CICC: Maintain "outperform" rating on Q TECH (01478) with target price raised to HK$6.42.

CICC released a research report stating that it maintains a "outperform the industry" rating on Q TECH (01478), and is optimistic about the profit improvement brought by the upgrade of phone optical technology and the growth of the car business in the next 25 years. The target price has been raised by 32% to HK$6.42. CICC's main points are as follows: Forecasted net profit to increase by 200%~280% year-on-year in 2024, in line with market expectations The company forecasted a 200%~280% year-on-year increase in net profit in 2024, in line with market expectations. The significant growth is mainly due to: 1) Increase in market share: in 2024, the company's shipments of phone camera modules reached 422 million pieces, a year-on-year increase of 14%, and fingerprint recognition modules reached 161 million pieces, a year-on-year increase of 46%, with shipments exceeding company guidance, meeting market expectations, and outpacing the industry growth rate, mainly due to the company's increase in market share; 2) Upgrading of product structure to high-end: in phone camera modules, the proportion of shipments of 32MP and above increased from 41% in 2023 to 51% in 2024, and in fingerprint recognition modules, shipments of ultrasonic modules began in April 2024, with a total sales of 8.49 million pieces for the year, accounting for 5%, the high-end product proportion increase driving up the ASP; 3) Improvement in gross profit margin: the recovery in demand and upgrading of specifications increased capacity utilization rate year-on-year, leading to a significant improvement in gross profit margin, and the upgrading of product structure to high-end further improved the gross profit margin; 4) Losses of affiliated companies of the Group have narrowed year-on-year. In addition, the company disclosed that the total amount of income tax payable to the Indian tax authorities related to its subsidiaries has been reduced by approximately HK$42.85 million to HK$110 million compared to the announcement in November, and this amount may be further adjusted. Upgrade of phone optical and fingerprint recognition products, focusing on profit improvement In terms of phone optics, since Huawei returned in 2H23, the upgrade pace of phone camera modules has restarted, including the application of more high pixel, periscope, OIS, and other modules such as the OPPO Find X8 series using inverted periscope camera modules supplied exclusively by Q Technology. Under this trend, the proportion of Q Technology's camera modules above 32MP continues to increase, reaching 49% in 1H24 and 52% in 2H24. Considering that high-end modules have higher added value and occupy more capacity, the ASP and gross profit margin of Q Technology's phone camera modules in 2H24 are expected to increase. Looking ahead to 2025, the bank believes that optics may still be the main entry point for phone micro-innovations, and is optimistic about the continued trend of profit improvement in phone camera modules. As for fingerprint recognition modules, the gross profit margin in 1H24 is still in a deficit state, but with the increase in shipments of higher-end ultrasonic modules, the gross profit margin of fingerprint recognition modules in 2H24 and 2025 is expected to continue to recover, even turning losses. Optimistic about the second growth curve in the automotive and IoT fields Shipments of other camera modules in 2024 reached 12.13 million pieces, a year-on-year increase of 59%, mainly due to the significant growth in shipments of car camera modules. The bank is optimistic about the company's continued expansion of customers in the automotive field and expects to gain a larger market share with leading packaging processes like COB and advanced manufacturing technologies. Risk factors Continued weakness in global mobile terminals; Company's expansion of car customers may not meet expectations.