Q Technology: Profit Warning Uneventful, Small Surprises in Nonoperating Items

We are not surprised by Q Tech’s profit warning, which expects net income in 2023 to decline by 35% to 45% compared with 2022. At the midpoint, net income in the second half of fiscal 2023 will rise to CNY 81.9 million from CNY 20.8 million in the first half and CNY 5.0 million a year ago. Although Q Tech’s net income is susceptible to nonoperating items such as investment income, grants, and tax deductions due to its low profitability, we estimate that its operating income should have turned profitable in the second half of the year after two consecutive halves of operating losses, driven by improving product mix and inventory restocking as we expected. We maintain our view that Q Tech will benefit from the overall smartphone camera upgrade trend driven by flagship smartphones, and thus, its shares are undervalued. We hold our fair value estimate for Q Tech at HKD 4.7 for now and will update our earnings forecasts and fair value estimate after the full-year earnings briefing in March.