014. We arrive QT’s new TP at HK$5.44, which translates to FY25E 14.1x PE (30% discount to Sunny Optical vs. 40% discount in our last update). QT is making their way to diversify sales and client mix, it still takes time for non-smartphone segment to bear fruit, while focusing on core business quality growth. We upgrade QT’s rating from Neutral to BUY.
　　Risk Factors
　　Downside risks include: 1) Upstream supply shock; 2) Smartphone end demand deteriorates;3) Slower than expected multi cam CCM/ 3D sensing module/ UDFP adoption in Android camp and hence limit ASP upside; 4) Non-smartphone (IoT+automobile) ramp up longer than expected, 5) Increase pricing pressure arising from overseas players and domestic peers and 6) management execution