20180716-信达国际控股-丘钛科技-01478.HK-Profit_warning_update_made_investors__heartbroken_8页_666kb

Q-Tech Profit Warning Summary

Core Content

Q-Tech, a leading Chinese camera module manufacturer, issued an updated profit warning after market close on July 13, 2018. The company expects a net loss of approximately RMB50 million in 1H18, which is significantly worse than the previously projected profit before tax (PBT) decline of 50% YoY. The warning was attributed to several factors including RMB depreciation, components shortages, and slow product optimization.

Main Points

• RMB Depreciation: A depreciation of approximately 3.8% during May and June 2018 impacted the company's financial performance.
• Components Shortage: Slow CCM sales were dragged by raw materials and components shortage.
• Product Optimization Delays: Slow product optimization in both CCM and fingerprint recognition modules.
• Aggressive Pricing Strategy: The adoption of more aggressive pricing strategies is expected to further reduce earnings.
• Product Yield: Lower than expected CCM product yield due to the wider adoption of integrated lens set (MOC), which Q-Tech is still learning to manage.
• Market Demand: Lower than expected utilization rate due to weakened market demand, despite capacity expansion of over 50%.

Key Information

• Shipment Growth: Q-Tech's total CCM shipment in 1H18 reached 58.9 million units, with a YoY growth of 22.4% and a QoQ growth of 27.4%.
• Product Mix:
  • ≤8MP CCM shipment made up ~60% of total in 1H18, compared to ~44.5% in 4Q17.
  • ≥10MP CCM shipment accounted for 38.0% in May and 36.2% in June, which is near its record low.
• FPC Shipments: Q-Tech shipped 45.1 million pieces of FPC in 1H18, representing a 31.6% YoY increase and 46.6% of FY18E estimates.
• Earnings Forecast Revisions:
  • Revenue: FY18E revised down to HK$8,289M from HK$8,526M (-2.8%).
  • GP: FY18E revised down to HK$580M from HK$836M (-30.6%).
  • GM: FY18E revised down to 7.0% from 9.8% (-280bps).
  • Net Profit: FY18E revised down to HK$109M from HK$315M (-65.2%).
  • Diluted EPS: FY18E revised down to HK$0.098 from HK$0.281 (-65.2%).
• Valuation Cut: The target price was slashed from HK$4.26 to HK$3.03, implying a 11.1x FY19E PE, which is a 45% discount to leading players' average PE of 20.2x.
• CAGR: Q-Tech's diluted EPS growth is expected to be -7.6% CAGR for FY17-FY20E, compared to ~83% CAGR for FY15-FY17.

Investment Implication

• Sell Rating: The report reiterates the Sell rating for Q-Tech due to its unattractive valuation and blurred visibility on CCM business performance.
• Market Sentiment: The profit warning update has further shaken investor confidence in Q-Tech.

Company Overview

• Established: In 1997.
• Listing: Hong Kong Exchanges in 2014.
• Focus: Mid-to-high end camera module market for Chinese branded smartphones and tablets.
• Technologies: Early adopter of COB and COF assembly technologies.
• Major Customers: Includes leading Chinese smartphone manufacturers like vivo, OPPO, and Huawei.

Additional Notes

• Fingerprint Recognition Module: Q-Tech is reported to have shipped samples to Huawei and aims to be one of the suppliers for the rumored Mate 20.
• Market Cap: As of the latest data, the market cap is HK$6,224.5 million.
• Major Shareholder: He Ning Ning holds 68.58% of shares.
• Auditors: KPMG.
• Result Due: 1H18 results due in August 2018.

Peer Comparison

• Valuation: Q-Tech's PE is significantly lower than its peers, indicating an unattractive valuation.
• Performance: The company's CCM business growth is slower than expected, with a declining contribution from higher-margin products like ≥10MP CCM.

Conclusion

The profit warning and subsequent earnings forecast revisions highlight Q-Tech's challenges in maintaining profitability, primarily due to external factors like RMB depreciation and internal issues such as product optimization and yield. The report suggests that the company's future performance is uncertain and its valuation is not competitive, leading to a Sell rating.