Tue, 20 Sep 2016

Equity Research TMT/China Q Tech (1478 HK)

Chloe Liu Riding the dual camera ramp +852 2135 0209  Second largest domestic CCM manufacturer for dual camera modules  CCM revenue to deliver 36% CAGR from FY15 to FY18E [email protected]  Fingerprint modules ramp up from FY16E onwards  Initiate BUY with TP HK$4.63 based on 12x FY17E PE Yuji Fung Riding on dual camera penetration inflection point. Dual camera is becoming +852 2135 0236 a popular feature in smartphones in 2016 and top smartphone vendors, including Apple, Huawei, Xiaomi and Coolpad have launched their dual camera [email protected] 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 Initial Coverage 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 BUY 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 Close price: HK$3.31 than 2 times of single camera module, total revenue of dual camera module is Target Price: HK$4.63 (+39.9%) 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 Key Data 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 HKEx code 1478 HK Vivo/Oppo/Huaqin(ODM for Huawei), which recorded 109%/134%/38%(Huawei) 12 Months High (HK$) 3.40 yoy shipment growth in 1H16. We believe the current client mix of Q Tech is solid 12 Month Low (HK$) 0.96 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+ 3M Avg Dail Vol. (mn) 2.55 modules. In 1H16, Q Tech’s 13M modules account for 13% of total shipments, Issue Share (mn) 1,041.77 and targets further improving 13M modules proportion to 20%/35% in FY16/17E. Market Cap (HK$mn) 3,448.26 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 Fiscal Year 12/2015 months ramp up, we believe it will help product mix upgrade. We forecast CCM Major shareholder (s) He Ningning revenue to deliver 40% CAGR to RMB6,000mn in FY18E from RMB2,202mn in (72.13%) FY15. Source: Company data, Bloomberg, OP Research Closing price are as of 19/09/2016 Margin expansion from fingerprint module robust shipments growth. Q Tech commenced fingerprint module shipment in FY16, it delivered 1.4mn units in

Price Chart 1H16, and aims to deliver 20mn units for FY16E given most smartphone models launched in second half. With increasing penetration of fingerprint modules in 1478 HK MSCI CHINA HK$ China smartphones from 15% in 2015 to 62% in 2018E, and capacity expansion 3.5 of Q Tech from current 6mn units/month to 10mn units/month by end of 2016, we 3.0 expect Q Tech’s fingerprint to achieve 20mn/60mn/100mn units shipment and 2.5 contribute RMB580mn/RMB1,530mn/RMB2,240mn revenue in FY16/17/18E, 2.0 representing 14%/24%/27% of total revenue. Moreover, as fingerprint enjoys 1.5 higher GPM than CCM, it will help on margin expansion. 1.0 Attractive valuation on quadruple earnings growth. Initiate BUY with TP 0.5 HK$4.63 based on 12x FY17E PE with 40% upside. We forecast Q Tech to 0.0 record 61% EPS CAGR from FY15 to FY18E, compared to peers’ 26% EPS Sep/15 Dec/15 Mar/16 Jun/16 CAGR, thanks to 1) increase in dual camera penetration and fingerprint penetration; 2) top 5 clients, Chinese smartphone vendors’ robust shipment 1mth 3mth 6mth growth; 3) CCM product mix upgrade. Q Tech currently trades at 8.6x FY17E PE, Absolute % 35.7 108.2 156.6 39% discount to peers. Moreover, we expect Q Tech to launch dividend policy for FY16E given its solid financial results. Rel. MSCI CHINA % 34.4 93.5 143.7 Risks: 1) slowdown in China smartphone shipments; 2) lower than expected dual PE camera penetration; 3) ASP erosion of CCM and fingerprint modules. Exhibit 1: Forecast and Valuation 16 Forward P/E Ratio 14 Year to Dec (RMB mn) FY14A FY15A FY16E FY17E FY18E +1std. 12 Revenue 2,161 2,202 4,095 6,398 8,240 10 avg. 8 Growth (%) 53 2 86 56 29 -1std. 6 Net Profit 196 102 176 342 447 4 Growth (%) 20 (48) 73 94 31 2 0 Diluted EPS (HK$) 0.370 0.122 0.198 0.386 0.504 Jan/15 Jul/15 Jan/16 Jul/16 EPS growth (%) (9) (67) 63 94 31 Change to previous EPS (%) 0.0 0.0 0.0 Company Profile Consensus EPS (HK$) 0.238 0.294 0.345 Q Technology is a leading PRC-based ROE (%) 28.1 8.7 13.5 22.1 23.6 manufacturer focusing on mid-to-high end P/E (x) 8.9 27.2 16.7 8.6 6.6 camera module and fingerprint module P/B (x) 1.5 2.2 2.1 1.7 1.4 market for Chinese branded smart phone Yield (%) 1.6 0.0 1.2 2.3 3.0 and tablet PC manufacturers. DPS (HK$) 0.052 0.000 0.040 0.077 0.101

Source: Bloomberg, OP Research Tue, 20 Sep 2016

Q Tech (1478 HK)

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

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Q Tech (1478 HK)

Riding on dual camera penetration inflection point Dual camera is the new trend in mid-to-high-end smartphones Dual camera provides premium Dual camera can provide premium photographic quality over single camera, such photographic quality and has four as resolution enhancement, larger aperture or in-depth function, optical zoom and types 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, iPhone 7 Plus LG G5/G5 SE Huawei Honor V8/8, Xiaomi Redmi Pro LeEco Cool1 dual, HTC One M8 360 Q5 Plus, Qiku Terra Source: OP Research iPhone 7 Plus adopts Tele + Wide Newly released iPhone 7 Plus is the only current model with Telephoto + Wide dual-cam, which would speed up angle dual-cam, which can produce premium optical zoom effect to create depth dual-cam adoption in Android of field and 3D imagery by combining photos from long and short focal length camp 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.

RGB+Mono dual cam is mainly For RGB+Mono dual-cam, it is mainly adopted by Chinese smartphones, adopted by Chinese smartphones, including Huawei P9, LeEco Cool1 dual, and 360 Q5 plus. This type of dual-cam including Huawei P9, LeEco significantly improves photographic clarity and light sensitivity by combining Cool1 dual, and 360 Q5 plus. normal photo from colour sensor and black & white photo with pixel enhancement and better low-light performance from monochrome sensor.

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Q Tech (1478 HK)

RGB+RGB dual-cam with different RGB + RGB dual-cam with different resolutions can simulate a dimensional effect resolutions has simpler and create pictures with different areas of focus. The manufacture of RGB+RGB manufacture process, and is dual-cam is less difficult and it is adopted by Xiaomi Redmi Pro, LG G5 and HTC adopted by Xiaomi Redmi Pro, LG One M8. G5 and HTC One M8

We believe dual-cam will become We believe an increasing number of smartphone vendors will follow iPhone to the next trend of mid-to-high-end adopt dual camera in their upcoming models, which puts dual camera into the smartphones 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 Octa core Deca core Qualcomm Snapdragon 820 Qualcomm Snapdragon 652 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 RMB2,599/RMB2,799 RMB1,099/RMB1,499 RMB1,499/RMB1,699 /RMB7,988 RMB1,599/RMB1,699 /RMB1,999 Huawei Honor 8 Huawei Honor V8 Huawei P9/P9 Plus LG G5SE/G5

CPU Octa core Octa core Quad core Quad core HiSilicon Kirin 950 HiSilicon Kirin 950/955 HiSilicon Kirin 955 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

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Q Tech (1478 HK)

Dual camera penetration gradually ramps up

We expect China/global We expect China/global smartphone dual camera penetration to improve from smartphone dual camera 7%/5% in 2016 to 37%/33% in 2020E, and thus drive the dual camera penetration improves further to China/global shipment growth of 64%/71% CAGR from 2016E to 2020E. 37%/33% in 2020E Exhibit 4: China/Global dual-cam penetration from 2014 to 2020E

40% 37%

35% 33%

30% 28% 27% 25% 22% 20% 20% 16% 15% 13%

10% 7% 5% 5% 0.1%0.4% 0.7% 0.5% 0% 2014 2015 2016E 2017E 2018E 2019E 2020E China Global

Source: IDC, IHS, OP Research

We expect China/global dual-cam Exhibit 5: China/Global dual-cam shipment from 2014 to 2020E shipments to grow at a 4-year (mn unit) CAGR of 64%/71% to 700 234mn/610mn in 2020E 610 600

500 470

400 343

300 212 200

71 234 100 173 5 7 127 0.4 3 82 0 32 2014 2015 2016E 2017E 2018E 2019E 2020E

China Global

Source: IDC, IHS, OP Research

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Q Tech (1478 HK)

Second largest domestic player in dual camera modules market There are only three domestic Currently, only three domestic players can produce dual camera modules (DCM). players which can produce DCM; Sunny Optical is the first domestic player to produce DCM, and is the DCM Q Tech is the second largest one supplier for Huawei models, including P9 and Honor8, together with Liteon. Q following Sunny Optical 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 to deliver We forecast Q Tech will deliver 4.4mn/26.6mn/40.7mn units for DCM, 4.4mn/26.6mn/40.7mn DCM in representing 3%/15%/20% shipment penetration in FY16/17/18E, similar to FY16/17/18E, representing China dual camera penetration rate. Q Tech also allocates 5mn monthly capacity 3%/15%/20% of total shipment; Q Tech also allocates 22% of total for DCM, representing ~22% of total capacity. capacity for DCM Exhibit 6: Q Tech’s DCM shipment and penetraton

(mn units) 45.0 25% 20% 40.0

35.0 20%

30.0 15% 15% 25.0

20.0 40.7 10% 15.0 26.6 10.0 3% 5% 5.0 4.4 - 0% FY16E FY17E FY18E Dual cam shipment Dual cam shipment penetration

Source: OP Research

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Q Tech (1478 HK)

We estimate DCM revenue to be ASP of DCM is normally 2.5-3 times of single camera module, as currently only a RMB252mn/RMB1,211mn few CCM suppliers can produce DCM so they enjoy high bargaining power. Q /RMB1,671mn in FY16/17/18E, as Tech’s yield for RGB+RGB and RGB+MONO camera modules can achieve over ASP of DCM is 2.5-3 times of 90%. We estimate the DCM revenue to be RMB252mn/RMB1,211mn/ single camera module, and Q Tech can achieve 90% yield rate RMB1,671mn in FY16/17/18E, representing 6%/19%20% of total sales.

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

(RMBmn/RMB) 2,000 25%

20% 1,600 19% 20%

1,200 15%

800 1,671 10%

6% 1,211

400 5%

252 57.0 45.6 41.0 - 0% FY16E FY17E FY18E Dual cam revenue Dual cam ASP Dual cam revenue proportion

Source: OP Research

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Q Tech (1478 HK) Robust shipment growth and product mix upgrade in CCM Solid customer base drives shipment growth Q Tech has solid client mix, top 5 Q Tech’s top 5 clients in 1H16 are Vivo, Oppo, Huaqin (ODM for Huawei), ZTE clients are Vivo, Oppo, and Xiaomi. Given that currently Huawei is the No.1 smartphone vendor in China, Huaqin(ODM for Huawei), ZTE and followed by Oppo, Xiaomi and Vivo, we believe Q Tech’s client mix is very solid. Xiaomi 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

Q Tech is well positioned to Chinese smartphone vendors are grabbing market share aggressively. capture the robust growth of Huawei/Oppo/Vivo have experienced 38%/134%/109% yoy growth for 1H16 Chinese smartphone vendors. In shipments, and we believe they will maintain the growth momentum. Q Tech is 1H16, Huawei/Oppo/Vivo well positioned to capture the robust growth of Chinese smartphone vendors, as recorded 38%/134%/109% yoy shipment growth 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 104% yoy Q Tech recorded strong shipment in 1H16; it was up 104% yoy to 72.4mn units, shipment growth in 1H16 thanks thanks to its clients mix change ( Oppo, Xiaomi replaced Lenovo and TCL in top 5 to client mix change and robust clients), and robust shipment growth of Vivo, Oppo, and Huawei. Other growth of top 3 clients. 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

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Q Tech (1478 HK)

Q Tech plans to expand CCM Q Tech has CCM capacity of 16.5mn units/month in 1H16, and plans to expand to capacity from current 23mn units/month by the end of FY16E, together with O-film and Sunny’s 16.5mn/month to 23mn/month by capacity expansion plans. end of 2016 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’s 8M/10M+ CCM accounts Q Tech keeps upgrading product mix of camera modules, in 1H16, its 8M/10M+ for 49%/14% of total shipment in CCM accounted for 49%/14% of total shipment, leading to a blended ASP of 1H16 with blended ASP of RMB22.8. Sunny Optical, Q Tech’s CCM competitor, had 20%/60% of total RMB22.8 shipment for 8M/10M+ CCM, and enjoys a blended ASP of RMB40.0 in 1H16.

Exhibit 12: CCM product shipment mix and ASP (RMB) 70% 27.0 26.1 60% 26.0 14% 50% 25.0

40% 24.0 6% 22.8 30% 22.4 23.0 49% 20% 22.0 3% 34%

10% 17% 21.0

0% 20.0 FY14 FY15 1H16 8M 10M+ ASP

Source: Company, OP Research

Sunny’s 8M/10M+ CCM accounts Exhibit 13: CCM product shipment mix and ASP – Sunny Optical for 20%/60% of total shipment in (RMB) 1H16 with blended ASP of 90% 41.0 RMB40.0 40.0 80% 40.0

70% 39.0 38.0 60% 37.0 50% 60% 36.0 35.1 40% 31% 35.0 16% 30% 34.2 34.0

20% 33.0 25% 10% 20% 20% 32.0

0% 31.0 FY14 FY15 1H16

8M 10M+ ASP

Source: Company, OP Research

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Q Tech (1478 HK)

We believe there is ASP Thus, we believe there is ASP improvement room for Q Tech given 1) potential improvement room given product mix upgrade, management guided 20%/35% of total shipment for 13M 1)management guided 20%/35% CCM in FY16/17E, compared to the 1H16’s proportion of 13%, as its 13M and 13M CCM shipment penetration in above CCM has entered into supply chain of several leading brands, including FY16/17E as it tapped into Oppo Oppo and Vivo since 4Q15 and it normally takes 6-8 months to see significant and Vivo’s 13M CCM supply chain shipment; 2) Q Tech began DCM shipments in 2H16 as supplier of Xiaomi Redmi in 4Q15 and ramp up takes 6-8 months; 2) increase DCM Pro, LeEco Cool1 dual and 360 Q5 plus. DCM shipment is counted as 1 and ASP shipment is 2.5-3 times of single camera module, thus we expect it will further drive ASP.

13M/16M/dual-cam CCM will keep We forecast 8M/13M/16M/dual cam CCM will account for 50%/18%/1%/3% of increasing shipment proportion 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

100% 1% 3% 6% 1%3% 13% 15% 20% 17% 18% 80% 5% 34% 10%

60% 49% 35% 50% 64% 50% 40% 51%

40% 20% 35% 26% 16% 20% 10% 5% 0% 2% 2% 0% FY14 FY15 1H16 FY16E FY17E FY18E 3M and below 5M 8M 13M 16M+ Dual cam

Source: Company, OP Research

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Q Tech (1478 HK)

We expect revenue to record As a result, we expect ASP of CCM to gradually improve to 60%/38%/23% yoy growth to RMB23.8/RMB27.5/RMB29.5 in FY16/17/18E, and shipment yielding RMB3,515mn/RMB4,868mn/ 50%/20%/15% yoy growth in FY16/17/18E, and revenue recording RMB6,000mn in FY16/17/18E. 60%/38%/23% yoy growth to RMB3,515mn/RMB4,868mn/RMB6,000mn in FY16/17/18E.

Exhibit 15: CCM revenue, shipment and ASP

(RMBmn/mn units) (RMB) 7,000 35.0 6,000 6,000 27.5 29.5 30.0 26.1 23.8 4,868 5,000 22.4 25.0

4,000 3,515 20.0

3,000 15.0 2,161 2,202 2,000 10.0

1,000 5.0 148 177 204 83 98 - - FY14 FY15 FY16E FY17E FY18E CCM Revenue(LHS) CCM shipments(LHS) CCM ASP(RHS)

Source: Company, OP Research

Further opportunity to penetrate Huawei CCM supply chain from Single CCM to Dual Cam from FY17E onwards Q Tech currently supplier CCM to Q Tech currently supplies CCM to Huawei through Huaqin, Huawei’s major ODM Huawei through Huawei’s ODM, for Honor model. The reason why Q Tech has not tapped into Huawei’s CCM Huaqin supplier chain is because Q Tech used to be a major supplier of ZTE and ZTE is the main competitor of Huawei.

Further opportunity to tap into However, since Q Tech begins supplying fingerprint modules to Huawei in FY16E, Huawei’s CCM supply chain given we believe it has opportunity to further extend to Huawei’s CCM supply chain, Q Tech begins fingerprint and Huawei is likely to share Honor dual cam supply to Q Tech to diversify dual modules shipment to Huawei and cam supply chain risk. Huawei is likely to diversify dual-cam supply chain risk

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Q Tech (1478 HK) Margin expansion from fingerprint module robust shipments growth Rapid growth of fingerprint market and penetration of smartphone

Global fingerprint shipments are Global fingerprint sensor shipment is expected to record 28% CAGR from 418mn expected to record 29% CAGR units in 2015 to 1,479mn units in 2020E, while ASP will drop gradually from US$4 from 2015 to 2020E in 2015 to US$2 in 2020E.

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

(mn unit) (US$)

1,600 5.5 6.0

1,400 5.0 1,200 4.0 4.0 1,000 3.0 1,435 1,479 800 2.5 3.0 2.3 2.1 2.0 600 1,151 2.0 400 861 619 1.0 200 418 237 - 0.0 2014 2015 2016E 2017E 2018E 2019E 2020E Volume ASP

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.

Fingerprint penetration in Exhibit 17: China/Global fingerprint penetration in smartphones from 2014 China/global smartphones will to 2018E improve to 62%/65% in 2018E from 15%/29% in 2015E 70% 65% 62%

60% 55% 52%

50% 45% 40% 40%

29% 30%

19% 20% 15%

10% 3% 0% 2014 2015E 2016E 2017E 2018E China Global

Source: OP Research

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Q Tech (1478 HK)

We believe fingerprint modules The rising penetration rate is the result of: 1) smartphone market players are becoming a key component of following Apple’s adoption of fingerprint, making fingerprint modules a key smartphones and they facilitate component in smartphone market. As fingerprint modules can be seen from the mobile payments 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

Key components of fingerprint The key components of fingerprint module include sensor, metal loop, cover plate, module include sensor, metal ect; among these components, the sensor is the most important. Currently, there loop, and cover plate 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 Q Tech procures sensors from FPC, Goodix and Silead, and then assembles FPC, Goodix, and Silead them with metal loop, cover plate and other components.

Exhibit 18: Fingerprint supply chain

Distributor Module house OEM/ODM

Software customization and integration. 3-9 months

Design/customization support Huawei O-film (002456 CH) Avnet OPPO Truly (732 HK) Arrow FPC Xiaomi Shipment of sensor Q Tech (1478 HK) WPI vivo CrucialTech Future (114120 KS) Electronics ZTE Primax

Other Chinese brands Warehousing Packaging & module Industrial design, & logistics manufacturing integration, tuning and end-user experience

Source: FPC, Company, OP Research

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Q Tech (1478 HK)

Exhibit 19: Fingerprint value chain Components Sensor Metal Loop Cover Plate Others Module Process IC design Manufacturing Packing&Testing Companies

Apple Xintech (3374 TT) Authen Tec (US) Sapphire Tech ASE (2311 TT) ASE(2311 TT), (acquired by Apple TSMC (2330TT) Crystal Applied WLCSP (603005 Sharp(6753 JP) in 2012) Aurora (600666 CH) CH) Samsung, HTC Synaptics (Validity）(US)

Sweden: FPC Other brands O-film (002456 CH) China: Goodix, smartphones, TSHT (2185 CH) Aurora (600666 CH) Truly (732 HK) Silead, Microarray SMIC (981 HK) eg: Huawei, JCET(600584 CH) TDG (600330 SH) Q Tech (1478 HK) Korea: CrucialTec Oppo, Vivo CrucialTec (114120 KS) (114120 KS) TW: More DNA, Focal Tech (3545 TT) Source: OP Research

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Q Tech (1478 HK)

Capacity expansion with first-tier client mix We expect Q-Tech to record 20mn Q Tech obtained FPC fingerprint certificate in 2H15, and officially kicked off its fingerprint shipments in FY16E 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’s capacity expands from Q Tech has fingerprint capacity of 3.5mn units/month in early 2016, and 3.5mn/month in 1Q16 to 10mn expanded to 6mn units/month in Aug16, and targets to further expand to 10mn units/month by end of FY16E 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 Q-Tech mainly produces coating Currently, there are four types of fingerprint products, coating for low-to-mid-end and covered fingerprint module smartphones, while covered is used widely in mid-to-high end smartphones. with shipment proportion of 6:4. 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 Unique oDLC surface Sensors mounted under a It is based on multiple static full range of mid-to low-end hardness solution matching sheet of glass or ceramics. features, which derived smartphones sapphire glass. 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

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Q Tech (1478 HK)

Q-Tech’s fingerprint module ASP Q-Tech enjoys fingerprint module ASP of RMB29.7 in 1H16, and aims to further is HK$29.7 in 1H16 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 forecast Q Tech to record We expect Q Tech to deliver 20mn/60mn/100mn units fingerprint module, and RMB580mnRMB1,530mn/ RMB580mn/1,530mn/2,240mn revenue, representing 14%/24%/27% of total RMB2,240mn fingerprint revenue revenue in FY16/17/18E. in FY16/17/18E

Exhibit 24: Fingerprint module and revenue from FY16E to FY18E

(RMBmn/mn units) (RMB) 2,500 35.0 2,240 29.0 30.0 2,000 25.5 25.0 22.4 1,530 1,500 20.0

15.0 1,000

580 10.0 500 5.0 100 20 60 - - FY16E FY17E FY18E Revenue(LHS) Shipment(LHS) ASP(RHL)

Source: Company, OP Research

Page 16 of 28 Tue, 20 Sep 2016

Q Tech (1478 HK) 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 Both CCM and fingerprint We expect Q Tech to deliver 148mn/177mn/204mn units CCM in FY16/17/18E, shipments are expected to record representing 50%/20%/15% yoy growth, due to 1) upgrading of client mix; 2)solid robust growth from FY16E to growth of top 3 clients(Vivo, Oppo, and Huaqin). Fingerprint modules shipment is FY18E 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

(mn units) 350 200% 200.0%

300

150.0% 250 100

200 60 100.0% 150 20 67% 100 204 50% 177 50.0% 148 50 83 98 20% 19% 15% - 0.0% FY14 FY15 FY16E FY17E FY18E

CCM shipments Fingerprint shipment Fingerprint yoy% CCM yoy%

Source: Company, OP Research

ASP of CCM is expected to ASP of CCM is expected to recover gradually due to 1) increasing dual cam recover gradually while penetration in China from 0.7% in FY15 to 22% in FY18E; 2) upgrade product mix fingerprint modules ASP will drop 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

(RMB) 50.0 20% 15%

40.0 10% 38.3 7% 6%

30.0 29.0 29.5 0% 27.5 26.1 22.4 23.8 25.5 22.4 20.0 -11% -10% -12% -14% -12%

10.0 -20% -24%

- -30% FY14 FY15 FY16E FY17E FY18E CCM ASP Fingerprint ASP CCM yoy% Fingerprint yoy%

Source: Company, OP Research

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Q Tech (1478 HK)

Revenue is expected to record As a result, we expect Q Tech revenue to record a 55% CAGR to RMB8,240mn in 55% CAGR from RMB2,202mn in FY18E from RMB2,202mn in FY15. FY15 to RMB8,240mn in FY18E Exhibit 27: Revenue from FY14 to FY18E

(RMBmn) 8,240 100% 8,000

86% 2,240 6,398 80% 6,000 1,530 60% 56% 53% 4,095 4,000 580 40% 6,000 2,202 2,161 4,868 29% 2,000 - 3,515 20% 2,161 2,202 2% - 0% FY14 FY15 FY16E FY17E FY18E CCM Fingerprint Total yoy%

Source: Company, OP Research

Exhibit 28: Revenue mix from FY14 to FY18E

100% 14%

24% 27% 80%

60%

100% 100% 86% 40% 76% 73%

20%

0% FY14 FY15 FY16E FY17E FY18E CCM Fingerprint

Source: Company, OP Research

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Q Tech (1478 HK)

Net profit CAGR higher than peers and valuation discount to peers We forecast GPM to be We expect Q Tech’s GPM to be 9.5% in FY16E, and pick up to 10.5% in FY17E, 9.5%/10.5%/10.5% in FY16/17/18E 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

20.0%

16.3% 16.0%

12.0% 10.9% 10.5% 10.6% 9.0% 9.5%

8.0% 5.3% 5.4% 4.6% 4.3% 4.0%

0.0% FY14 FY15 FY16E FY17E FY18E

GPM NPM

Source: Company, OP Research Net profit is expected to record Hence, we expect net profit to achieve 64% CAGR to RMB447mn in FY18E from 64% CAGR from RMB102mn in RMB102mn in FY15, compared to peers’ 3-year earnings CAGR of 26%. FY15 to RMB447mn in FY18E Exhibit 30: Net profit from FY14 to FY18E

(RMBmn) 500 120%

94% 400 73% 80%

300 40% 31% 20% 447 200 0% 342

100 196 -40% -48% 176 102

- -80% FY14 FY15 FY16E FY17E FY18E Net profit yoy%

Source: Company, OP Research

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Q Tech (1478 HK)

For 1H16 results, revenue was up 1H16 result review. Revenue was up 99% to RMB1,727mn in 1H16, thanks to 99% to RMB1,727mn and net 100% yoy CCM shipment growth and ramp up of fingerprint business. GPM profit was up 30% yoy to dropped 3.5ppts yoy and 0.4ppt hoh due to 1) depreciation of RMB in 1H16 by RMB82mn 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 Initiate BUY with TP of HK$4.63 based on 12x FY17E PE, 15% discount to based on 12x FY17E PE, 15% peers. We believe Q Tech is well-positioned to ride on increasing dual-cam and discount to peers 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.

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Q Tech (1478 HK)

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

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Q Tech (1478 HK)

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.

Page 22 of 28 Tue, 20 Sep 2016

Q Tech (1478 HK) Management profiles

Exhibit 32: Management profiles Name Age Position Role and responsibilities Description Mr. He Ning ning 45 Chairman, Overall strategic planning Mr. He founded the company in 2007. Executive Director and formulation of In 2004, Mr. He founded Shenzhen Xike Dexin Telecom Equipment investment strategies 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, Overall business operations Mr. Yang joined the group in 2007 as the assistant to chairman and Executive director 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, Audit management and Mr. Fan joined the group in 2013 and was appointed to be the chief Company Secretary budgeting, legal compliance financial officer in 2016. matters and risk control 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 Mr. Wang joined the group in 2014. and formulation of Mr. Wang served as the chief financial officer of Shenzhen CK and investment strategies 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

Page 23 of 28 Tue, 20 Sep 2016

Q Tech (1478 HK) Shareholding structure

Exhibit 33: Shareholding structure

He Ningning Pan Hou Capital Samart i-Mobile Public (Chairman) (pre-IPO investor) (pre-IPO investor)

72.13% 2.33% 1.34% 24.20%

Source: Company, OP Research

Page 24 of 28 Tue, 20 Sep 2016

Q Tech (1478 HK) 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

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Q Tech (1478 HK)

Exhibit 34: Peer Group Comparison

3-mth EV/ EV/ Net Gross Net Mkt cap avg t/o PER Hist PER FY1 PER FY2 EPS FY1 EPS FY2 3-Yr EPS Div yld Div yld P/B Hist P/B FY1 Ebitda Ebitda gearing margin margin ROE ROE FY1 Sh px Sh px Company Ticker Price (US$m) (US$m) (x) (x) (x) YoY% YoY% Cagr (%) PEG (x) Hist (%) FY1 (%) (x) (x) Hist Cur Yr Hist (%) Hist (%) Hist (%) Hist (%) (%) 1-mth % 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

Page 26 of 28 Tue, 20 Sep 2016

Q Tech (1478 HK)

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

25/08/2016 Harmonicare 1509 Downgrade on hospitals revamping HOLD Chloe Liu/Yuji Fung

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

Page 27 of 28

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