Tue, 20 Sep 2016

Equi ty Research Q Tech (1478 HK) TMT/China

Riding the dual camera ramp Second largest domestic CCM manufacturer for dual camera modules CCM revenue to deliver 36% CAGR from FY15 to FY18E Fingerprint modules ramp up from FY16E onwards

Initiate BUY with TP HK$4.63 based on 12x FY17E PE

Riding on dual camera penetration inflection point. Dual camera is becoming a popular feature in smartphones in 2016 and top smartphone vendors, including Apple, Huawei, Xiaomi and Coolpad have launched their dual camera smartphones. We expect the dual camera penetration in China/global will improve to 22%/20% in 2018E from 0.7%/0.5% in 2015 as it enhances photography experience. Q Tech is the second largest domestic CCM manufacturer of dual camera modules, following Sunny Optical. Q Tech is the sole CCM supplier for LeEco Cool1 dual, the first RMB1,000 level dual camera model, 360 Q5 plus, and major CCM supplier for Xiaomi Redmi Pro, which are the latest dual camera smartphones launched by LeEco, 360 and Xiaomi. Thus, we believe Q Tech is a good proxy for dual camera investment. We expect Q Tech to deliver 4.4mn/26.6mn/40.7mn units dual camera modules, with ASP more than 2 times of single camera module, total revenue of dual camera module is expected to be RMB252mn/RMB1,211mn/RMB1,671mn in FY16/17/18E, representing 6%/19%/20% of total revenue.

Robust shipments growth and product mix upgrade in CCM. Q Tech recorded 100%/94% shipment/revenue yoy growth for compact camera module (CCM) in 1H16, thanks to its client mix upgrade. Its top 3 clients are Vivo/Oppo/Huaqin(ODM for Huawei), which recorded 109%/134%/38%(Huawei) yoy shipment growth in 1H16. We believe the current client mix of Q Tech is solid compared to its 1H15 top 3 clients of Vivo, ZTE and Lenovo. Q Tech also maintains product mix upgrade by increasing shipment proportion of 8M+ modules. In 1H16, Q Tech’s 13M modules account for 13% of total shipments, and targets further improving 13M modules proportion to 20%/35% in FY16/17E. Q Tech’s 13M+ modules has tapped into supply chain of leading Chinese smartphone vendors including Oppo and Vivo since 4Q15, with normally 6-8 months ramp up, we believe it will help product mix upgrade. We forecast CCM revenue to deliver 40% CAGR to RMB6,000mn in FY18E from RMB2,202mn in FY15.

Margin expansion from fingerprint module robust shipments growth. Q Tech commenced fingerprint module shipment in FY16, it delivered 1.4mn units in 1H16, and aims to deliver 20mn units for FY16E given most smartphone models launched in second half. With increasing penetration of fingerprint modules in China smartphones from 15% in 2015 to 62% in 2018E, and capacity expansion of Q Tech from current 6mn units/month to 10mn units/month by end of 2016, we expect Q Tech’s fingerprint to achieve 20mn/60mn/100mn units shipment and contribute RMB580mn/RMB1,530mn/RMB2,240mn revenue in FY16/17/18E, representing 14%/24%/27% of total revenue. Moreover, as fingerprint enjoys higher GPM than CCM, it will help on margin expansion.

Attractive valuation on quadruple earnings growth. Initiate BUY with TP HK$4.63 based on 12x FY17E PE with 40% upside. We forecast Q Tech to record 61% EPS CAGR from FY15 to FY18E, compared to peers’ 26% EPS CAGR, thanks to 1) increase in dual camera penetration and fingerprint penetration; 2) top 5 clients, Chinese smartphone vendors’ robust shipment growth; 3) CCM product mix upgrade. Q Tech currently trades at 8.6x FY17E PE, 39% discount to peers. Moreover, we expect Q Tech to launch dividend policy for FY16E given its solid financial results. Risks: 1) slowdown in China smartphone shipments; 2) lower than expected dual camera penetration; 3) ASP erosion of CCM and fingerprint modules.

Chloe Liu

+852 2135 0209

chloe.liu@oriental-patron.com.hk

Yuji Fung

+852 2135 0236

yuji.fung@oriental-patron.com.hk

Initial Coverage

BUY

Close price: HK$3.31

Target Price: HK$4.63 (+39.9%)

Key Data

HKEx code 1478 HK

12 Months High (HK$) 3.40

12 Month Low (HK$) 0.96

3M Avg Dail Vol. (mn) 2.55

Issue Share (mn) 1,041.77

Market Cap (HK$mn) 3,448.26

Fiscal Year 12/2015

Major shareholder (s) He Ningning (72.13%)

Source: Company data, Bloomberg, OP Research

Closing price are as of 19/09/2016

Price Chart

1mth 3mth 6mth

Absolute % 35.7 108.2 156.6

Rel. MSCI CHINA % 34.4 93.5 143.7

PE

Company Profi le Q Technology is a leading PRC-based

manufacturer focusing on mid-to-high end

camera module and fingerprint module

market for Chinese branded smart phone

and tablet PC manufacturers.

Exhibit 1: Forecast and Valuation Year to Dec (RMB mn) FY14A FY15A FY16E FY17E FY18E

Revenue 2,161 2,202 4,095 6,398 8,240

Growth (%) 53 2 86 56 29

Net Profit 196 102 176 342 447

Growth (%) 20 (48) 73 94 31

Diluted EPS (HK$) 0.370 0.122 0.198 0.386 0.504

EPS growth (%) (9) (67) 63 94 31

Change to previous EPS (%) 0.0 0.0 0.0

Consensus EPS (HK$) 0.238 0.294 0.345

ROE (%) 28.1 8.7 13.5 22.1 23.6

P/E (x) 8.9 27.2 16.7 8.6 6.6

P/B (x) 1.5 2.2 2.1 1.7 1.4

Yield (%) 1.6 0.0 1.2 2.3 3.0

DPS (HK$) 0.052 0.000 0.040 0.077 0.101

Source: Bloomberg, OP Research

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Sep/15 Dec/15 Mar/16 Jun/16

HK$1478 HK MSCI CHINA

0

2

4

6

8

10

12

14

16

Jan/15 Jul/15 Jan/16 Jul/16

Forward P/E Ratio

+1std.

avg.

-1std.

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 2 of 28

Table of Contents

Table of Contents ......................................................................................................................................... 2

Riding on dual camera penetration inflection point ....................................................................................... 3

Robust shipment growth and product mix upgrade in CCM .......................................................................... 8

Margin expansion from fingerprint module robust shipments growth ...........................................................12

Attractive valuation on quadruple earnings growth. Initiate BUY with TP HK$4.63 with 40% upside ...........17

Investment Risks .........................................................................................................................................22

Management profiles ..................................................................................................................................23

Shareholding structure ................................................................................................................................24

Financial Summary .....................................................................................................................................25

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 3 of 28

Riding on dual camera penetration inflection point Dual camera is the new trend in mid-to-high-end smartphones

Dual camera can provide premium photographic quality over single camera, such

as resolution enhancement, larger aperture or in-depth function, optical zoom and

3D mapping, etc. Four major types of dual-cam are on the market: (1) Identical

type – 2 high resolutions with RGB + RGB; (2) Twin type - 2 high resolutions with

RGB + Mono (black and white); (3) Twin type – Telephoto + wide-angle with RGB

+ RGB and (4) Depth type – high resolution + low resolution with RGB + RGB.

Exhibit 2: Major type of dual camera

Structure Symmetric Dual-cam Asymmetric Dual-cam Single Camera

Resolution High + High High + High High+ High High+ Low

CMOS sensor RGB + RGB RGB + Mono RGB + RGB RGB + RGB RGB

Focal length Same Same Telephoto + Wide-angle Depends

Photo demo

Optical zoom ★ ★ ★★★★★ ★ ★

Low-light image

quality

★★ ★★★★★ ★★★★ ★★ ★★

Improved resolution ★★★★ ★★★★★ ★★★★ ★★ ★

3D depth mapping ★★★★★ ★★★ ★★★★ ★★★★★ ★

Multiple

focus/post-photo

adjustments

★★★ ★★★ ★★★ ★★ ★

Adopted models Huawei Honor 6 Huawei P9/P9 Plus,

Huawei Honor V8/8,

LeEco Cool1 dual,

360 Q5 Plus, Qiku Terra

iPhone 7 Plus

LG G5/G5 SE

Xiaomi Redmi Pro

HTC One M8

Source: OP Research

Newly released iPhone 7 Plus is the only current model with Telephoto + Wide

angle dual-cam, which can produce premium optical zoom effect to create depth

of field and 3D imagery by combining photos from long and short focal length

cameras. It is the most advanced dual-cam design due to higher level of

algorithm and more complicated data process. We believe the dual-cam adoption

of iPhone 7 Plus would speed up the dual-cam adoption in Android camp.

For RGB+Mono dual-cam, it is mainly adopted by Chinese smartphones,

including Huawei P9, LeEco Cool1 dual, and 360 Q5 plus. This type of dual-cam

significantly improves photographic clarity and light sensitivity by combining

normal photo from colour sensor and black & white photo with pixel enhancement

and better low-light performance from monochrome sensor.

Dual camera provides premium

photographic quality and has four

types

iPhone 7 Plus adopts Tele + Wide

dual-cam, which would speed up

dual-cam adoption in Android

camp

RGB+Mono dual cam is mainly

adopted by Chinese smartphones,

including Huawei P9, LeEco

Cool1 dual, and 360 Q5 plus.

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 4 of 28

RGB + RGB dual-cam with different resolutions can simulate a dimensional effect

and create pictures with different areas of focus. The manufacture of RGB+RGB

dual-cam is less difficult and it is adopted by Xiaomi Redmi Pro, LG G5 and HTC

One M8.

We believe an increasing number of smartphone vendors will follow iPhone to

adopt dual camera in their upcoming models, which puts dual camera into the

next trend of mid-to-high-end smartphones.

Exhibit 3: Latest smartphones adopting dual camera in 2016

iPhone 7 Plus 360 Q5 Plus LeEco Cool1 dual Xiaomi Redmi Pro

CPU Dual core A10 Quad core

Qualcomm Snapdragon 820

Octa core

Qualcomm Snapdragon 652

Deca core

Helio X20/X25

RAM 3GB 4/6G 3/4GB 3/4GB

Storage 32/128/256G 128G (up to 256G) 32/64G 32/64/128G (up to 128G)

Display 5.5'' QHD LTPS 6''QHD AMOLED 5.5''FHD LTPS 5.5''QHD AMOLED

Camera Dual 12MP (rear) 7MP (front) Dual 13MP(rear) 13MP(front) Dual 13MP(rear) 8MP(front) 13MP+5MP (rear) 5MP (front)

CCM supplier LG Q Tech Q Tech Q Tech, O-film

Fingerprint ✓ ✓ ✓ ✓

SIM Single SIM Dual SIM Dual SIM Dual SIM

OS iOS 10 360 OS2.0 Androd 6.0 MIUI 8

Launch time Sep 2016 Aug 2016 Aug 2016 Jul 2016

Price RMB6,388/RMB7,188

/RMB7,988

RMB2,599/RMB2,799 RMB1,099/RMB1,499

RMB1,599/RMB1,699

RMB1,499/RMB1,699

/RMB1,999

Huawei Honor 8 Huawei Honor V8 Huawei P9/P9 Plus LG G5SE/G5

CPU Octa core

HiSilicon Kirin 950

Octa core

HiSilicon Kirin 950/955

Quad core

HiSilicon Kirin 955

Quad core

Qualcomm Snapdragon 652/820

RAM 3/4GB 4GB 4GB 3/4GB

Storage 32/64G (up to 256G) 32/64G (up to 256G) 32/64GB (up to 256GB) 32G (up to 256gG)

Display 5.2''FHD LTPS 5.7''QHD LTPS 5.2''FHD LTPS/ AMOLED 5.3'' FHD LTPS

Camera Dual 12MP(rear) 8MP(front) Dual 12MP(rear) 8MP(front) Dual 12MP(rear) 8MP(front) 16MP+8MP (rear) 8MP (front)

CCM Supplier Sunny Optical, Liteon Sunny Optical, Liteon Sunny Optical, Liteon LG

Fingerprint ✓ ✓ ✓ ✓

SIM Dual SIM Dual SIM Dual SIM Dual SIM

OS Androd 6.0.1 Androd 6.0 Androd 6.0 Androd 6.0.1

Launch time Jul 2016 May 2016 Apr 2016 Apr/Feb 2016

Price RMB1,999/2,499 RMB2,299 RMB3,188/RMB3,988 RMB3,499RMB3,999

Source: OP Research

RGB+RGB dual-cam with different

resolutions has simpler

manufacture process, and is

adopted by Xiaomi Redmi Pro, LG

G5 and HTC One M8

We believe dual-cam will become

the next trend of mid-to-high-end

smartphones

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 5 of 28

0.1% 0.7%

7%

16%

22%

28%

37%

0.4% 0.5%

5%

13%

20%

27%

33%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2014 2015 2016E 2017E 2018E 2019E 2020E

China Global

0.4 3 32 82

127 173

234

5 7

71

212

343

470

610

0

100

200

300

400

500

600

700

2014 2015 2016E 2017E 2018E 2019E 2020E

China Global

(mn unit)

Dual camera penetration gradually ramps up

We expect China/global smartphone dual camera penetration to improve from

7%/5% in 2016 to 37%/33% in 2020E, and thus drive the dual camera

China/global shipment growth of 64%/71% CAGR from 2016E to 2020E.

Exhibit 4: China/Global dual-cam penetration from 2014 to 2020E

Source: IDC, IHS, OP Research

Exhibit 5: China/Global dual-cam shipment from 2014 to 2020E

Source: IDC, IHS, OP Research

We expect China/global

smartphone dual camera

penetration improves further to

37%/33% in 2020E

We expect China/global dual-cam

shipments to grow at a 4-year

CAGR of 64%/71% to

234mn/610mn in 2020E

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 6 of 28

4.4

26.6

40.7

3%

15%

20%

0%

5%

10%

15%

20%

25%

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

FY16E FY17E FY18E

Dual cam shipment Dual cam shipment penetration

(mn units)

Second largest domestic player in dual camera modules market

Currently, only three domestic players can produce dual camera modules (DCM).

Sunny Optical is the first domestic player to produce DCM, and is the DCM

supplier for Huawei models, including P9 and Honor8, together with Liteon. Q

Tech is the second domestic player in dual camera market, and is the sole

supplier for Cool1 dual jointly launched by LeTV and Coolpad, 360 Q5 Plus and

also the major supplier of Xiaomi Redmi Pro. O-film is the third domestic player in

dual camera market, and it is also the DCM supplier for Xiaomi Redmi Pro. Thus,

we believe Q Tech is a good proxy for dual camera investment.

We forecast Q Tech will deliver 4.4mn/26.6mn/40.7mn units for DCM,

representing 3%/15%/20% shipment penetration in FY16/17/18E, similar to

China dual camera penetration rate. Q Tech also allocates 5mn monthly capacity

for DCM, representing ~22% of total capacity.

Exhibit 6: Q Tech’s DCM shipment and penetraton

Source: OP Research

There are only three domestic

players which can produce DCM;

Q Tech is the second largest one

following Sunny Optical

We forecast Q Tech to deliver

4.4mn/26.6mn/40.7mn DCM in

FY16/17/18E, representing

3%/15%/20% of total shipment; Q

Tech also allocates 22% of total

capacity for DCM

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 7 of 28

252

1,211

1,671

57.0 45.6 41.0

6%

19%20%

0%

5%

10%

15%

20%

25%

-

400

800

1,200

1,600

2,000

FY16E FY17E FY18EDual cam revenue Dual cam ASP Dual cam revenue proportion

(RMBmn/RMB)

ASP of DCM is normally 2.5-3 times of single camera module, as currently only a

few CCM suppliers can produce DCM so they enjoy high bargaining power. Q

Tech’s yield for RGB+RGB and RGB+MONO camera modules can achieve over

90%. We estimate the DCM revenue to be RMB252mn/RMB1,211mn/

RMB1,671mn in FY16/17/18E, representing 6%/19%20% of total sales.

Exhibit 7: Q Tech’s dual camera revenue and ASP

Source: OP Research

We estimate DCM revenue to be

RMB252mn/RMB1,211mn

/RMB1,671mn in FY16/17/18E, as

ASP of DCM is 2.5-3 times of

single camera module, and Q

Tech can achieve 90% yield rate

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 8 of 28

Robust shipment growth and product mix upgrade in CCM

Solid customer base drives shipment growth

Q Tech’s top 5 clients in 1H16 are Vivo, Oppo, Huaqin (ODM for Huawei), ZTE

and Xiaomi. Given that currently Huawei is the No.1 smartphone vendor in China,

followed by Oppo, Xiaomi and Vivo, we believe Q Tech’s client mix is very solid.

Q Tech is currently the largest CCM supplier of Vivo, and second largest CCM

supplier of Oppo, in terms of shipments.

Exhibit 8: Top 5 clients by shipment

1H16 2015 1H15

1 Vivo Vivo Vivo

2 Oppo Oppo ZTE

3 Huaqin(Main ODM for Huawei) Lenovo Lenovo

4 ZTE ZTE Huaqin

5 Xiaomi Meizu TCL

Source: Company, OP Research

Chinese smartphone vendors are grabbing market share aggressively.

Huawei/Oppo/Vivo have experienced 38%/134%/109% yoy growth for 1H16

shipments, and we believe they will maintain the growth momentum. Q Tech is

well positioned to capture the robust growth of Chinese smartphone vendors, as

Vivo, Oppo and Huaqin (ODM for Huawei) are its top 3 clients.

Exhibit 9: Chinese smartphone vendors global shipments

1H16 Ranking Vendors 1H16 1H15 yoy% FY16E 1H16 as FY16E

1 Huawei 60.6 43.9 38% 140 43%

2 Oppo 34.6 14.8 134% 78 44%

3 Xiaomi 30.5 30.8 -1% Not disclosed n.a.

4 Vivo 28.2 13.5 109% 66 43%

5 ZTE 23.3 21.7 7% 70 33%

Source: Company, OP Research

Q Tech recorded strong shipment in 1H16; it was up 104% yoy to 72.4mn units,

thanks to its clients mix change ( Oppo, Xiaomi replaced Lenovo and TCL in top 5

clients), and robust shipment growth of Vivo, Oppo, and Huawei. Other

competitors’ CCM shipment growth in 1H16 was much lower, O-film recorded

~50% yoy growth, Truly is 18% while Sunny’s CCM shipment was flat.

Exhibit 10: 2016 CCM shipment and target of leading suppliers

Company 1H16(mn units) 1H16 yoy% FY16E target(mn units) 1H16 /FY16E target

O-film (002456 SZ) 130.0 50% 300.0 43%

Sunny (2382 HK) 107.8 0.7% 250.9 43%

Q Tech (1478 HK) 72.4 104% 147.6 49%

Truly (732 HK) 50.1 18% 109.6 46%

Source: Company, O-film, Truly, OP Research

Q Tech has solid client mix, top 5

clients are Vivo, Oppo,

Huaqin(ODM for Huawei), ZTE and

Xiaomi

Q Tech is well positioned to

capture the robust growth of

Chinese smartphone vendors. In

1H16, Huawei/Oppo/Vivo

recorded 38%/134%/109% yoy

shipment growth

Q Tech recorded 104% yoy

shipment growth in 1H16 thanks

to client mix change and robust

growth of top 3 clients.

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 9 of 28

17%

34%

49%

3%

6%

14%

26.1

22.4 22.8

20.0

21.0

22.0

23.0

24.0

25.0

26.0

27.0

0%

10%

20%

30%

40%

50%

60%

70%

FY14 FY15 1H16

8M 10M+ ASP

(RMB)

25%20% 20%

16%31%

60%

35.1

34.2

40.0

31.0

32.0

33.0

34.0

35.0

36.0

37.0

38.0

39.0

40.0

41.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY14 FY15 1H16

8M 10M+ ASP

(RMB)

Q Tech has CCM capacity of 16.5mn units/month in 1H16, and plans to expand to

23mn units/month by the end of FY16E, together with O-film and Sunny’s

capacity expansion plans.

Exhibit 11: 2016 CCM monthly capacity of leading suppliers

Company Early 2016(mn units/month) By end of 2016(mn units/month)

O-film (002456 SZ) 38.0 40-45

Sunny (2382 HK) 30.0 40.0

Q Tech (1478 HK) 16.5 23.0

Truly (732 HK) not disclosed not disclosed

Source: Company, O-film, Truly, OP Research

Product mix upgrade to drive above market ASP enhancement

Q Tech keeps upgrading product mix of camera modules, in 1H16, its 8M/10M+

CCM accounted for 49%/14% of total shipment, leading to a blended ASP of

RMB22.8. Sunny Optical, Q Tech’s CCM competitor, had 20%/60% of total

shipment for 8M/10M+ CCM, and enjoys a blended ASP of RMB40.0 in 1H16.

Exhibit 12: CCM product shipment mix and ASP

Source: Company, OP Research

Exhibit 13: CCM product shipment mix and ASP – Sunny Optical

Source: Company, OP Research

Q Tech plans to expand CCM

capacity from current

16.5mn/month to 23mn/month by

end of 2016

Q Tech’s 8M/10M+ CCM accounts

for 49%/14% of total shipment in

1H16 with blended ASP of

RMB22.8

Sunny’s 8M/10M+ CCM accounts

for 20%/60% of total shipment in

1H16 with blended ASP of

RMB40.0

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 10 of 28

16%10%

2% 2% 0%

64%

51%

35%26%

5%

17%

34%

49%

50%

40%

20%

3% 6%13%

18%

35%

50%

1%1%

5%

10%

3%

15%20%

0%

20%

40%

60%

80%

100%

FY14 FY15 1H16 FY16E FY17E FY18E

3M and below 5M 8M 13M 16M+ Dual cam

Thus, we believe there is ASP improvement room for Q Tech given 1) potential

product mix upgrade, management guided 20%/35% of total shipment for 13M

CCM in FY16/17E, compared to the 1H16’s proportion of 13%, as its 13M and

above CCM has entered into supply chain of several leading brands, including

Oppo and Vivo since 4Q15 and it normally takes 6-8 months to see significant

shipment; 2) Q Tech began DCM shipments in 2H16 as supplier of Xiaomi Redmi

Pro, LeEco Cool1 dual and 360 Q5 plus. DCM shipment is counted as 1 and ASP

is 2.5-3 times of single camera module, thus we expect it will further drive ASP.

We forecast 8M/13M/16M/dual cam CCM will account for 50%/18%/1%/3% of

total shipments in FY16E, and improves to 40%/35%/5%/15% in FY17E, and

further improves to 20%/50%/10%20% in FY18E.

Exhibit 14: CCM product shipment mix

Source: Company, OP Research

We believe there is ASP

improvement room given

1)management guided 20%/35%

13M CCM shipment penetration in

FY16/17E as it tapped into Oppo

and Vivo’s 13M CCM supply chain

in 4Q15 and ramp up takes 6-8

months; 2) increase DCM

shipment

13M/16M/dual-cam CCM will keep

increasing shipment proportion

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 11 of 28

2,161 2,202

3,515

4,868

6,000

83 98 148 177 204

26.1

22.4 23.8

27.5 29.5

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY14 FY15 FY16E FY17E FY18E

CCM Revenue(LHS) CCM shipments(LHS) CCM ASP(RHS)

(RMBmn/mn units) (RMB)

As a result, we expect ASP of CCM to gradually improve to

RMB23.8/RMB27.5/RMB29.5 in FY16/17/18E, and shipment yielding

50%/20%/15% yoy growth in FY16/17/18E, and revenue recording

60%/38%/23% yoy growth to RMB3,515mn/RMB4,868mn/RMB6,000mn in

FY16/17/18E.

Exhibit 15: CCM revenue, shipment and ASP

Source: Company, OP Research

Further opportunity to penetrate Huawei CCM supply chain from

Single CCM to Dual Cam from FY17E onwards

Q Tech currently supplies CCM to Huawei through Huaqin, Huawei’s major ODM

for Honor model. The reason why Q Tech has not tapped into Huawei’s CCM

supplier chain is because Q Tech used to be a major supplier of ZTE and ZTE is

the main competitor of Huawei.

However, since Q Tech begins supplying fingerprint modules to Huawei in FY16E,

we believe it has opportunity to further extend to Huawei’s CCM supply chain,

and Huawei is likely to share Honor dual cam supply to Q Tech to diversify dual

cam supply chain risk.

We expect revenue to record

60%/38%/23% yoy growth to

RMB3,515mn/RMB4,868mn/

RMB6,000mn in FY16/17/18E.

Q Tech currently supplier CCM to

Huawei through Huawei’s ODM,

Huaqin

Further opportunity to tap into

Huawei’s CCM supply chain given

Q Tech begins fingerprint

modules shipment to Huawei and

Huawei is likely to diversify

dual-cam supply chain risk

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 12 of 28

237 418

619

861 1,151

1,435 1,479

5.5

4.0

3.0

2.5 2.3

2.1 2.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-

200

400

600

800

1,000

1,200

1,400

1,600

2014 2015 2016E 2017E 2018E 2019E 2020E

Volume ASP

(mn unit) (US$)

3%

15%

40%

52%

62%

19%

29%

45%

55%

65%

0%

10%

20%

30%

40%

50%

60%

70%

2014 2015E 2016E 2017E 2018E

China Global

Margin expansion from fingerprint module robust shipments growth

Rapid growth of fingerprint market and penetration of smartphone

Global fingerprint sensor shipment is expected to record 28% CAGR from 418mn

units in 2015 to 1,479mn units in 2020E, while ASP will drop gradually from US$4

in 2015 to US$2 in 2020E.

Exhibit 16: Global fingerprint sensor shipment vs. ASP from 2014 to 2020E

Source: Carnegie Research, OP Research

Thus, we expect China/global fingerprint penetration in smartphones will improve

from 15%/29% in 2015 to 62%/65% in 2018E.

Exhibit 17: China/Global fingerprint penetration in smartphones from 2014

to 2018E

Source: OP Research

Global fingerprint shipments are

expected to record 29% CAGR

from 2015 to 2020E

Fingerprint penetration in

China/global smartphones will

improve to 62%/65% in 2018E

from 15%/29% in 2015E

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 13 of 28

FPC

Avnet

Arrow

WPI

Future

Electronics

O-film

(002456 CH)

Truly

(732 HK)

Q Tech

(1478 HK)

CrucialTech

(114120 KS)

Primax

Huawei

OPPO

Xiaomi

vivo

ZTE

Other Chinese

brands

Shipment of sensor

Design/customization support

Software customization and integration. 3-9 months

Distributor Module house OEM/ODM

Warehousing

& logistics

Packaging & module

manufacturing

Industrial design,

integration, tuning and

end-user experience

The rising penetration rate is the result of: 1) smartphone market players

following Apple’s adoption of fingerprint, making fingerprint modules a key

component in smartphone market. As fingerprint modules can be seen from the

outside, it offers a clear differentiation from non-fingerprint module-applied

smartphones and which customers find more attractive. 2) increasing mobile

payments are adopting fingerprint for authentication, including Apple Pay, Alipay,

and Samsung Pay. We expect the penetration of mobile payments will continue to

improve in China market, thus driving the penetration of fingerprint modules in

smartphone.

Fingerprint industry value chain analysis

The key components of fingerprint module include sensor, metal loop, cover plate,

ect; among these components, the sensor is the most important. Currently, there

are mainly 8 integrated circuit (IC) developers, Authen Tec was acquired by Apple,

and provides sensor IC design for Apple exclusively, Synaptics mainly supports

Samsung and HTC, while other smartphone companies, like HuaWei, Oppo, Vivo

are supported by FPC (a Swedish company), Goodix and Silead (Chinese

companies), Crucial Tec (114120 KS), More DNA and Focal Tech (Taiwan

companies).

Q Tech procures sensors from FPC, Goodix and Silead, and then assembles

them with metal loop, cover plate and other components.

Exhibit 18: Fingerprint supply chain

Source: FPC, Company, OP Research

We believe fingerprint modules

are becoming a key component of

smartphones and they facilitate

mobile payments

Key components of fingerprint

module include sensor, metal

loop, and cover plate

Q Tech procures sensors from

FPC, Goodix, and Silead

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 14 of 28

Exhibit 19: Fingerprint value chain

Components Sensor Metal Loop Cover Plate Others Module

Process IC design Manufacturing Packing&Testing

Companies

Apple Authen Tec (US)

(acquired by Apple

in 2012)

TSMC (2330TT)

Xintech (3374 TT)

ASE (2311 TT)

WLCSP (603005

CH)

Sapphire Tech

Crystal Applied

Aurora (600666 CH)

ASE(2311 TT),

Sharp(6753 JP)

Samsung, HTC Synaptics

(Validity）(US)

SMIC (981 HK) TSHT (2185 CH)

JCET(600584 CH)

Aurora (600666 CH)

TDG (600330 SH)

O-film (002456 CH)

Truly (732 HK)

Q Tech (1478 HK)

CrucialTec (114120 KS)

Other brands

smartphones,

eg: Huawei,

Oppo, Vivo

Sweden: FPC

China: Goodix,

Silead, Microarray

Korea: CrucialTec

(114120 KS)

TW: More DNA,

Focal Tech

(3545 TT)

Source: OP Research

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 15 of 28

Capacity expansion with first-tier client mix

Q Tech obtained FPC fingerprint certificate in 2H15, and officially kicked off its

fingerprint business in FY16. Currently it ranks 6th in terms of fingerprint module

shipment, Q Tech delivered 1.4mn units in 1H16, and targets to deliver 20mn

units for FY6E. Q Tech’s fingerprint clients are first-tier China smartphone

vendors, including Huawei, Vivo, Oppo, and Xiaomi, which are grabbing market

share aggressively.

Exhibit 20: 2016 fingerprint shipment and target of leading suppliers

Company 1H16(mn units) FY16E target(mn units) 1H16 as % of FY16E target

O-film (002456 SZ) 70 120 58%

Truly (732 HK) 8.9 50 18%

Q Tech (1478 HK) 1.4 20 7%

Source: Company, O-film, Truly, OP Research

Q Tech has fingerprint capacity of 3.5mn units/month in early 2016, and

expanded to 6mn units/month in Aug16, and targets to further expand to 10mn

units/month by end of 2016.

Exhibit 21: 2016 fingerprint monthly capacity of leading suppliers

Company Early 2016(mn units/month) By end of 2016(mn units/month)

O-film (002456 SZ) 18 22

Truly (732 HK) 2.5 7.5-10

Q Tech (1478 HK) 3.5 10

Source: Company, O-film, Truly, OP Research

Margin expansion story

Currently, there are four types of fingerprint products, coating for low-to-mid-end

smartphones, while covered is used widely in mid-to-high end smartphones.

Q-tech has mastered the two technologies with shipment proportion of 6:4

between coating and covered.

Exhibit 22: Type of fingerprint products

Coating Covered Underglass Aliveness Detection FPI

Economical solution for a

full range of mid-to low-end

smartphones

Unique oDLC surface

hardness solution matching

sapphire glass.

Sensors mounted under a

sheet of glass or ceramics.

It is based on multiple static

features, which derived

from a single fingerprint

image. The static features

are comprised of individual

pore spacing, residual

noise and several first

order statistics.

Q Tech: √ Q Tech: √

ASP: US$3.5-US$4 ASP: US$5

Source: Company, OP Research

We expect Q-Tech to record 20mn

fingerprint shipments in FY16E

Q Tech’s capacity expands from

3.5mn/month in 1Q16 to 10mn

units/month by end of FY16E

Q-Tech mainly produces coating

and covered fingerprint module

with shipment proportion of 6:4.

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 16 of 28

580

1,530

2,240

20 60 100

29.0

25.5

22.4

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

-

500

1,000

1,500

2,000

2,500

FY16E FY17E FY18E

Revenue(LHS) Shipment(LHS) ASP(RHL)

(RMBmn/mn units) (RMB)

Q-Tech enjoys fingerprint module ASP of RMB29.7 in 1H16, and aims to further

improve ASP by increasing covered module proportion. Besides, as fingerprint

module enjoys higher GPM of 12%-15%, we believe the expansion of fingerprint

business will help margin expansion as its CCM GPM is around 9-11%.

Exhibit 23: 1H16 fingerprint ASP of leading suppliers

Company 1H16

O-film (002456 SZ) ~RMB36

Truly (732 HK) HK$39.3

Q Tech (1478 HK) RMB29.7

Source: Company, O-film, Q-tech OP Research

We expect Q Tech to deliver 20mn/60mn/100mn units fingerprint module, and

RMB580mn/1,530mn/2,240mn revenue, representing 14%/24%/27% of total

revenue in FY16/17/18E.

Exhibit 24: Fingerprint module and revenue from FY16E to FY18E

Source: Company, OP Research

Q-Tech’s fingerprint module ASP

is HK$29.7 in 1H16

We forecast Q Tech to record

RMB580mnRMB1,530mn/

RMB2,240mn fingerprint revenue

in FY16/17/18E

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 17 of 28

26.1 22.4 23.8

27.5 29.5

38.3

29.0

25.5 22.4

-11%

-14%

6%

15%

7%

-24%

-12%-12%

-30%

-20%

-10%

0%

10%

20%

-

10.0

20.0

30.0

40.0

50.0

FY14 FY15 FY16E FY17E FY18E

CCM ASP Fingerprint ASP CCM yoy% Fingerprint yoy%

(RMB)

83 98

148 177

204

20

60

100

200%

67%

19%

50%

20%15%

0.0%

50.0%

100.0%

150.0%

200.0%

-

50

100

150

200

250

300

350

FY14 FY15 FY16E FY17E FY18E

CCM shipments Fingerprint shipment Fingerprint yoy% CCM yoy%

(mn units)

Attractive valuation on quadruple earnings growth. Initiate BUY with TP HK$4.63 with 40% upside

Increasing shipment and ASP drive revenue growth with 52% CAGR

We expect Q Tech to deliver 148mn/177mn/204mn units CCM in FY16/17/18E,

representing 50%/20%/15% yoy growth, due to 1) upgrading of client mix; 2)solid

growth of top 3 clients(Vivo, Oppo, and Huaqin). Fingerprint modules shipment is

expected to achieve 20mn/60mn/100mn units in FY16/17/18E with 200%/67%

yoy growth in FY17/18E, thanks to 1) ramp up and tap into Huawei, Oppo, Vivo

and Xiaomi’s fingerprint module supply chain in FY16E; 2) improving fingerprint

penetration in China smartphones from 15% in FY15 to 62% in FY18E.

Exhibit 25: Shipment from FY14 to FY18E

Source: Company, OP Research

ASP of CCM is expected to recover gradually due to 1) increasing dual cam

penetration in China from 0.7% in FY15 to 22% in FY18E; 2) upgrade product mix

of CCM to high pixel modules. While ASP of fingerprint modules is expected to

drop due to competition despite product mix upgrade from coating to covered.

Exhibit 26: ASP from FY14 to FY18E

Source: Company, OP Research

Both CCM and fingerprint

shipments are expected to record

robust growth from FY16E to

FY18E

ASP of CCM is expected to

recover gradually while

fingerprint modules ASP will drop

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 18 of 28

2,161 2,202

3,515

4,868

6,000

-

580

1,530

2,240

2,161 2,202

4,095

6,398

8,240

53%

2%

86%

56%

29%

0%

20%

40%

60%

80%

100%

-

2,000

4,000

6,000

8,000

FY14 FY15 FY16E FY17E FY18E

CCM Fingerprint Total yoy%

(RMBmn)

100% 100%

86%76% 73%

14%24% 27%

0%

20%

40%

60%

80%

100%

FY14 FY15 FY16E FY17E FY18ECCM Fingerprint

As a result, we expect Q Tech revenue to record a 55% CAGR to RMB8,240mn in

FY18E from RMB2,202mn in FY15.

Exhibit 27: Revenue from FY14 to FY18E

Source: Company, OP Research

Exhibit 28: Revenue mix from FY14 to FY18E

Source: Company, OP Research

Revenue is expected to record

55% CAGR from RMB2,202mn in

FY15 to RMB8,240mn in FY18E

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 19 of 28

196

102

176

342

447 20%

-48%

73%94%

31%

-80%

-40%

0%

40%

80%

120%

-

100

200

300

400

500

FY14 FY15 FY16E FY17E FY18E

Net profit yoy%

(RMBmn)

16.3%

10.9%

9.5%10.5% 10.6%

9.0%

4.6% 4.3%5.3% 5.4%

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

FY14 FY15 FY16E FY17E FY18E

GPM NPM

Net profit CAGR higher than peers and valuation discount to peers

We expect Q Tech’s GPM to be 9.5% in FY16E, and pick up to 10.5% in FY17E,

due to 1) greater revenue contribution from fingerprint modules which has higher

GPM of double digits; 2) greater revenue contribution from DCM which has higher

GPM than single camera module when capacity ramps up.

Exhibit 29: GPM and NPM from FY14 to FY18E

Source: Company, OP Research

Hence, we expect net profit to achieve 64% CAGR to RMB447mn in FY18E from

RMB102mn in FY15, compared to peers’ 3-year earnings CAGR of 26%.

Exhibit 30: Net profit from FY14 to FY18E

Source: Company, OP Research

We forecast GPM to be

9.5%/10.5%/10.5% in FY16/17/18E

Net profit is expected to record

64% CAGR from RMB102mn in

FY15 to RMB447mn in FY18E

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 20 of 28

1H16 result review. Revenue was up 99% to RMB1,727mn in 1H16, thanks to

100% yoy CCM shipment growth and ramp up of fingerprint business. GPM

dropped 3.5ppts yoy and 0.4ppt hoh due to 1) depreciation of RMB in 1H16 by

2.1%, GPM normally drops by 1% for every 3% RMB depreciation; 2) low

utilization rate of fingerprint business due to limited shipment in 1H16. We expect

the GPM will pick up gradually with the mass production and significant shipment

of fingerprint modules. As a result, net profit was up 30% yoy to RMB82mn.

Initiate BUY with TP of HK$4.63 based on 12x FY17E PE, 15% discount to

peers. We believe Q Tech is well-positioned to ride on increasing dual-cam and

fingerprint adoption in smartphones, it is expected to achieve 61% EPS CAGR

from FY15 to FY18E, which is higher than peers’ 26%, while it currently trades at

only 8.6x FY17E PE, 39% discount to peers. Besides, we expect Q Tech to

launch dividend policy in FY16E given its solid financial results.

For 1H16 results, revenue was up

99% to RMB1,727mn and net

profit was up 30% yoy to

RMB82mn

Initiate BUY with TP of HK$4.63

based on 12x FY17E PE, 15%

discount to peers

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 21 of 28

Exhibit 31: Results summary

RMB mn 1H14 2H14 1H15 2H15 1H16 1H16 YoY 2H16E

Revenue 965 1,196 869 1,334 1,727 99% 2,368

COGS (797) (1,012) (757) (1,205) (1,566) 107% (2,140)

Gross profit 168 184 112 129 161 45% 228

Other income & gains 1 27 15 (23) (2) -114% 9

Selling exp (2) (3) (2) (4) (3) 45% (7)

Admin exp (9) (13) (10) (17) (12) 20% (24)

R&D (33) (40) (36) (39) (52) 45% (70)

Listing exp (9) (8) 0 0 0 n.a. 0

Other opex 0 0 0 0 0 n.a. 0

Operating profit (EBIT) 116 146 78 47 91 18% 137

Provision for other items 0 0 0 0 0 n.a. 0

Finance costs (10) (13) (6) (4) (1) -77% (2)

Profit after financing costs 106 133 72 43 90 26% 135

Associated cos 0 0 0 0 0 n.a. 0

Jointly controlled cos 0 0 0 0 0 n.a. 0

Pre-tax profit 106 133 72 43 90 26% 135

Tax (17) (27) (9) (4) (8) -9% (26)

Minority interests 0 0 0 0 0 n.a. 0

Net profit 89 107 63 39 82 30% 109

HoH%

Revenue 24% -27% 54% 29% 37%

Gross profit

10% -39% 16% 25%

41%

Net profit 20% -41% -38% 111% 33%

YoY%

Revenue -10% 12% 99% 78%

Gross profit

-34% -30% 45%

77%

Net profit -29% -63% 30% 179%

Key ratios

GPM 17.4% 15.4% 12.8% 9.7% 9.3% 9.6%

Selling exp 0.2% 0.3% 0.3% 0.3% 0.2% 0.3%

Admin exp 1.0% 1.1% 1.2% 1.3% 0.7% 1.0%

R&D 3.4% 3.4% 4.1% 2.9% 3.0% 2.9%

EIT 15.8% 20.2% 12.1% 9.4% 8.8% 19.2%

Net margin 9.2% 8.9% 7.3% 2.9% 4.8% 4.6%

Revenue by segment

Compact camera module 965 1,196 869 1,333 1,686 94% 1,829

Fingerprint module 0 0 0 0 41 n.a. 539

ASP by segment

Compact camera module 27 25 23 21.7 22.7 -3% 25

Fingerprint module n.a. n.a. n.a. 38.0 29.7 n.a. 29

Shipment by segment

Compact camera module 35 48 37 61 74 100% 73

Fingerprint module 0 0 0 0 1 n.a. 19

Source: Company, OP Research

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 22 of 28

Investment Risks Demand for smartphone slows down. According to IDC, global smartphone

shipment in 2016E is expected to slow down to 3.1% yoy from 10.5% yoy growth

in 2015. Q Tech as the component supplier of smartphone venders may suffer

from slower revenue growth if smartphone shipments remain sluggish. However,

we believe Q Tech can maintain growth as its major customers are Chinese

smartphone vendors, which is expected to maintain solid shipment growth of 14%

yoy in 2016E.

Lower than expected penetration of dual camera. The penetration of dual

camera may be lower than expected as end customers may find it is not useful or

attractive. However, as iPhone 7 plus is equipped with dual camera, we believe it

can promote the adoption of dual camera in Android smartphones, and the dual

camera technology is advancing from RGB+RGB to RGB+MONO and further

Telephoto + wide-angle, which will bring customers improving photography

experience.

ASP erosion of CCM and fingerprint module. ASP of smartphone camera

module declined ~14% yoy in 2015 and the downtrend remains due to fierce

competition in the camera module market. Fingerprint modules also face fierce

competition as all the players are expanding capacity to grab more market share.

However, we believe the ASP pressure can be relieved by (1) product mix

upgrade to high pixels CCM and covered fingerprint modules; 2) increasing

shipment proportion from DCM.

Foreign exchange risk. Q Tech’s 30%-40% material costs are denominated in

USD, and material costs accounts for ~85% of COGS. As a result, GPM will drop

by 1% for every 3% depreciation in RMB. We believe Q Tech will pay close

attention to the fluctuation of exchange rate, and adopt appropriate measures to

control the risks.

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 23 of 28

Management profiles

Exhibit 32: Management profiles

Name Age Position Role and responsibilities Description

Mr. He Ning ning 45 Chairman,

Executive Director

Overall strategic planning

and formulation of

investment strategies

Mr. He founded the company in 2007.

In 2004, Mr. He founded Shenzhen Xike Dexin Telecom Equipment

Co. (深圳市西可德信通信技術設備有限公司) (“Shenzhen CK”)

which engaged in research, development and sales of complete

handsets components.

In 2000, Mr. He founded Surewheel Asia Pacific Limited (幸誠賽貝

亞太有限公司) which engaged in agency sales of printheads.

Mr. He received the Bachelor’s Degree in Science, majoring in

dynamic meteorology, from the Peking University in 1992 and

Master’s Degree of Business Administration from the University of

California in 2002.

Mr. He has over 20 years of experience in the electrical and

electronic industries.

Mr. He is the step-brother of Mr. Wang Jian qiang, an executive

director of the group.

Mr. Yang Pei kun 36 Chief Executive officer,

Executive director

Overall business operations Mr. Yang joined the group in 2007 as the assistant to chairman and

was appointed CEO in 2014.

Mr. Yang worked at ZTE Corporation (中興通訊股份有限公司)(763

HK & 000063 SZ) from 2004 to 2007.

Mr. Yang received his Bachelor’s Degree in Management with

major in financial management and master’s degree in

management with major in accounting, from the Wuhan University

in 2001 and 2004 respectively.

Mr. Fan Fu qiang 38 Chief Financial Officer,

Company Secretary

Audit management and

budgeting, legal compliance

matters and risk control

Mr. Fan joined the group in 2013 and was appointed to be the chief

financial officer in 2016.

Mr. Fan served as the assistant to the chief financial officer of

Shenzhen CK and Heyuan CK, responsible for legal compliance

matters and risk control.

Mr. Fan received a professional certificate from the Guangdong

International Finance College in 1996, majoring in international

finance. He graduated from the Central Party School of the

Guangdong Provincial Committee in 2008, majoring in public

management.

Mr. Wang Jian qiang 44 Executive Director Overall strategic planning

and formulation of

investment strategies

Mr. Wang joined the group in 2014.

Mr. Wang served as the chief financial officer of Shenzhen CK and

Heyuan CK from 2005 to 2014, responsible for audit management

and budgeting.

Mr. Wang received the Bachelor’s Degree in engineering, major in

fluid machinery and engineering, from the Sichuan University of

Science and Technology in 1995.

Mr. Wang has over 20 years of experience in the electrical and

electronic industries

Mr. Wang is the step-brother of Mr. He, an executive director and

the chairman of the Board.

Source: Company, OP Research

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 24 of 28

72.13% 24.20%

He Ningning

(Chairman)Public

2.33% 1.34%

Pan Hou Capital

(pre-IPO investor)Samart i-Mobile

(pre-IPO investor)

Shareholding structure

Exhibit 33: Shareholding structure

Source: Company, OP Research

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 25 of 28

Financial Summary Year to Dec FY14A FY15A FY16E FY17E FY18E

Year to Dec FY14A FY15A FY16E FY17E FY18E

Income Statement (RMB mn)

Ratios

Compact camera module 2,161 2,202 3,515 4,868 6,000

Gross margin (%) 16.3 10.9 9.5 10.5 10.6 Fingerprint module 0 0 580 1,530 2,240

Operating margin (%) 12.1 5.7 5.1 6.3 6.4

Net margin (%) 9.0 4.6 4.3 5.3 5.4

Selling & dist'n exp/Sales (%) 0.3 0.3 0.2 0.2 0.2

Turnover 2,161 2,202 4,095 6,398 8,240

Admin exp/Sales (%) 1.1 1.2 1.2 1.1 1.1 YoY% 53 2 86 56 29

Payout ratio (%) 14.1 0.0 20.0 20.0 20.0 COGS (1,809) (1,962) (3,705) (5,727) (7,368)

Effective tax (%) 18.2 11.1 15.0 15.0 15.0

Gross profit 353 241 390 671 872

Total debt/equity (%) 63.4 11.7 10.9 8.9 7.3 Gross margin 16.3% 10.9% 9.5% 10.5% 10.6%

Net debt/equity (%) 14.2 Net cash 14.0 24.6 23.9 Other income 28 (8) 7 10 4

Current ratio (x) 1.66 2.01 1.59 1.52 1.53 Selling & distribution (6) (6) (10) (15) (19)

Quick ratio (x) 1.54 1.73 1.30 1.22 1.22 Admin (23) (28) (49) (70) (87)

Inventory T/O (days) 29 39 39 39 39 R&D (73) (74) (127) (190) (241)

AR T/O (days) 147 147 147 147 147 Listing exp (17) 0 0 0 0

AP T/O (days) 90 116 116 116 116

Other opex 0 0 0 0 0

Cash conversion cycle (days) 86 70 70 70 70

Total opex (119) (108) (186) (275) (347)

Asset turnover (x) 1.06 1.03 1.72 1.97 1.96 Operating profit (EBIT) 262 125 211 406 530

Financial leverage (x) 2.92 1.83 1.82 2.10 2.22 Operating margin 12.1% 5.7% 5.1% 6.3% 6.4%

EBIT margin (%) 12.1 5.7 5.1 6.3 6.4 Provisions 0 0 0 0 0

Interest burden (x) 0.91 0.92 0.98 0.99 0.99 Finance costs (23) (10) (3) (4) (4)

Tax burden (x) 0.82 0.89 0.85 0.85 0.85

Profit after financing costs 239 115 207 402 526

Return on equity (%) 28.1 8.7 13.5 22.1 23.6 Associated companies & JVs 0 0 0 0 0

ROIC (%) 22.1 9.4 13.4 18.6 19.2

Pre-tax profit 239 115 207 402 526

Tax (44) (13) (31) (60) (79)

Year to Dec FY14A FY15A FY16E FY17E FY18E

Minority interests 0 0 0 0 0

Balance Sheet (RMB mn)

Net profit 196 102 176 342 447

Fixed assets 336 421 564 621 702 YoY% 20 (48) 73 94 31

Intangible assets & goodwill 0 1 1 1 0 Net margin 9.0% 4.6% 4.3% 5.3% 5.4%

Associated companies & JVs 0 0 0 0 0 EBITDA 288 157 260 479 622

Long-term investments 0 0 0 0 0 EBITDA margin 13.3% 7.1% 6.3% 7.5% 7.5%

Other non-current assets 24 32 31 31 31

EPS (RMB) 0.296 0.098 0.167 0.324 0.424

Non-current assets 360 454 597 653 733 YoY% (9) (67) 71 94 31

DPS (HK$) 0.052 0.000 0.040 0.077 0.101

Inventories 142 209 395 611 786

AR 873 889 1,653 2,582 3,325 Year to Dec FY14A FY15A FY16E FY17E FY18E

Prepayments & deposits 0 0 0 0 0

Cash Flow (RMB mn)

Other current assets 375 156 156 156 156 EBITDA 288 157 260 479 622

Cash 553 282 (43) (266) (346)

Chg in working cap 62 203 (397) (504) (398)

Current assets 1,943 1,537 2,161 3,083 3,922 Others (7) 2 0 0 0

Operating cash 343 362 (137) (25) 224

AP 445 622 1,175 1,816 2,336 Interests paid 0 0 0 0 0

Tax 12 2 31 60 79 Tax (39) (38) (2) (31) (60)

Accruals & other payables 0 0 0 0 0

Net cash from operations 304 324 (139) (56) 163

Bank loans & leases 713 142 152 152 152

CB & othe debts 0 0 0 0 0 Capex (158) (137) (200) (128) (165)

Other current liabilities 0 0 0 0 0

Investments 314 125 0 0 0

Current liabilities 1,169 766 1,358 2,028 2,567 Dividends received 0 0 0 0 0

Sales of assets 81 2 0 0 0

Bank loans & leases 0 0 0 0 0 Interests received 3 13 8 (1) (7)

CB & othe debts 0 0 0 0 0

Others (1) 1 0 0 0

Deferred tax & others 9 7 7 7 7 Investing cash 239 4 (192) (129) (172)

MI 0 0 0 0 0

FCF 543 328 (331) (185) (9)

Non-current liabilities 9 7 7 7 7 Issue of shares 551 11 0 0 0

Buy-back 0 0 0 0 0

Total net assets 1,124 1,218 1,394 1,701 2,081 Minority interests 0 0 0 0 0

Dividends paid 0 (42) 0 (35) (67)

Shareholder's equity 1,124 1,218 1,394 1,701 2,081 Net change in bank loans (33) (654) 10 0 0

Share capital 8 8 8 8 8 Interest paid (11) (14) (3) (4) (4)

Reserves 1,116 1,209 1,385 1,693 2,073

Others (540) 80 0 0 0

Financing cash (33) (618) 6 (38) (71)

BVPS (HK$) 2.28 1.50 1.60 1.95 2.39

Net change in cash 510 (290) (325) (223) (79)

Total debts 713 142 152 152 152 Exchange rate or other Adj 1 19 0 0 0

Net cash/(debts) (160) 140 (195) (418) (497) Opening cash 42 553 282 (43) (266)

Closing cash 553 282 (43) (266) (346)

CFPS (HK$) 0.575 0.387 (0.157) (0.063) 0.184

Source: Company, OP Research

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 26 of 28

Exhibit 34: Peer Group Comparison

Company Ticker Price

Mkt cap

(US$m)

3-mth

avg t/o

(US$m)

PER Hist

(x)

PER FY1

(x)

PER FY2

(x)

EPS FY1

YoY%

EPS FY2

YoY%

3-Yr EPS

Cagr (%) PEG (x)

Div yld

Hist (%)

Div yld

FY1 (%)

P/B Hist

(x)

P/B FY1

(x)

EV/

Ebitda

Hist

EV/

Ebitda

Cur Yr

Net

gearing

Hist (%)

Gross

margin

Hist (%)

Net

margin

Hist (%)

ROE

Hist (%)

ROE FY1

(%)

Sh px

1-mth %

Sh px

3-mth %

Q Technology Gro 1478 HK 3.31 444 0.9 27.2 16.7 8.6 62.8 94.3 60.5 0.28 0.0 1.2 2.21 2.07 20.5 13.9 Net cash 10.9 4.6 8.7 13.5 35.7 113.5

HSI 23,550.45 12.6 12.9 11.8 (2.1) 9.7 6.0 2.15 3.5 3.4 1.21 1.19 9.6 9.2 2.8 17.5

HSCEI 9,747.75 8.4 8.5 7.8 (1.5) 8.9 5.4 1.57 3.7 3.5 0.99 0.94 11.8 11.1 0.4 15.9

CSI300 3,263.12 15.0 13.7 12.1 9.8 12.8 11.6 1.18 2.2 2.1 1.79 1.64 11.9 12.0 (3.8) 4.7

Adjusted sector avg* 19.7 18.3 14.1 33.4 30.1 25.7 0.8 2.6 2.2 3.3 2.9 14.2 11.2 19.5 13.5 4.3 17.9 14.4 (2.2) 4.9

Sunny Optical 2382 HK 38.90 5,500 33.8 47.2 31.2 23.8 51.2 30.9 35.2 0.89 0.6 0.9 8.99 7.54 31.7 22.4 0.0 16.5 7.1 24.6 27.0 (0.1) 54.7

Truly Intl Hldgs 732 HK 3.57 1,338 8.2 12.3 11.4 9.8 7.6 16.3 13.9 0.82 2.8 2.8 1.45 1.33 7.0 6.2 36.3 10.9 4.4 11.0 11.8 (11.2) (1.9)

Cowell 1415 HK 3.08 330 2.1 5.3 6.6 5.6 (20.0) 18.3 0.9 7.51 N/A 0.5 1.16 0.97 2.9 3.6 0.0 14.0 6.2 25.4 15.0 3.0 7.7

Shenzhen O-Fil-A 002456 CH 35.38 5,568 114.5 76.9 40.7 28.7 88.9 41.7 52.6 0.77 0.2 0.4 5.75 5.34 32.1 25.4 59.9 12.6 2.6 9.4 13.5 2.0 26.8

Huizhou Speed -A 300322 CH 18.03 1,103 43.3 N/A 73.6 48.1 N/A 53.1 (220.9) N/A N/A N/A 13.31 12.56 (122.0) 39.6 40.6 16.5 (13.5) (4.8) 16.7 (4.0) (7.3)

Crucialtec Co Lt 114120 KS 9,410.00 240 3.3 27.0 15.0 9.6 80.5 56.8 55.5 0.27 N/A 0.0 2.46 2.29 14.7 11.4 89.9 19.7 3.7 24.6 17.2 (10.4) (13.7)

Lite-On Technolo 2301 TT 46.70 3,496 9.5 15.1 13.1 12.0 15.2 8.8 11.0 1.19 4.7 5.0 1.49 1.35 5.5 5.0 0.0 13.0 3.3 10.8 10.5 (3.6) 6.7

Primax Electroni 4915 TT 45.25 637 6.6 11.1 10.1 8.8 10.5 14.9 10.5 0.96 4.6 5.5 1.98 1.67 5.4 4.7 0.0 10.9 2.7 19.3 16.1 6.5 15.7

* Outliners and "N/A" entries are in red and excl. from the calculation of averages

Source: Bloomberg, OP Research

Tue, 20 Sep 2016

Q Tech (1478 HK)

Page 27 of 28

Our recent reports Date Company / Sector Stock Code Title Rating Analyst

12/09/2016 TCL Display 334 August shipments rising on track BUY Chloe Liu/Yuji Fung

12/09/2016 Sunny Optical 2382 Aug shipments as expected SELL Yuji Fung

12/09/2016 Chunli Medical 1858 1H16 results overwhelm GPM and opex BUY Chloe Liu/Yuji Fung

02/09/2016 Anta Sports 2020 Keep the momentum going in 2H16 BUY Walter Woo

02/09/2016 Peak Sport 1968 Lack of other upside catalysts HOLD Walter Woo

01/09/2016 EGL 6882 Looking forward FY17E HOLD Bruce Yeung

31/08/2016 Wasion Group 3393 Another cut in State Grid tenders HOLD Bruce Yeung

30/08/2016 Shenzhen International 152 1H16 results inline HOLD Bruce Yeung

29/08/2016 Tcl Display 334 Rising star of TCL BUY Chloe Liu/Yuji Fung

29/08/2016 Truly Intl 732 All-around play BUY Chloe Liu/Yuji Fung

29/08/2016 Lifetech SCI 1302 1H16 results beat on opex control BUY Chloe Liu/Yuji Fung

29/08/2016 Display Module Sector - Riding on Technology upgrade BUY Chloe Liu/Yuji Fung

25/08/2016 Sinotrans 598 Solid gains with 1H16 performance BUY Bruce Yeung

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24/08/2016 Canvest 1381 Solid results at higher costs BUY Bruce Yeung

24/08/2016 Chinasoft Intl 354 Reiterate BUY on solid 1H16 results BUY Chloe Liu/Yuji Fung

23/08/2016 HC International 2280 Core business in transition BUY Yuji Fung

23/08/2016 Xtep 1368 1H16 result is better than it looks BUY Walter Woo

23/08/2016 Dynagreen Environmental 1330 Expecting a robust 2H16E from 1H16 BUY Bruce Yeung

22/08/2016 Wasion Group 3393 1H16 profit decline as lower demand from power grid HOLD Bruce Yeung

18/08/2016 361 Degrees 1361 1H16 muted, but dividend surprised BUY Walter Woo

18/08/2016 UMP 722 The worst has gone BUY Chloe Liu/Yuji Fung

18/08/2016 Best Pacific 2111 Better than expected sales and margins BUY Walter Woo

17/08/2016 Sunny Optical 2382 1H16 results beat on ASP and non-core items SELL Yuji Fung

16/08/2016 Ju Teng Intl 3336 1H16 results miss on delay in new product launch BUY Chloe Liu/Yuji Fung

15/08/2016 TCL COMM 2618 Road to privatization HOLD Chloe Liu/Yuji Fung

15/08/2016 TCL Multimedia 1070 2Q16 results miss BUY Chloe Liu/Yuji Fung

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