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CSCI-Technology-Q Technology (1478 HK)：Slowing growth weighs on valuation - 20171215

Slowing growth weighs on valuation

• Q Tech has failed to cheer the market with stalled growth in CCM shipments, which, if persistent, could prompt the street to revise down growth forecasts, in our view.
• In addition, China continued to report lacklustre smartphone shipments in Nov-17, which has been traditionally a strong month.
• Our new earnings forecasts for FY17E-19E of 15.6%-23.8% are below consensus, reflecting our more cautious view of the smartphone industry in China. We downgrade Q Tech from Buy to Hold.

Lacklustre shipments cloud growth outlook. Q Tech has reported lacklustre CCM shipments for four months in a row, which, if persistent, could prompt the street to revise down growth forecasts, in our view. Encouragingly, Nov-17 saw a strong pickup in fingerprint shipments (10.81mn a record high), although it was not adequate to cheer the market, which in our view is due to the uncertainties regarding fingerprint deployment amid growing popularity of face ID. As smartphone vendors will increasingly shift to face ID for flagship models, fingerprint would see rising competition and hence pressure in prices and gross margins going forward.

Cooling smartphone shipment in China. Traditionally, Nov and Dec have been strong months for smartphone shipments in China, posting 42.6%/32.3% MoM growth in Nov-15/Nov-16 versus only 12.7% MoM increase in Nov-17. For the Jan-Nov17 period, total smartphone shipments in China declined 8.7% YoY, in contrast with 19.2%/14.0% YoY growth in 2015/2016. In our view, growing market saturation and lack of innovations were to blame for the sluggish demand for smartphones. In addition, the new iPhone models seem to be unable to drive sales volume, with shipments averaging at 7.2mn units during the three months to Nov-17 post the launch of the new models in Sep-17, which was slightly above the 6.1mn average shipment during Jan-Aug17.

Slowing growth to weigh on valuation. As our new forecasts are made based on the old ones dating back to the pre-interim, we have revised up our FY17E/18E/19E revenue and earnings by 3.3%/6.2%/2.7% and 22.6%/26.4%/24.9%, and raised our DCF-based price target to HKD10.5. Our new earnings forecasts for FY17E-19E are 15.6%-23.8% below consensus, which reflects our more cautious view of the smartphone industry in China amid sluggish progress in innovations. Since reaching an all-time high in Aug-17, Q Tech’s share price has dropped over 50%.Meanwhile, we do not see any major catalysts for a near-term re-rating, as we do not see signs of a swift recovery in either the company or industry-wide shipment growth. Downgrade our rating from Buy to Hold.