Q-tech issued a positive profit alert, stating FY19E NP of RMB500-520mn, with mid-point 19%/22% above consensus/our estimates. The beat was driven by 1) higher CCM/FPM GPM on better mix and scale, 2) improved labor cost after upgrading production automation, and 3) better profitability of Newmax. We raised FY19-21E EPS by 22-26% to reflect better GPM/expense, higher product ASP and better Newmax oultook. We believe Q-tech is poised to benefit from multi-cam/3D sensing trend and accelerate share gain from O-Film in 2020E. Our new TP HK$16.7 is based on higher 25x FY20E P/E (upcycle P/E), implying 34% upside.
- CCM: multi-cam/3D sensing, share gain and better automation. Given rapid adoption of tri/quad-cam by HOVX new models, we expect strong CCM demand to continue with 35%/22% YoY volume growth into FY20-21E (vs +47% YoY in FY19E). In addition, we believe Q-tech is well positioned to benefit from ASP hike due to ultra-high-end pixel (48MP+), periscope-cam, and SL/ToF 3D modules for IoT/AR/VR applications in FY20E.
- FPM: higher UD adoption and large-area/LCD in 2020E. We believe FPM ASP will continue improvement backed by increasing penetration of under-display solution (49%/75%/90% in FY19/20/21E). Looking ahead, we expect spec upgrade will focus on large-area/half-screen/LCD UD solutions, which will benefit industry leaders such as Q-tech.
- Newmax’s synergy began to bear fruit. Q-tech’s acquired lens business, Newmax, continued to deliver strong momentum and operating leverage. We are positive on its earnings upside given Q-tech’s accelerated integration with Newmax’s product/client portfolio, as well as Newmax’s capacity expansion and spec upgrade (6P/7P) for FPM/CCM clients in FY20E.
- Our EPS is 16-18% above consensus; Lifted TP to HK$16.7. On the back of HOVX’s multi-cam adoption and share gain on O-film weakness, we revised up our FY19E-21E EPS by 22-26% to factor in better 2019, higher ASP and better Newmax outlook. We raised TP to HK$16.7, based on upcycle 25x FY20E P/E (from 18x P/E). Catalysts include flagship rollout and China 5G subs ramp.
