Company Reports

We raised our fair value estimate for Q Technology, or Q Tech, to HKD 5.7 from HKD 4.7 as we think its competitive position in camera modules has improved, and we expect the trend to persist until 2026. At 0.75 times book value and 6.7 times 2025 forward price/earning, Q Tech’s shares are the most undervalued among our smartphone camera coverage, as we are more optimistic about its earnings recovery through 2025 due to product mix improvement and the overall demand recovery for smartphone camera modules.

Q Technology is the third-largest supplier of smartphone camera modules in China. We think continued camera specifications upgrades would drive revenue growth, but profitability should stay subdued due to intense competition in smartphone camera module assembly. The company is switching its focus from maximizing market share to improving camera module designs and competing with higher-end Android smartphone camera assemblers by working more closely with and investing in its component suppliers. However, we believe that its current positioning and modest investments and partnerships mean that it will be difficult for Q Technology to become a serious contender in the high-end assembly segment.

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.

Q Technology is the third-largest supplier of smartphone camera modules in China. We think continued camera specifications upgrades would drive revenue growth, but profitability should stay subdued due to intense competition in smartphone camera module assembly. The company is switching its focus from maximizing market share to improving camera module designs and competing with higher-end Android smartphone camera assemblers by working more closely with and investing in its component suppliers. However, we believe that its current positioning and modest investments and partnerships mean that it will be difficult for Q Technology to become a serious contender in the high-end assembly segment.

We initiate coverage on camera module assembler Q Technology with a fair value estimate of HKD 4.70, no moat rating, and Standard Morningstar Capital Allocation Rating. We think Q Technology is fairly valued as the market has fully priced in the pickup in demand for smartphone camera upgrades and a recovery in smartphone sales after years of tepid demand. We believe intense competition among smartphone camera assemblers means that Q Technology will only benefit temporarily from the volume recovery as image-sensor and lens-set suppliers capture most of the margin expansion related to specification upgrades. Q Technology’s efforts to vertically integrate smartphone camera components and expand its nonsmartphone products should allow it to keep pace with its competitors.