20160920-东英亚洲证券-丘钛科技-01478.HK-Riding_the_dual_camera_ramp_28页_2mb

Equity Research Summary: Q Tech (1478 HK)

Core Content

Q Tech (1478 HK) is a leading PRC-based manufacturer specializing in mid-to-high-end camera module and fingerprint module markets for Chinese branded smartphones and tablets. The research initiates a BUY recommendation with a Target Price of HK$4.63, representing a 40% upside from the closing price of HK$3.31 on 19/09/2016. The report highlights the company's strong growth prospects, driven by the adoption of dual camera technology and the expansion of fingerprint modules in the smartphone market.

Key Points

Market Position and Growth Drivers

• Dual Camera Modules: Q Tech is the second largest domestic manufacturer of dual camera modules (DCM), following Sunny Optical. It is the sole supplier for the LeEco Cool1 dual and a major supplier for Xiaomi Redmi Pro and 360 Q5 Plus.
• Fingerprint Modules: Q Tech is a key player in the fingerprint module market, supplying major Chinese smartphone vendors like Huawei, Vivo, Oppo, and Xiaomi. It has a 6th position in terms of shipment volume and is expanding its capacity.
• Revenue Projections: Q Tech is expected to achieve RMB252mn/RMB1,211mn/RMB1,671mn in DCM revenue for FY16/17/18E, representing 6% / 19% / 20% of total revenue. The company also forecasts RMB580mn/RMB1,530mn/RMB2,240mn in fingerprint module revenue for FY16/17/18E, contributing 14% / 24% / 27% of total revenue.
• CCM Growth: Compact camera module (CCM) revenue is projected to grow at a 40% CAGR, reaching RMB6,000mn in FY18E from RMB2,202mn in FY15. Q Tech is the largest CCM supplier for Vivo and second largest for Oppo.

Shipment Growth and Product Mix

• Shipment Growth: Q Tech recorded 104% yoy shipment growth in 1H16, driven by client mix changes and strong growth from top clients (Vivo, Oppo, Huaqin).
• Product Mix Upgrade: The company is increasing its proportion of 8M+ and 13M+ CCM modules. In 1H16, 13M modules accounted for 13% of total shipments, targeting 20% / 35% in FY16/17E.
• ASP Improvement: The average selling price (ASP) of CCM is expected to rise due to product mix upgrades and increased dual camera shipments. The forecasted ASP for CCM is RMB23.8 / RMB27.5 / RMB29.5 for FY16/17/18E.

Valuation and Financials

• Valuation: Q Tech currently trades at 8.6x FY17E PE, which is 39% discount to peers. The target price of HK$4.63 is based on a 12x FY17E PE.
• Earnings Growth: The company is projected to achieve a 61% EPS CAGR from FY15 to FY18E, significantly outperforming peers with a 26% EPS CAGR.
• Revenue Growth: Q Tech is expected to record 60% / 38% / 23% yoy revenue growth to RMB3,515mn / RMB4,868mn / RMB6,000mn in FY16/17/18E.

Risks

• Market Risks: Potential slowdown in China smartphone shipments, lower-than-expected dual camera penetration, and ASP erosion for CCM and fingerprint modules.
• Supply Chain Risks: Reliance on key clients and potential competition from other suppliers like Sunny Optical and O-film.

Major Viewpoints

• Q Tech is well-positioned to benefit from the growing adoption of dual camera and fingerprint modules in smartphones.
• The company's strong client mix with top smartphone vendors and capacity expansion plans are key growth drivers.
• Product mix upgrades and ASP improvements are expected to enhance profitability and margins.
• The target price is based on a 12x FY17E PE, reflecting the company's attractive valuation relative to its projected earnings growth.

Key Information

• Major Shareholder: He Ningning holds 72.13% of shares.
• Market Cap: RMB3,448.26 million as of 19/09/2016.
• Issue Shares: 1,041.77 million.
• Valuation Table:
  • FY14A: Revenue RMB2,161mn, Net Profit RMB196mn
  • FY15A: Revenue RMB2,202mn, Net Profit RMB102mn
  • FY16E: Revenue RMB4,095mn, Net Profit RMB176mn
  • FY17E: Revenue RMB6,398mn, Net Profit RMB342mn
  • FY18E: Revenue RMB8,240mn, Net Profit RMB447mn

Investment Risks

1. Slowdown in China smartphone shipments
2. Lower-than-expected dual camera penetration
3. ASP erosion of CCM and fingerprint modules

Financial Summary

• Revenue Growth:
  • FY16E: 86% yoy
  • FY17E: 56% yoy
  • FY18E: 29% yoy
• Net Profit Growth:
  • FY16E: 73% yoy
  • FY17E: 94% yoy
  • FY18E: 31% yoy
• EPS Growth:
  • FY16E: 63% yoy
  • FY17E: 94% yoy
  • FY18E: 31% yoy
• P/E Ratio:
  • FY14A: 8.9x
  • FY15A: 27.2x
  • FY16E: 16.7x
  • FY17E: 8.6x
  • FY18E: 6.6x

Conclusion

Q Tech is a promising investment opportunity due to its strong market position in the dual camera and fingerprint module markets, robust shipment growth, and attractive valuation. The company is expected to deliver significant revenue and earnings growth, driven by its strategic partnerships with leading smartphone manufacturers and ongoing product mix upgrades.