20180718-东英亚洲证券-丘钛科技-01478.HK-Double_disappointments__7页_1mb

Q Tech (1478 HK) Equity Research Summary

Core Content

Q Technology (Q Tech) is a leading Chinese manufacturer based in the People's Republic of China, specializing in mid-to-high end camera module and fingerprint module markets for Chinese branded smartphones and tablet PCs. The company has been subject to a series of earnings disappointments and has seen its financial performance and market position affected by several factors.

Main Points

Earnings Update

• Q Tech further revised its 1H18E earnings estimate to a net loss of around RMB50 million, which is worse than the previously expected 50% year-over-year drop.
• The company cited three main reasons for the earnings shrinkage: (1) sharp depreciation of the RMB against USD, (2) less-than-expected shipments in May and June, and (3) slower product mix optimization for both HCM (High-End Camera Module) and FPM (Fingerprint Module).
• The research team reduced their FY18/19E earnings estimates by 69.8% and 15.7% respectively, to RMB94 million and RMB266 million.
• Q Tech's FY18/19E ASP (Average Selling Price) for HCM and FPM was cut by 7.2%/0.0% and 14.8%/11.3% respectively, to RMB28/RMB32 and RMB16/RMB13.
• The gross margin was revised down by 1.0ppt and 0.4ppt to 8.0% and 8.3% for FY18 and FY19.
• The diluted EPS was revised down by 69.7% and 15.6% to HK$0.098 and HK$0.276.

Investment Recommendation

• The research team maintains a SELL recommendation with the target price cut to HK$4.10 from HK$4.90, based on a 15x FY19E PE.
• The key reasons for the SELL rating include: (1) ongoing product mix deterioration and margin shrinkage with no sign of recovery; (2) weakened investor confidence due to repeated disappointments since 2H17.
• The company is unlikely to benefit from the tri-cam upgrade due to yield issues that have persisted since the dual-cam adoption phase.
• It is also unlikely to profit from the adoption of under-panel FPM in the near-term, as GIS (6456 TT, NR) and O-Film (002456 CH, NR) dominate the supply of under-panel FPM, and mass adoption by non-flagship handsets is expected to take time due to production cost concerns.

Upside Risks

• Potential faster ramp up of Newmax lens set business.
• Higher than expected shipment growth.
• Recovery of over RMB10 million CCM (Camera Module) penetration in 2H18E.
• Faster than expected adoption of under-panel FPM.

Key Financial Data

Shareholder and Market Data

• HKEx code: 1478 HK
• Market Cap: HK$4,922.99 million
• Issue Share: 1,131.72 million
• Major Shareholder: He Ningning (66.39%)

Price Performance

• Close price: HK$4.35 (as of 17/07/2018)
• 1MTH % change: -36.9%
• 3MTH % change: -57.1%
• 6MTH % change: -61.0%
• Rel. MSCI CHINA % change: -28.4%, -51.9%, -49.6%

Financial Summary (RMB million)

Key Ratios

• P/E (x): 20.3, 9.3, 44.5, 15.8, 9.5
• P/B (x): 2.5, 1.9, 1.9, 1.7, 1.5
• Yield (%): 0.9, 2.2, 0.5, 1.3, 2.2
• DPS (HK$): 0.039, 0.096, 0.020, 0.057, 0.094
• ROE (%): 13.7, 23.5, 4.4, 11.7, 17.1

Peer Group Comparison

Summary of Financial Highlights

• Q Tech's revenue and net profit growth slowed significantly in FY18E.
• The company's gross margin and operating margin have declined due to product mix and cost pressures.
• The P/E ratio has increased, while the P/B ratio has decreased, indicating a potential overvaluation.
• The company's diluted EPS and net profit have been revised down, reflecting poor performance.
• The company is not expected to benefit from the adoption of under-panel FPM in the near term due to competition and cost concerns.

Conclusion

Q Tech has experienced significant earnings disappointments and financial challenges, with the research team maintaining a SELL recommendation. The company's financial performance is heavily influenced by its product mix, margin issues, and production yield problems. Despite some potential upside risks, the outlook for Q Tech remains cautious due to ongoing challenges and competition in the market.