Q-tech announced positive 1H20 profit alert, stating net profit to climb 50-90% YoY, which is well above 23%/37% YoY for our/consensus estimates, thanks to better HCM product mix and higher margin on automation. Despite FY20E HCM shipment guidance cut to “-5% to +5% YoY growth” from “20% YoY growth” due to COVID-19 impact, we believe improving product mix will continue to drive ASP/margin expansion in 2H20E, offsetting slower near-term shipment growth. We lifted FY20-22E EPS by 3-5%, and derived new TP of HK$16.0 based on rollover 18x FY21E P/E (vs 22x FY20E P/E prev.). Reiterate BUY.
- Strong 1H20 on better product mix and higher margin Q-tech expected 1H20 net profit growth of 50-90% YoY, well ahead of our/ consensus estimate of 23%/37% YoY, given better HCM product mix and improving margin with higher automation and lower depreciation. We expect 1H20E revenue/net profit to grow 27%/63% YoY, and GPM improved to 9% in 1H20 from 8.2% in 1H19. Despite flattish HCM shipment in 1H20, we estimate HCM ASP growth of 52% YoY, thanks to 10MP+/32MP+ pixel mix reaching 73%28% in 1H20 (vs 59%/12% in 2H19).
- HCM guidance revision to “-5% to +5% YoY growth” largely expected. Q-tech’s 6M20 HCM shipment was flattish at -1% YoY, behind previous guidance of 20% YoY, while 6M20 FPM shipment came in at 6% YoY. Given sluggish smartphone demand in 1H20 and peers’ conservative comment (Cunny, Largan), we are not surprised by HCM shipment guidance revision. Overall, we are positive on Q-tech’s efforts on product mix enhancement, and we expect pixel upgrade and periscope adoption to drive HCM ASP growth at 7% CAGR in FY20-22E.
- Newmax’s synergy and Samsung HCM to provide further upside. We believe Q-tech’s lens business, Newmax, will continue to deliver solid results in FY20E, backed by accelerated integration in product/client portfolio, lens capacity expansion and spec upgrade (6P/7P) for FPM/CCM clients. In addition, we expect Q-tech will expand into Samsung HCM in 2H20E-1H21E, which will boost HCM growth in FY21E.
- Maintain BUY; Raise TP to HK$16.0. We revised up FY20E-21E EPS by 3-5% to factor in stronger 1H20, better margin and HCM outlook. Our new TP of HK$16.0 is based on rollover 18x FY21E P/E (from 22x FY20E P/E prev.). Catalysts include Samsung HCM order win and 3D sensing adoption.
