Q Technology’s Earnings: Solid Numbers With a Bright Outlook

Q Technology (Group) Company Ltd (SEHK: 1478) is the third-largest camera module supplier in China, by revenue.

Its major customers are the large smartphone producers in China, such as Xiaomi Corp (SEHK: 1810), Huawei, and Vivo.

In this article, I’ll take a look at the company’s latest earnings and its future outlook.

Overview of results

Q Technology has two main business segments; production and sales of camera modules and fingerprint recognition modules.

The company reported upbeat first-half results with revenue growing by 74% year-on-year, thanks to the strong growth in the segment of camera modules.

This was driven by the company’s improved product mix geared towards high-end camera modules in the first half of 2020.

As such, although the sales volume in the first half of 2020 slightly decreased, the average selling price of camera modules has almost doubled.

That’s mainly because of the change in product mix to make up for the drop in volume, which led to strong revenue growth.

Given this, its gross profit also grew by 76% year-on-year, with a stable gross profit margin at around 8%.

Research & development (R&D) expenses accounted for the majority (around 80%) of the company’s total operating expenses.

In the first half of 2020, in order to support the production of higher-end camera modules, the company’s R&D expenses increased by 110% year-on-year.

As a result, the company’s total operating expenses almost doubled in the first half of 2020 as compared to that in the first half of 2019. The company’s first-half net profit increased by almost 90% year-on-year.

Comparison to its competitors

The two major competitors of Q Technology are Sunny Optical Technology (Group) Company Ltd (SEHK: 2382) and OFILM Group Co Ltd (SHZ: 002456).

The first-half revenue percentage growth figures of Sunny Optical and OFILM Group in 2020 were 21% and -1%, respectively. Q Technology clearly outperformed both of them.

Given the impact of Covid-19 and the US-China trade war, the share price of Q Technology has come down by almost 25% since the beginning of the year.

This is more than a 21% drop in the case of Sunny Optical and a 7% gain in the case of OFILM.

Based on the EV/EBITDA multiple, a similar trend is seen, where Q Technology is trading at 11x as opposed to Sunny Optical’s 18x and OFILM’s 15x.

Q Technology’s first-half results have seemed to defy market expectations, but its share price and valuation haven’t really priced that in.

Future outlook

Although the outlook of the company and the sector have been tarnished by the outbreak of Covid-19 and the global economic slowdown in growth, technology adoption is only going to accelerate.

This is especially true for mobile communications given the further commercialisation of 5G and the Internet of Things (IoT).

As the camera module is one of the most important human-machinery interactive interfaces during the IoT era, it will only bring more application scenarios to 3D modules and systems.

In my opinion, if the company can continue to shift its focus to producing more high-end camera modules by investing in its R&D, its outlook is actually quite positive.

Foolish takeaway

Q Technology managed to defy market expectations by reporting strong first-half results. Its outlook is more favourable than the market perceives.

If it can continue to focus on high-end products, it can be a main beneficiary of the popularisation of 5G and IoT in the future.

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