20170526-交银国际证券-丘钛科技-01478.HK-Industry_consolidation_to_continue__Potential_GPM_rebound_a_catalyst_17页_1mb

Q Tech (1478.HK) Summary

Core Content

Q Tech is a key player in the China camera module industry, which is expected to consolidate further as leading smartphone manufacturers gain market share and focus on flagship models. The company's performance and outlook are closely tied to the industry dynamics, product mix upgrades, and margin recovery.

Main Points

Industry Outlook

• Consolidation: The camera module industry is likely to consolidate further, with share gains moving toward first-tier vendors.
• Growth Drivers: The shift toward higher-end product mix, fewer smartphone models, and increased spec requirements (e.g., dual cameras, higher megapixels) will continue to favor top-tier vendors.
• Overseas Growth: Chinese smartphone vendors are expanding their presence in overseas markets, especially India and Southeast Asia, which is expected to drive shipment growth and benefit Q Tech.

Q Tech's Performance

• Financial Highlights: Q Tech's revenue and net profit have shown significant growth, with a 127% YoY increase in 2016 and a 25% YoY growth expected in 2017.
• Earnings Growth: Earnings are highly sensitive to GPM improvements, with every 1% increase in GPM leading to approximately 19% upside in earnings.
• GPM Recovery: The company's gross profit margin has hit a historical low but is expected to rebound due to better product mix, scale, and stabilization of RMB/USD exchange rate.
• Target Price: The target price is set at HK$7.20, based on a 15x average of 2017–2018E EPS, reflecting a 48% EPS CAGR forecast for 2016–2019.

Share and Customer Mix

• Customer Gains: Q Tech is expected to gain more share with major clients like OPPO and Vivo, and has potential to become a direct supplier to Huawei.
• Product Mix: The company's product mix is improving, with a significant portion of camera modules now being 13MP or higher, and a potential increase in dual-camera modules in 2017.
• Fingerprint Module: Fingerprint module shipments are expected to grow significantly, becoming a major contributor to earnings.

Key Information

Revenue and Profit Growth

Financial Metrics

Share Gains

• In 2H16, the top 4 Chinese vendors accounted for 39% of the shipment share, up from 33% in 2H15.
• Q Tech's share in OPPO/Vivo is still small, offering potential upside.
• The company's share in Huawei is limited, but there is potential for future collaboration.

Dual-Camera and Spec Upgrade

• Dual-camera modules are becoming more common, with Q Tech supplying to most smartphone makers.
• The 2017 product lineup includes several dual-camera models from major Chinese brands.
• Continued innovation in camera specs (e.g., OPPO's lossless 5x zoom) is expected to drive further mix and ASP upgrades.

Fingerprint Module

• Fingerprint module penetration is expected to rise from 40% in 2016 to 60% in 2017, leading to a 64% YoY shipment growth.
• Q Tech's fingerprint module shipments reached 21m units in 2016, up from almost none in 2015.

Newmax Acquisition

• Q Tech acquired 36% of Newmax, which is expected to have a short-term negative impact on earnings due to Newmax's past losses.
• The acquisition may allow Q Tech to in-source lens components, supporting vertical integration.

Earnings Sensitivity

Conclusion

Q Tech is positioned to benefit from industry consolidation, product mix upgrades, and the growth of the Chinese smartphone market. The company's financial performance is expected to improve with a rebound in gross profit margin and increased shipment growth. While the Newmax acquisition may cause short-term earnings pressure, it is seen as a strategic move to enhance the company's capabilities and long-term growth potential. The target price of HK$7.20 reflects a positive outlook based on projected earnings growth and improved margin performance.