Riding the dual camera ramp

Tue, 20 Sep 2016 E q u i t y R e s e a r c h Q Tech (1478 HK) T M T/C h i n a Riding the dual camera ramp  Second largest domestic CCM manufacturer for dual camera modules  CCM revenue to deliver 36% CAGR from FY15 to FY18E  Fingerprint modules ramp up from FY16E onwards  Initiate BUY with TP HK$4.63 based on 12x FY17E PE Riding on dual camera penetration inflection point. Dual camera is becoming a popular feature in smartphones in 2016 and top smartphone vendors, including Apple, Huawei, Xiaomi and Coolpad have launched their dual camera smartphones. We expect the dual camera penetration in China/global will improve to 22%/20% in 2018E from 0.7%/0.5% in 2015 as it enhances photography experience. Q Tech is the second largest domestic CCM manufacturer of dual camera modules, following Sunny Optical. Q Tech is the sole CCM supplier for LeEco Cool1 dual, the first RMB1,000 level dual camera model, 360 Q5 plus, and major CCM supplier for Xiaomi Redmi Pro, which are the latest dual camera smartphones launched by LeEco, 360 and Xiaomi. Thus, we believe Q Tech is a good proxy for dual camera investment. We expect Q Tech to deliver 4.4mn/26.6mn/40.7mn units dual camera modules, with ASP more than 2 times of single camera module, total revenue of dual camera module is expected to be RMB252mn/RMB1,211mn/RMB1,671mn in FY16/17/18E, representing 6%/19%/20% of total revenue. Robust shipments growth and product mix upgrade in CCM. Q Tech recorded 100%/94% shipment/revenue yoy growth for compact camera module (CCM) in 1H16, thanks to its client mix upgrade. Its top 3 clients are Vivo/Oppo/Huaqin(ODM for Huawei), which recorded 109%/134%/38%(Huawei) yoy shipment growth in 1H16. We believe the current client mix of Q Tech is solid compared to its 1H15 top 3 clients of Vivo, ZTE and Lenovo. Q Tech also maintains product mix upgrade by increasing shipment proportion of 8M+ modules. In 1H16, Q Tech’s 13M modules account for 13% of total shipments, and targets further improving 13M modules proportion to 20%/35% in FY16/17E. Q Tech’s 13M+ modules has tapped into supply chain of leading Chinese smartphone vendors including Oppo and Vivo since 4Q15, with normally 6-8 months ramp up, we believe it will help product mix upgrade. We forecast CCM revenue to deliver 40% CAGR to RMB6,000mn in FY18E from RMB2,202mn in FY15. Margin expansion from fingerprint module robust shipments growth. Q Tech commenced fingerprint module shipment in FY16, it delivered 1.4mn units in 1H16, and aims to deliver 20mn units for FY16E given most smartphone models launched in second half. With increasing penetration of fingerprint modules in China smartphones from 15% in 2015 to 62% in 2018E, and capacity expansion of Q Tech from current 6mn units/month to 10mn units/month by end of 2016, we expect Q Tech’s fingerprint to achieve 20mn/60mn/100mn units shipment and contribute RMB580mn/RMB1,530mn/RMB2,240mn revenue in FY16/17/18E, representing 14%/24%/27% of total revenue. Moreover, as fingerprint enjoys higher GPM than CCM, it will help on margin expansion. Attractive valuation on quadruple earnings growth. Initiate BUY with TP HK$4.63 based on 12x FY17E PE with 40% upside. We forecast Q Tech to record 61% EPS CAGR from FY15 to FY18E, compared to peers’ 26% EPS CAGR, thanks to 1) increase in dual camera penetration and fingerprint penetration; 2) top 5 clients, Chinese smartphone vendors’ robust shipment growth; 3) CCM product mix upgrade. Q Tech currently trades at 8.6x FY17E PE, 39% discount to peers. Moreover, we expect Q Tech to launch dividend policy for FY16E given its solid financial results. Risks: 1) slowdown in China smartphone shipments; 2) lower than expected dual camera penetration; 3) ASP erosion of CCM and fingerprint modules. Chloe Liu +852 2135 0209 chloe.liu@oriental-patron.com.hk Yuji Fung +852 2135 0236 yuji.fung@oriental-patron.com.hk Initial Coverage BUY Close price: HK$3.31 Target Price: HK$4.63 (+39.9%) Key Da t a HKEx code 1478 HK 12 Months High (HK$) 3.40 12 Month Low (HK$) 0.96 3M Avg Dail Vol. (mn) 2.55 Issue Share (mn) 1,041.77 Market Cap (HK$mn) 3,448.26 Fiscal Year 12/2015 Major shareholder (s) He Ningning (72.13%) Source: Company data, Bloomberg, OP Research Closing price are as of 19/09/2016 Pr i c e Ch a r t 1mth 3mth 6mth Absolute % 35.7 108.2 156.6 Rel. MSCI CHINA % 34.4 93.5 143.7 PE C o m p a n y P r o f i l e Q Technology is a leading PRC-based manufacturer focusing on mid-to-high end camera module and fingerprint module market for Chinese branded smart phone and tablet PC manufacturers. E x h i b i t 1: F o r e c a s t a n d Va l u a t i o n Year to