We believe Q-tech’s FY19 beat and Feb’s better-than-feared shipment will reduce market concerns on production disruption due to COVID-19 outbreak. We expect Q-tech’s strong product pipeline in multi/3D-cam, accelerated Newmax’s integration and expansion into overseas clients will continue to drive 22% EPS CAGR in FY20-22E. We lifted FY20-21E EPS by 2%/8%, but revised down our TP to HK$14.8 based on lower 22x FY20E P/E (vs 25x P/E prev.) due to potential COVID-19 impact. Maintain BUY and our new TP implies 33% upside.
- Strong FY19 and Feb shipment better than feared. Q-tech reported FY19 net profit of RMB542 (vs RMB14.4mn in FY18 on GPM/FX loss) is 8%/7% above our/consensus estimates, which also beats high-end of preannounced range of RMB500mn-520mn in positive profit alert. FY19 revenue grew 62% YoY, 12%/4% above our/consensus estimates, driven by CCM volume/ ASP growth 54%/7% YoY and FPM volume/ASP growth of 5%/58% YoY. GPM significantly improved to 9% in FY19 from 4.3% in FY18, due to improved yield with higher automation and better mix in camera pixel and under-display fingerprint. Q-tech Feb shipment came in at 0%/16% YoY growth for HCM/FPM, which is largely in-line with expectations given less working days.
- CCM: multi/3D-cam, overseas expansion and better automation. Given rapid adoption of multi/3D-cam and India expansion, mgmt. guided 20% YoY CCM shipment growth with 10MP+/32MP+ mix to reach 60%/25% in FY20E. Capacity targets to reach 60kk (+20% YoY) in FY20E, with 8KK in India new plant. We estimate CCM shipment/ASP to grow at 20%/3% FY20/21E CAGR in (vs +53%/7% YoY in FY19E).
- Newmax’s integration began to bear fruit. Q-tech’s acquired lens business, Newmax, continued to deliver robust momentum and turned around with associated income of RMB40mn in FY19. We are positive on its upside given Q-tech’s accelerated integration with its product/client portfolio, lens capacity expansion and spec upgrade (6P/7P) for FPM/CCM clients in FY20E.
- Near-term demand uncertainty; new TP of HK$14.8. On the back of continued multi/3D-cam trend and share gain on O-film, we revised up our FY20E-21E EPS by 2-8% to factor in stronger 2019, higher ASP and better Newmax outlook. Our new TP of HK$16.7 is based on lower 22x FY20E P/E (from 25x P/E) due to potential COVID-19 impact.
