Increasing competition in HCM supply chain
? Q Tech expects 1Q22F HCM net profit to drop 48-58% yoy due to customers’ weak high-end smartphone sales and increased competition.
? We see HCM shipments growing 15% yoy in FY22F due to order wins for Samsung and Honor, but GPM declining c.0.7% pt on increased competition.
? Maintain Add. TP lowered to HK$14.25 as we cut FY21-23F EPS by 8-20%.
Disappointing HCM performance in 1Q22F on intense competition
Q Technology’s (Q Tech) share price plunged 15% today on the announcement (published on 23 Feb after market close) of an update on the proposed spin-off in the Shenzhen Stock Exchange). It forecasts 1Q22F handset camera module (HCM) business (c.90% of total revenue) net profit to drop 48%-58% yoy (Rmb85m to Rmb105m). The company attributed the poor operational performance to weak customer demand and increased competition in the HCM market, and losses in its IoT and automotive camera module business unit.
HCM shipment growth of 15% in FY22F but GPM to fall 0.7% pt
Q Tech guides for 1Q22F HCM revenue of approximately Rmb3.5bn-4.0bn, down 5.5-7.7% yoy which implies net profit margin could fall to 2.4%-2.6% (vs. 5.3% in 1Q21). We estimate HCM gross profit margin (GPM) to decline c.2.5% pts yoy to 8-9% in 1Q22F (1Q21 GPM estimate: 10.5-11.5%) due to a sharp fall (c.-10% hoh) in HCM ASP, due to fierce competition given the lack of new model launches and weak domestic demand in the high end segment. Q Tech’s HCM shipments grew by 31% yoy (+5% mom) in Jan 2022 due to rising orders from Samsung and Honor. We believe 1Q22F HCM shipments can maintain
the strong growth momentum (c.20-25% yoy growth), driven by customers’ new model launches and further project wins for Oppo, Vivo and Samsung. We maintain our HCM shipment forecast of 15% yoy growth in FY22F amid stable order flows from Oppo and Vivo and continued market share gain in the Samsung supply chain. We expect sequential GPM improvement on a better product mix, but we believe GPM could fall 0.7% pt to c.9.7% in FY22F (FY21F estimate: 10.4%) due to increased competition and weak ASP growth.
Vehicle camera module business could drag down FY22F net profit
Q Tech started vehicle camera module shipments to domestic automakers including Geely Auto, Foton Daimler, XPeng, etc. in FY21F. The company has obtained certifications for qualified suppliers from more than 10 automakers. Given the company’s capacity expansion (c.2m units/mth at end-FY21) and higher R&D expenses, we believe this business unit could drag down the company’s overall profitability in FY22F while it will take a few years to execute orders on hand. We expect it to turn profitable in FY23F on better
capacity utilisation and higher shipments.
Maintain Add; lower TP to HK$14.25 on 8-20% cut in FY21-23F EPS
We cut EPS by 8-20% in FY21-23F as we lower our GPM assumptions. We retain Add on Q Tech due to its cheap valuation of c.6x FY22F P/E (c.10%/20% EPS growth in FY22F/23F). TP lowered to HK$14.25, based on 10x FY23F (previously 14x FY22F), a 50% discount to its closest peer to reflect its weaker earnings growth and smaller handset lens business. Re-rating catalysts include stable GPM outlook. Downside risk: sustained GPM pressure from competition.