Q Technology (Group) Company Ltd Dual engines to drive growth

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1 Vol m Technology Components Hong Kong Equity research October 20, 2016 Company Note Hong Kong ADD Consensus ratings*: Buy 6 Hold 0 Sell 0 Current price: HK$3.96 Target price: HK$5.50 Previous target: N/A Up/downside: 38.9% CIMB / Consensus: 18.0% Reuters: Bloomberg: Market cap: Average daily turnover: 1478.HK 1478 HK US$531.8m HK$4,125m US$2.03m HK$15.72m Current shares o/s: 1,042m Free float: 27.9% *Source: Bloomberg Key changes in this note N/A Price Close Relative to HSI (RHS) Oct-15 Jan-16 Apr-16 Jul-16 Source: Bloomberg Price performance 1M 3M 12M Absolute (%) Relative (%) Major shareholders % held Mr. HE Ningning Q Technology (Group) Company Ltd Dual engines to drive growth Q Tech is likely to benefit from favourable conditions in China s smartphone market. We believe the market has underestimated its earnings growth potential from dual camera and FRM manufacturing segments which drives re-rating of share price. Strong dual camera shipments and rapid growth in FRM are key earnings drivers. We forecast 53% EPS CAGR over FY15-18F, driven by strong CCM shipment growth, new FRM manufacturing revenue stream and steady GPM expansion. Initiate coverage on Q Tech with Add. Our TP of HK$5.50 offers 39% upside. Favourable China smartphone environment to benefit Q Tech As one of the three largest smartphone compact camera module (CCM) manufacturers in China, we believe Q Tech benefits from favourable conditions in China s smartphone market, including: 1) ongoing global and domestic market share gains by its key customers (Vivo, Oppo and Huawei), 2) rising demand for high resolution (13MP+) smartphone cameras, 3) rapid growth in dual camera penetration rate among the top 10 Chinese vendors, and 4) rapid growth of mobile payment in China. Share price has increased significantly YTD While the stock has jumped over 149% YTD on the back of strong earnings recovery in 1H16, we believe its current valuation (12x FY17F P/E) is undemanding as we think the market has underestimated its earnings growth potential from rapid growth in dual camera module shipments and substantial increase in FRM output. but the valuation could re-rate further We believe its current valuation has not priced in: 1) the faster-than-expected increase in dual camera penetration rate among Chinese brands; 2) more dual camera project wins; 3) potential gross margin expansion from a significant product mix shift towards high-end cameras; and 4) greater adoption of fingerprint recognition sensors by Chinese brands. Dual camera penetration rate to rise to 18% in 2017F We project the dual camera penetration rate among the top 10 Chinese brands will increase from 3% in 2016F to 13% in 2017F and 18% in 2018F. We expect the shipments to rise from 21m units in 2016F to 97m (+374% yoy) in 2017F and 142m (+45% yoy) in 2018F, underpinned by greater adoption of dual cameras in mid- to highrange models. Q Tech will be the key beneficiary as there are limited high-quality domestic suppliers, in our view. Forecasting 53% core EPS CAGR in FY15-18F We believe its earnings growth will be driven by: 1) significant increase in its 13MP+ camera module output, 2) strong shipment growth in dual camera, and 3) significant increase in profit from fingerprint recognition module (FRM) manufacturing. We forecast a 53% core EPS CAGR in FY15-18F, driven by strong CCM shipment growth (+178% in FY15-18F) and new FRM manufacturing revenue stream (+160% in FY16-18F), as well as steady GPM expansion (+0.5% pt in FY16-18F). Initiate with Add and target price of HK$5.50 Initiate with Add as we believe it will benefit from the fast-growing demand for dual cameras and high-resolution, multi-function cameras, as well as fingerprint recognition sensors. Our TP is based on 17x FY17F P/E, a 10% premium over the average of its optical component-maker peers. Risks to our view are slower-than-expected increase in dual camera penetration rate among the top 10 Chinese vendors, low production yield for dual camera module manufacturing and faster-than-expected drop in FRM ASPs. Analyst Ray KWOK T (852) E ray.kwok@cimb.com Financial Summary Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F Revenue (Rmbm) 2,161 2,202 4,153 5,923 7,719 Net Profit (Rmbm) Normalised EPS (Rmb) Normalised EPS Growth 34.8% (51.4%) 84.2% 54.2% 26.5% FD Normalised P/E (x) Price To Sales (x) DPS (Rmb) Dividend Yield 1.18% 0.00% 1.36% 2.10% 2.65% EV/EBITDA (x) P/FCFE (x) 7.1 NA Net Gearing (8.0%) (23.5%) (20.7%) (12.2%) (9.1%) P/BV (x) ROE 30.5% 8.8% 14.9% 19.9% 21.4% % Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x) SOURCE: COMPANY DATA, CIMB FORECASTS IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-PARTY AFFILIATED RESEARCH. Powered by the EFA Platform

2 Dual engines to drive growth Investment summary Q Tech is a likely beneficiary of the fast-growing dual camera demand and rapid growth of mobile payment in China Favourable China smartphone environment for Q Tech. Q Technology (Group) Company Limited (Q Tech) is benefiting from the favourable conditions in the China smartphone market, including: 1) ongoing global and domestic market share gain by its key customers (Vivo, Oppo and Huawei), 2) rising demand for high resolution (13MP+) smart cameras for smartphones from toptier Chinese brands looking to differentiate their products, 3) rapid growth in dual camera penetration rate among the top 10 Chinese vendors, driven by strong consumer demand for high quality smartphone photos, and 4) rapid growth of mobile payment in China, which will drive demand for smartphones equipped with fingerprint recognition sensors for security enhancement. Q Tech is the main compact camera module (CCM) and fingerprint recognition module (FRM) manufacturer for Chinese handset vendors. We believe it is likely to benefit from substantial demand for CCM and FRM from its key customers, owing to its significant production capacity and advanced production capability. What is driving the share price higher? Q Tech s share price has jumped over 149% YTD on the back of strong earnings recovery in 1H16. Nevertheless, we think its current valuation (12x FY17F P/E) is attractive as the market underestimated its earnings growth potential from rapid growth in dual camera module shipments and substantial increase in fingerprint recognition module output. We believe its current valuation is not reflecting 1) the fasterthan-expected increase in dual camera penetration rate among the top 10 Chinese vendors, 2) continual dual camera project wins, 3) potential gross margin expansion from a significant products mix shift towards high resolution, multi-function cameras such as dual camera, and 4) greater adoption of fingerprint recognition sensors by Chinese brands. Q Tech s earnings drivers. We identified the following as Q Tech s earnings growth drivers:1) significant increase in its 13MP+ camera module output, 2) strong shipment growth for smart cameras such as dual cameras, high resolution cameras with optical image stabilisation (OIS), phase detection auto focus (PDAF), wide angle and 4K video, 3) expected significant increase in profits from fingerprint recognition module manufacturing. Key highlights: Significant increase in high resolution products. We estimate that Q Tech s 13MP+ camera module output will increase significantly from c.34m units in FY16F to c.72m units in FY17F and c.126m units in FY18F. Based on our estimates, high megapixel products will account for c.33% and c.46% of Q Tech s total CCM output in FY17F and FY18F, respectively, driven by strong consumer demand for high quality smartphone cameras. Dual camera penetration rate to reach 13% in 2017F. We project that dual camera penetration rate among the top 10 Chinese brands will increase from 3% in 2016F to 13% in 2017F and 18% in 2018F, underpinned by greater adoption of dual cameras in mid- to high-range models. Q Tech is the likely beneficiary of higher dual camera penetration rate. We believe that Q Tech will be the key beneficiary of rising dual camera demand, given that there are a limited number high-quality domestic suppliers. We expect Q Tech s dual camera module output to account for c.7% of its total CCM output in FY17F and 12% in FY18F. This would help to raise its blended ASP and protect gross margin and strengthen its market leadership position in smart camera manufacturing for Chinese vendors. In our view, we believe increasing output of dual cameras will be a key earnings driver, as their ASP is 2

3 2.5x higher than that of the single camera module and their GPM is 1-2% higher. Strong market position to capture smart camera demand. There is rising demand for smart cameras by Chinese brands to differentiate their products amid fierce competition in the smartphone market. As a result, Q Tech benefits from the substantial demand for high-end multi-function cameras from its customers. Q Tech has entered the supply chains of top-tier Chinese vendors, thanks to its advanced technology and production know-how in high megapixel cameras with features like OIS, PDAF, wide angle and 4K video etc. Fingerprint recognition module (FRM) manufacturing to become a new earnings driver. Given the rapid growth of mobile payment in China, most of the new smartphone models launched by Chinese brands are equipped with fingerprint recognition sensors in order to enhance security. Given the plans for rapid expansion in its FRM production capacity (from 6kk/month in Jun 2016 to 10kk/month by end-2016), we expect Q Tech s revenue and profit from FRM manufacturing to rise rapidly in the next few years. We anticipate that FRM will become a key earnings driver for Q Tech, contributing around 14% of annual net profit in FY17F and FY18F. We project 53% core EPS CAGR in FY15-18F. We forecast that Q Tech s core net profit will rise from Rmb103m in FY15 to Rmb381m in FY18F, which translates into 3-year core EPS CAGR of 53% (FY15-18F), driven by strong CCM shipment growth (+178% in FY15-18F) and new FRM manufacturing revenue stream (+160% in FY16-18F), as well as steady gross margin expansion (+0.5% pt from FY16-18F). Initiate with Add rating. We initiate coverage on Q Tech with an Add rating, as we believe it will be the key beneficiary of fast-growing demand for dual cameras and high resolution, multi-function cameras, as well as fingerprint recognition sensors, thanks to its advanced technological know-how in CCM and FRM manufacturing, as well as its leading market position in the supply chains of Chinese vendors. Target price of HK$5.50, offer 39% upside. Our target price of HK$5.50 is based on 17x FY17F P/E, at a 10% premium over the average of its peers (optical component makers). It is equivalent to 0.7x PEG, the lowest among its peers, based on 53% EPS CAGR in FY15-18F. We believe Q Tech deserves to trade at a premium valuation over its peers due to the strong sales growth in its CCM and FRM segments, as well as the significant shift in its product mix towards high-end smartphone cameras (such as dual cameras and high resolution multi-function cameras). Rapid dual cameras output is a potential share price catalyst, in our view. Potential share price catalysts include rapid shipment output for dual cameras and high megapixel camera modules, as well as sustainable gross margin expansion. Risks. Risks to our bullish view are slower-than-expected increase in dual camera penetration rate among the top 10 Chinese vendors, low production yield for dual camera module manufacturing and faster-than-expected drop in fingerprint recognition module ASPs. 3

4 core EPS (Rmb) DPS (Rmb) Rmb (million) Rmb (million) Technology Components Hong Kong Q Technology (Group) Company Ltd October 20, 2 Figure 1: Peer comparison Bloomberg Price Target Price Market Cap 3-year Core P/E (x) EPS P/BV (x) Recurring ROE (%) EV/EBITDA (x) Dividend Yield (%) Company Ticker Recom. (local curr) (local curr) (US$ m) CY2016F CY2017F PEG CAGR (%) CY2016F CY2017F CY2016F CY2017F CY2016F CY2017F CY2016F CY2017F Handset component makers - optical Cow ell e Holdings 1415 HK Add % % 18.4% % 0.0% Largan Precision 3008 TT Add 3,710 4,100 15, % % 35.8% % 1.9% Liteon Tech 2301 TT Hold , % % 12.3% % 5.6% Q Tech 1478 HK Add % % 19.9% % 2.1% SEMCO KS Add 47,350 63,000 3, % % 4.6% % 1.6% Sunny Optical Tech 2382 HK Hold , % % 30.7% % 1.2% Average (excluded Cowell) % % 20.7% % 2.5% Handset component makers - others AAC Technologies 2018 HK Add , % % 32.0% % 2.3% Flexium Interconnect 6269 TT Reduce n.a. -2.1% % 14.8% % 3.3% Pegatron 4938 TT Add , % % 14.7% % 6.0% Tongda Group 698 HK Add , % % 23.9% % 3.4% TPK Holding Co 3673 TT Reduce na 10.7 n.a. na % 5.2% % 0.0% Zhen Ding Technology 4958 TT Hold , n.a. -4.3% % 13.8% % 4.4% Average % % 17.4% % 3.2% SOURCE: CIMB RESEARCH, BLOOMBERG Figure 2: Revenue growth (FY13 - FY18F) Figure 3: Core net profit growth and core net profit margin (FY13 - FY18F) 9, % 8,000 7, % 6,000 5,000 4,000 3, % 6% 4% 2,000 1, % - Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F 0 Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F 0% Camera modules Fingerprint recognition module Core net profit Core net profit margin - RHS SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS Figure 4: Core EPS growth (FY13 - FY18F) Figure 5: DPS growth (FY13 - FY18F) Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F - Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS 4

5 Company background A key compact camera module and fingerprint recognition module manufacturer for top-tier Chinese handset vendors Q Technology (Group) Company Ltd (Q Tech) was founded in 2007 and listed on the HKEx in Dec It is currently one of the three largest handset compact camera module (CCM) manufacturers in China. Q Tech s products comprise camera modules and fingerprint recognition modules (FRM) for smartphones and tablets. Apart from manufacturing 3-13MP camera modules for front-facing and rear-facing cameras, Q Tech has also developed products with 16MP and 20MP camera modules, and super-thin AF camera modules with wide-angle lenses, larger aperture, and dual cameras with functions of optical zoom, depth map, OIS (optimal image stabilisation), PDAF (phase detection autofocus), and gesture recognition, and outdoor sports cameras, and closeloop control motors, and alternate motors etc. (Figures 6 8). In 2015, the group produced approximately 160m camera modules for smartphones (74m units in 1H16). In 2016, the group also started to produce fingerprint modules. Supported by its high quality products and large scale of operations (6kk units per month as of Jun 2016), the group has become the key fingerprint recognition module manufacturer for Chinese handset vendors, in our view. Figure 6: 21MP camera module Figure 7: 18MP camera module Figure 8: 21MP camera module SOURCE: CIMB RESEARCH, COMPANY SOURCE: CIMB RESEARCH, COMPANY SOURCE: CIMB RESEARCH, COMPANY Strong customer base Q Tech is among the top-three compact camera modules (CCM) manufacturers for smartphones and tablets in China. The group has established a strong relationship with the top-tier Chinese handset vendors. Its top five customers -- Vivo, Oppo, Huawei, ZTE and Xiaomi accounted for 86% of its total CCM shipments in 1H16. Figure 9: Major customers and partnerships SOURCE: CIMB RESEARCH, COMPANY 5

6 Production facilities Q Tech currently has one factory located in Kunshan, Jiangsu province, and one advanced R&D centre for algorithm and software in Chengdu, Sichuan province. The group was one of the first camera module manufacturers in China to use both the COB (chip on board) and COF (chip on flex) assembly technologies in the manufacture of camera modules. By successfully developing a PCBA arranging machine, a function-test machine, an OTP burning machine, as well as an active alignment (AA) machine on its own, Q Tech has managed to reach a high level of automation. In the Kunshan factory, it owns three highly automated production lines (6kk/month each). Based on the group s expansion plan, its CCM capacity will increase from 16.5kk/month in Jun 2016 to 23kk/month by end-2016, bringing the group s annual CCM capacity to 240m units in FY17F. Q Tech also plans to expand its fingerprint recognition module (FRM) capacity to 10kk/month by end Phase II of the Kunshan factory, located adjacent to the current one, is under construction. Upon completion in Mar 2017, it will add more than 30,000 sq m for CCM and FRM manufacturing. Figure 10: Self-developed automated machine Figure 11: Advanced manufacturing process SOURCE: CIMB RESEARCH, COMPANY SOURCE: CIMB RESEARCH, COMPANY Financial performance in FY13 1HFY16 Revenue breakdown. In 2015, all of Q Tech s revenue was generated from handset camera modules manufacturing. The group commenced production of the fingerprint recognition modules in 1Q16 and this segment contributed around 2.4% of total revenue in 1H16. Nevertheless, we expect FRM to contribute around 12% total revenue in FY16F (Figure 13) due to the rapid ramp up of the new production lines. 6

7 Rmb (million) y oy % Rmb (million) Net profit margin % Technology Components Hong Kong Q Technology (Group) Company Ltd October 20, 2 Figure 12: Revenue breakdown by product category (FY15) Fingerprint modules 0% Figure 13: Revenue breakdown by product category (FY16F) Fingerprint modules 12% Camera modules 100% Camera modules 88% SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS Rapid revenue growth in FY Q Tech s revenue increased more than threefold from Rmb638m in FY12 to Rmb2.2bn in FY15, driven by a significant increase in CCM output. CCM output increased 4.1x from 24m units in FY12 to 98m units in FY15, supported by new customer wins and rapid capacity expansion. However, net profit only doubled from Rmb51m in FY12 to Rmb103m in FY15 because net margin narrowed from 7.9% in FY12 to 4.6% in FY15 (Figure 15). Figure 14: Revenue growth (FY12 - FY15) Figure 15: Net profit and net profit margins (FY12 - FY15) 2, % % 2, % % 1,500 1, % 80% 60% 40% % 6% 4% % 50 2% - Dec-12A Dec-13A Dec-14A Dec-15A 0% 0 Dec-12A Dec-13A Dec-14A Dec-15A 0% Revenue yoy % - RHS Core net profit Net profit margin - RHS SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS Recap of 1H16 results. Net profit in 1H16 rose 30.4% yoy to Rmb82m while revenue increased by 99% yoy to Rmb1.73bn as the group s GPM narrowed by 3.5% pts from 12.8% in 1H15 to 9.3% in 1H16 due to a surge in raw material costs which are based on US$, and low utilisation rate in fingerprint recognition modules manufacturing (Figure 16). Nevertheless, the group significantly increased its high resolution products (8MP/13MP+) by 4.1x to 46m units in 1H16 to account for 62% of total CCM output (31% in 1H15 and 45% in 2H15), thanks to strong customer demand. Its high resolution products accounted for 76% of total revenue (47% in 1H15 and 60% 2H15). 7

8 Figure 16: Results comparison FYE Dec (Rmb m) 1HFY16 1HFY15 yoy % 2HFY15 hoh % chg chg Comments Revenue 1, , Strong revenue growth was supported by signifcant CCM Operating costs (1,606.3) (786.4) (1,241.1) 29.4 output which jumped 104% yoy. EBITDA Gross margin narrowed by 3.5% pts yoy due to surge in EBITDA margin (%) raw materials cost. Depn & amort. (27.2) (19.4) 40.3 (23.1) 17.6 EBIT Interest expense (1.4) (6.1) (77.1) (3.8) (63.5) Interest & invt inc (2.1) 14.7 (114.0) (21.5) (90.4) Associates' contrib - - N/M - N/M Exceptionals #DIV/0! (1.1) - Pretax profit Tax (7.9) (8.7) (8.8) (4.0) 95.2 Tax rate (%) Minority interests - - N/M - N/M Net profit Core net profit strongly rebounded 110% hoh due to Core net profit change in customers mix. EPS (Rmb cts) Core EPS (Rmb cts) SOURCES: CIMB RESEARCH 8

9 Company outlook Ongoing megapixel migration will help sustain profitability Q Tech is currently one of the few manufacturers in China that can massproduce high resolution (16MP+) camera modules for smartphones and tablets. Q Tech has become an integral part of several top-tier Chinese brands supply chains in CCM manufacturing for high resolution camera modules (13MP+), thanks to its advanced technology and stronger production capability in multifunction camera modules, such as OIS (optimal image stabilisation), PDAF (phase detection auto-focus), gesture recognition, iris recognition and dual camera, etc. Based on our channel checks, Q Tech is the key supplier for the rear-facing cameras on Vivo X7 plus and ZTE Nubia Z11 (Figures 17 and 18). Figure 17: ZTE Nubia Z11 Primary camera specification: 16MP, f/2.0, PDAF, OIS Features: 1/2.8" sensor size, 1.12 µm pixel size, geo-tagging, touch focus, face/smile detection, panorama, HDR Figure 18: Vivo X7 plus Primary camera specification: 16MP, f/2.0, PDAF Features: Geo-tagging, touch focus, face detection, panorama, HDR SOURCE: CIMB RESEARCH, ZTE SOURCE: CIMB RESEARCH, Vivo Rapid growth in shipments of 8MP+ products. In 1H16, Q Tech produced 75m units of CCM, of which over 63% were 8MP+ that meet industry leading standards in the terms of high resolution products. We believe the group's 8MP+ products will continue to grow rapidly in 2H16F and FY17F on the back of the fast-growing shipments for its key customers and ongoing megapixel migration. More importantly, we expect its 13MP/16MP+ products with additional functionality such as OIS, PDAF and dual camera will significantly increase, underpinned by enhanced production capability and improved production yield in high value-added camera modules. We expect Q Tech s CCM shipment to reach 219m units (+35% yoy) in FY17F and 274m units (+25% yoy) in FY18F. More importantly, we estimate that Q Tech's 8MP CCM output will expand by 46% yoy from 84m units in FY16F to 111m units in FY17F (51% of total output), while 13MP+ products will jump 112% yoy from 33m units in FY16F to 72m units in FY17F (33% of total output), driven by strong customer demand (from Vivo, Oppo and Huawei) for high resolution products (Figure 20). Focus on high resolution products to widen its GPM. We believe Q Tech will focus on high resolution products to enable the group to maintain its strong market position and profitability in the highly competitive CCM industry. The ongoing megapixel migration in the group is also one of the main reasons we forecast that gross margin (GPM) will expand from 9.5% in FY16F to 10.0% in FY18F. 9

10 by value (Rmb million) by value (Rmb million) No. of units (weighting %) No. of units Technology Components Hong Kong Q Technology (Group) Company Ltd October 20, 2 Figure 19: Camera modules output weighting, breakdown by megapixel (FY14 - FY18F) Figure 20: Camera modules output, breakdown by megapixel (FY14 - FY18F) 100% % 80% 70% 60% 50% 40% 30% 20% 10% % Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F - Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F 3MP and below 5MP 8MP 13MP 16MP and above 3MP and below 5MP 8MP 13MP 16MP and above SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS Figure 21: Camera modules sales weighting, breakdown by megapixel (FY14 - FY18F) Figure 22: Camera modules sales, breakdown by megapixel (FY14 - FY18F) 100% 8,000 90% 80% 70% 60% 50% 40% 30% 20% 10% 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0% Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F - Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F 3MP and below 5MP 8MP 13MP 16MP and above 3MP and below 5MP 8MP 13MP 16MP and above SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS Dual camera to be key earnings driver The advantage of dual camera. Dual camera will enable good pictures to be taken in low light, capture a wider field of view, obtain 3D-imaging, as well as 4K video. It makes smartphone cameras behave more like professional digital single lens reflex (DSLR) cameras. Dual camera can substantially improve image quality with richer colour and sharper detail in a thinner size module as the camera carries two CMOS in two cameras which enables it to capture more light and details. Furthermore, dual camera allows the main camera to focus on optics and stabilisation while the another camera focuses on digital zoom to capture greater depth and gain horizontal space. LG G5 and iphone 7 plus already have dual camera. On the back of the more mature technology and significant desire for high quality pictures without a high-tech camera among consumers, handsets vendors are increasingly adopting dual camera in their flagship models. The most popular models launched by International smartphone brands with dual camera in 2016 include LG G5 and Apple iphone 7 plus. Chinese vendors also launch dual camera in their flagship models. We are more focused on dual camera development among leading domestic brands given that we believe it benefits players in the domestic supply chain 10

11 such as Q Tech and Sunny Optical which are the leaders in dual camera modules manufacturing. Leading Chinese smartphone brands such as Huawei, Xiaomi, LeEco Coolpad and ZTE, etc., have launched their flagship models with dual camera. Such models include Huawei P9 and Honor 8, Xiaomi 5S plus and Redmi Pro, Coolpad Cool 1 Dual and ZTE Axon, etc., Our channel checks suggest that Vivo, Oppo and TCL etc., tier-1 Chinese vendors are likely to launch their flagship models soon with dual camera in order to enhance user experience in photo taking. Q Tech currently plays important role in domestic supply chain. Q Tech has been providing dual camera modules for Xiaomi Redmi Pro (RGB+RGB), LeEco Cool 1 dual (2 RGB + 1 Mono) and Qiku 360 Q5, and plays an important role in domestic supply chain (Figures 23 and 24). Figure 23: Redmi Pro Primary camera specification: Dual 13 MP + 5MP, f/2.0, PDAF Features: Geo-tagging, touch focus, face detection, HDR, panorama Figure 24: LeEco Cool 1 Primary camera specification: Dual 13 MP, f/2.0, PDAF Features: Geo-tagging, touch focus, face detection, panorama, HDR SOURCE: CIMB RESEARCH, Xiaomi SOURCE: CIMB RESEARCH, Coolpad Drivers of dual camera development. We are positive on dual camera adoption by Chinese handset vendors for three reasons: 1. Declining dual camera costs due to increase in capacity and improvement in production yield of domestic suppliers; 2. Technological upgrades in both hardware and software; 3. The tremendous consumer demand in China for high quality smartphone cameras. We believe dual camera will quickly become a standard specification in mid-to high-end smartphones (Rmb3,000 to Rmb4,000/US$450 to US$600) produced by top-tier Chinese brands. Figure 25: Xiaomi Redmi Pro Figure 26: Huawei Honor 8 SOURCE: CIMB RESEARCH, Xiaomi SOURCE: CIMB RESEARCH, Huawei 11

12 Dual camera ouput (No. of units) % of total CCM ouput (%) Dual camera demand (No. of units) Penetration rate (%) Technology Components Hong Kong Q Technology (Group) Company Ltd October 20, 2 Dual camera penetration rate to reach 13% in 2017F. We estimate that dual camera penetration rate among the top 10 Chinese brands will remain low in 2016F at around 3% (2015: 0.5%) given that only a few new models have dual camera currently. Nevertheless, we expect the dual camera penetration rate among the top 10 Chinese brands to reach 13% in 2017F and 18% in 2018F while dual camera demand from the top 10 Chinese brands will increase by 184% yoy from c.21m units in 2016F to c.97m units in 2017F and 142m units in 2018F, underpinned by the wider adoption of dual camera in their mid-to highend models (Figure 27). Figure 27: Estimated dual camera penetration rate among top 10 Chinese brands % 18% % 14% 12% 10% 8% 6% 4% 2% F 2016F 2017F 2018F 0% Dual camera demand by top 10 Chinese brands - LHS Penetration rate (%) - RHS SOURCES: CIMB RESEARCH Dual cameras to comprise around 7% of CCM shipments in FY17F. With the integrated dual camera solutions for MTK and Qualcomm, Q Tech has participated in several dual camera projects for Xiaomi, Coolpad and other tier- 1 Chinese brands in We expect strong demand for dual cameras from Q Tech's customers, namely Huawei, ZTE and Xiaomi, as well as potential demand from Vivo and Oppo. Based on this, we forecast that Q Tech s dual camera shipments will rise from above 5m dual cameras in FY16F to 14m units in FY17F and 33m units in FY18F, representing 7% and 12% of its total CCM shipments in FY17F and FY18F, respectively (Figure 28). Figure 28: Estimated Q Tech s dual camera output (FY16 FY18F) 35 14% 30 12% 25 10% 20 8% 15 6% 10 4% 5 2% F 2017F 2018F 0% Q Tech's dual camera output % of total CCM output SOURCES: CIMB RESEARCH 12

13 ASP (Rmb / unit) GPM (%) Technology Components Hong Kong Q Technology (Group) Company Ltd October 20, 2 Positive ASP and gross margin outlook for CCM segment. Owing to the higher contribution from dual camera models, which enjoy higher ASP than single camera modules (around 2.5x), we expect Q Tech s CCM ASP to stabilise at around Rmb22/unit in FY16F. We forecast that CCM ASP will gradually rise to c.rmb23/unit in FY17F and Rmb24/unit in FY18F. This would be a reversal of the downward trend in FY On the other hand, we believe its gross profit margin (GPM) will be protected by an increase in dual camera shipments given that the dual camera module commands a 1-2% higher GPM. Hence, we forecast that Q Tech s CCM GPM will widen from 9.5% in FY16F to 10.0% in FY18F (Figure 29). Figure 29: Estimated CCM ASP and GPM (FY13 - FY18F) % 16% 15% % 13% 12% 11% 10% 9% 14 Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F 8% CCM ASP - LHS CCM GPM - RHS SOURCES: CIMB, COMPANY REPORTS Strong demand for multi-function smartphone cameras Rising demand for multi-function smartphone cameras. We observe that 13MP back-end camera have become a standard specification for almost all smartphones (with retail price of above Rmb600 / US$100) launched by the top-tier Chinese brands. However, vendors are requesting for additional functions on the main camera to differentiate and enhance the user experience. The most common functionalities added are OIS (optical image stabilisation) and PDAF (phase detection auto-focus) in high resolution camera modules. Furthermore, some cameras in the high-end models also carry large apertures and wide angle lenses as well as 4k video with a thinner camera size (Figure 30). Raising the barriers to entry in high-end camera modules. We are positive on Q Tech because of the above development trend in smartphone cameras as it increases the difficulty in production and raises the barriers to entry. As a result, it will benefit the leading CCM manufacturers such as Q Tech which has made breakthroughs in high mega pixel cameras with OIS and PDAF. Continual specification upgrade on main cameras to benefit Q Tech. Q Tech is also developing the next generation of smartphone cameras such as iris recognition and gesture recognition. We believe that Q Tech will continue gaining market share in domestic supply on the back of its technology knowhow in high-end value added smartphone camera, underpinned by continual specifications upgrade of the main camera among Chinese brands. 13

14 Figure 30: Estimated functionality breakdown in main camera, by volume (top 10 Chinese brands) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F AF/ VCM (5MP or above) PDAF/ OIS (13MP or above) AF/ VCM (8MP or above) PDAF/ OIS/ Dual camera (13MP or above) SOURCES: CIMB RESEARCH Riding on Oppo and Vivo s strong shipments growth Vivo, Oppo and Huawei are Q Tech s three largest customers. We estimate that they contribute around 67% of total revenue in FY16F (Figure 31). Figure 31: Estimated revenue breakdown in CCM segment by brands (FY16F) Xiaomi, 8% Others, 14% Vivo, 29% ZTE, 11% Huawei, 14% Oppo, 24% SOURCES: CIMB RESEARCH Oppo s and Vivo s shipment growth substantially outpaced its rivals in 1H16. According to Counterpoint, Oppo and Vivo were the rising stars among handset vendors globally in the first two quarters of 2016 on the back of 117% and 61% annual growth in shipments. Vivo shipped 16.5m smartphones, up 67% yoy, in 2Q16. It ranked no. 4 in the global smartphone market with market share of 4.6% (+1.6% via 4Q15, Figure 32). We estimate Vivo s shipment to increase 49% yoy to 64m units in 2016F (Figure 34). Oppo sold 23m smartphone in 2Q16, up 135% yoy. With 6.5% market share, it became the fourth largest handset vendor in the world in 2Q16 (Figure 33). We forecast Oppo s shipments to increase 104% yoy to 102m units in 2016F to become the fastest growth handset vendor (Figure 34). 14

15 Huawei Oppo Xiaomi Vivo ZTE Lenovo TCL-Alcatel Coolpad Meizu LeTV Units (million) 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 No. of units (million) Global market sahre (% ) No. of units (million) Global market sahre (%) Technology Components Hong Kong Q Technology (Group) Company Ltd October 20, 2 We believe that Oppo s and Vivo s fast growth is driven by their wellestablished distribution channels in the low-tier cities (tier-3 to tier-6) in China which heavily rely on physical stores to promote the products as online sales are not popular there. Oppo and Vivo are also gaining market share overseas, especially in South East Asia due to their high performance-to-cost quotient smartphone and increased brand awareness. Figure 32: Vivo s shipments by quarter (1Q14-1Q16) Figure 33: Oppo's shipments by quarter (1Q14-1Q16) % % % 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% % 5.0% 4.0% 3.0% 2.0% 1.0% 0 0.0% 0 0.0% Vivo shipment by quarter Global market share Oppo shipment by qarter Global market share SOURCES: CIMB, COUNTERPOINT SOURCES: CIMB, COUNTERPOINT Figure 34: Estimated shipments of top 10 Chinese vendors ( ) % The 3 largest customers of Q Tech % 80-10% +49% +11% -36% 60-23% -37% % +400% E SOURCES: CIMB RESEARCH, COUNTERPOINT Q Tech is set to benefit from fast-growing Oppo and Vivo, in our view. Leveraging on its high quality products and increased production capacity, Q Tech is the key camera modules supplier (both front-facing and rear-facing) to Vivo and Oppo. According to Counterpoint shipment figures and our internal estimate, we calculated that Q Tech produced around 21m/18m/10m camera modules (included front-facing and rear-facing) for Vivo/Oppo/Huawei in 1H16 which accounted for around 36%/25%/8% of total demand of Vivo/Oppo/Huawei, respectively. 15

16 No. of module output (million) Fingerprint recognition module revenue (Rmb m) % of total sales Technology Components Hong Kong Q Technology (Group) Company Ltd October 20, 2 Figure 35: Key customers of major camera module manufacturers Q Tech Sunny Optical Lite-On LG Innotek SECOM Partron Key customers Oppo, Vivo, Huawei, ZTE, Xiaomi Huawei, Xiaomi, Oppo and Vivo Huawei, Oppo, Samsung, Xiaomi and Vivo LGE, Apple Samsung, Apple, Xiaomi Samsung SOURCES: CIMB RESEARCH, COMPANY REPORTS Fingerprint modules Fingerprint recognition becoming a standard specification. On the back of rapid handset payment growth in China, fingerprint recognition has become a very important feature to ensure the security of mobile payments. We believe that the fingerprint recognition will be widely adopted in mid- to high-end smartphones in 2017, or even spread into the sub-rmb1,000 segment given the rising end-user demand for privacy and better user experience. Q Tech tapped into fingerprint recognition module manufacturing. Although Q Tech is a new entrant in this segment, the group has a good command of various fingerprint sensor technologies such as coating and cover, etc, in our view. Q Tech has started mass production for coating and ceramic cover fingerprint recognition modules (FRM). Moreover, the group is in the testing stage for glass and sapphire cover fingerprint recognition modules. New growth driver for Q Tech. Q Tech started to produce FRM for its customers in 1Q16. Its key customers include Huawei, Xiaomi, Vivo and Oppo. Given it was a trial run in 1H16, the group only produced 1.4m FRM in 1H16 and generated revenue of Rmb42m. Nevertheless, the group expects its FRM output to significantly increase to over 18m units in 2H16F driven by the rapid ramp up of its production lines. In order to capture the tremendous market demand, Q Tech plans to increase the FRM capacity by 67% from 6kk/month in Jun 2016 to 10kk/month by end It will bring the total FRM capacity to approximately 120m units in 2017 and become one of the top three suppliers, in terms of volume, in the Chinese smartphone market. Given that we believe the fingerprint recognition feature will become a standard specification in mid- to high-end smartphones, we think that the FRM segment will be another growth driver for Q Tech. We expect the group to produce 40m FRM in FY17F and 52m in FY18F and generate revenue of Rmb850m in FY17F and Rmb995m in FY18F (Figure 37). Figure 36: Fingerprint module output, no. of units (FY16F-18F) Figure 37: Fingerprint module revenue (FY16F-18F) % % % % % % 0 Dec-16F Dec-17F Dec-18F 0 Dec-16F Dec-17F Dec-18F FRM revenue % of total sales - RHS 10% SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS 16

17 No. of units (million) yoy % CCM blended ASP (Rmb/ unit) Technology Components Hong Kong Q Technology (Group) Company Ltd October 20, 2 Figure 38: SWOT Strengths * Rides the huge demand for high-end handset camera modules, thanks to the fast shipment growth of its customers. * Given its huge production capacity and advanced production capability, Q Tech benefits from the rising demand for dual cameras and high-resolution smart cameras from top-tier Chinese brands. * As the third-largest manufacturer of fingerprint recognition hardware for Chinese brands, Q Tech will benefit from the rapid growth of mobile payment in China. Opportunities * Chinese brands gaining market share both locally and globally. * Endless consumer demand for better photo quality from smartphones driving continuous smartphone camera upgrades among manufacturers. * Well prepared for technology upgrades, with new products such as iris recognition and gesture recognition in the pipeline. Weaknesses * Smartphone camera module production capacity and capability lags behind global and domestic leaders. Threats * Gross margins to face pressure from intensifying competition among low-megapixel products. * Lower-than-expected dual camera penetration rate among the top 10 Chinese vendors. * Faster-than-expected drop in FRM ASPs SOURCE: CIMB RESEARCH, COMPANY Financials Core EPS CAGR of 53% in FY15-18F We estimate that Q Tech s revenue will rise to Rmb7.7bn in FY18F, with 3-year CAGR of 52% (FY15-18F), driven by new revenue contribution (c.14% of annual revenue in FY17-18F) from FRM manufacturing and rapid growth in the camera module shipments. We project that camera module shipments will increase from 98m units in FY15 to over 274m units in FY18F (3-year CAGR of 41%). We believe net margin will be enhanced by 0.2% pt from 4.7% in FY15 to 4.9% in FY18F, thanks to fairly stable gross margin outlook (from 10.9% in FY15 to 10.0% in FY18F) and improved SG&A costs (1.5% in FY15 to 0.9% in FY18F). We project net profit of Rmb381m in FY18F, representing 3-year CAGR of 53% in FY15-18F (Figure 42). We estimate that Q Tech s CCM shipment will reach 162m units in FY16F (+65% yoy), 219m units in FY17F (+35% yoy) and 274m units in FY18F (+25% yoy) to lead its revenue growth (Figure 39). More importantly, we believe that CCM blended ASP will gradually rise from Rmb22/unit in FY16F to Rmb23/unit in FY17F and Rmb24/unit in FY18F (Figure 40), supported by rising contribution from smart cameras (such as dual cameras, as well as 13MP+ cameras with OIS, PDAF and wide angle). Figure 39: Total CCM output (FY13-18F) Figure 40: CCM blended ASP (FY13-18F) % % 60% % 40% % % 10% Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F 3MP to 12MP products 13MP+ products yoy% - RHS 0% Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS 17

18 Figure 41: Revenue assumptions and projections FYE Dec (Rmb m) Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F Revenue by products Camera modules 1,411 2,161 2,202 3,653 5,073 6,725 Fingerprint modules Total 1,411 2,161 2,202 4,153 5,923 7,719 Revenue by Products (yoy %) Camera modules 121.2% 53.2% 1.9% 65.9% 38.8% 32.6% Fingerprint modules n.a. n.a. n.a. n.a. 70.0% 17.0% Total 121.2% 53.2% 1.9% 88.6% 42.6% 30.3% Revenue by Products (weighting %) Camera modules 100.0% 100.0% 100.0% 88.0% 85.6% 87.1% Fingerprint modules 0.0% 0.0% 0.0% 12.0% 14.4% 12.9% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Modules output (m units) Camera modules Fingerprint modules Modules output (yoy %) Camera modules 101.3% 71.7% 18.9% 65.0% 35.0% 25.0% Fingerprint modules n.a. n.a. n.a. n.a % 30.0% ASP (Rmb / unit) Camera modules Fingerprint modules n.a. n.a. n.a ASP (Rmb / unit yoy%) Camera modules 9.8% -10.8% -14.3% 0.5% 2.9% 6.0% Fingerprint modules n.a. n.a. n.a. n.a % -10.0% SOURCE: CIMB RESEARCH, COMPANY REPORT 18

19 Figure 42: Consolidated income statement FYE Dec (Rmb m) Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F Revenue 1, , , , , ,719.1 Cost of sales (1,176.6) (1,808.5) (1,961.8) (3,760.8) (5,330.6) (6,947.2) Gross profit Other income (18.1) (2.8) R&D expenses (51.1) (73.4) (74.3) (124.6) (189.5) (262.5) Selling and marketing expenses (3.3) (5.6) (6.2) (9.4) (13.3) (17.0) Administrative expenses (14.6) (22.8) (27.5) (35.8) (46.4) (56.3) Operating profit Net finance cost (7.6) (17.9) Shares of associate co Extraordinary items 5.7 (16.8) (1.1) Profit before taxation Taxation (25.0) (43.6) (12.7) (29.1) (53.1) (67.2) Minority interests Net profit Recurring net profit Growth (yoy%) Revenue 121% 53% 2% 89% 43% 30% Gross profit n.a. 51% -32% 63% 51% 30% Operating profit n.a. 48% -58% 92% 59% 27% Net profit 226% 20% -48% 91% 54% 26% Core net profit 215% 35% -51% 89% 54% 26% Ratio analysis (%) Gross margin 16.6% 16.3% 10.9% 9.5% 10.0% 10.0% Operating margin 13.1% 12.7% 5.2% 5.3% 5.9% 5.8% Net profit margin 11.6% 9.0% 4.6% 4.7% 5.1% 4.9% Core net profit margin 11.2% 9.8% 4.7% 4.7% 5.1% 4.9% R&D expenses to revenue ratio 3.6% 3.4% 3.4% 3.0% 3.2% 3.4% Selling and marketing expenses to revenue ratio 0.2% 0.3% 0.3% 0.2% 0.2% 0.2% Administrative expenses to revenue ratio 1.0% 1.1% 1.2% 0.9% 0.8% 0.7% SG&A cost to sales 1.3% 1.3% 1.5% 1.1% 1.0% 0.9% Taxation rate 13.3% 18.2% 11.1% 13.0% 15.0% 15.0% Dividend payout 0.0% 21.1% 0.0% 25.0% 25.0% 25.0% +/- change % Gross margin 16.6% -0.3% -5.4% -1.5% 0.5% 0.0% Operating margin 13.1% -0.4% -7.5% 0.1% 0.6% -0.1% Net profit margin 3.7% -2.5% -4.4% 0.1% 0.4% -0.1% Core net profit margin 3.3% -1.3% -5.1% 0.0% 0.4% -0.1% SG&A to sales 1.3% 0.1% 0.2% -0.4% -0.1% -0.1% SOURCE: CIMB RESEARCH, COMPANY REPORT EBIT margin expected to expand Q Tech spent around 3-4% of total sales on R&D in FY13-15 for the continuous mega pixel migration in smartphone camera and the launch of fingerprint recognition modules manufacturing. Its SG&A expense to sales ratio remained low at % in FY13-15 due to its manufacturer status. The lowered EBIT from 11.7% in FY13 to 6.0% in FY15 was mainly due to decline of gross profit margin driven by keen competition in low mega pixel products. We expect its EBIT to be maintained at around % in FY16F to FY18F on the back of the stabilised gross profit margin (GPM) and stable R&D and SG&A expenses outlook (Figure 43). 19

20 Figure 43: Sales ratio and EBIT margin (FY13 FY18F) 100% 95% 90% 11.7% 11.6% 6.0% 5.4% 5.8% 5.7% 3.4% 3.0% 3.2% 3.4% 0.2% 0.9% 1.2% 0.3% 0.2% 0.8% 0.2% 0.7% 85% 3.6% 3.4% 1.0% 0.2% 1.1% 0.3% 89.1% 90.5% 90.0% 90.0% 80% 83.4% 83.7% 75% Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F Cost of sales Selling and marketing expenses to sales Administrative expenses to sales R&D EBIT margin SOURCE: CIMB RESEARCH, COMPANY REPORT Margins trend heads north in FY17 18F We believe that Q Tech s blended GPM will further decline from 10.9% in FY15 to 9.5% in FY16F due to low GPM achieved by the newly launched fingerprint recognition module (FRM) segment and ASP drop in low mega pixel camera modules. Nevertheless, we expect its blended GPM to gradually widen from 9.5% in FY16F to 10.0% in FY18F on the back of product mix improvements with higher contribution from high value-added products such as dual camera and multi-functions smartphone camera and rising GPM in FRM segment due to ramp up of production (Figure 44). Figure 44: Margins trend blended GPM, OPM and core NPM (FY13 FY18F) 18% 16% 14% 12% 10% 8% 6% 4% 2% Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F Blended GPM Operating profit margin Core net profit margin SOURCE: CIMB RESEARCH, COMPANY REPORT Working capital Normalised working capital at the industry norm level. Its cash conversion cycle has grown longer from negative 15 days in FY13 to 79 days in FY15 due to shortened payable days. The latter normalised from 281 days in FY13 to 99 days in FY15. Receivable days were maintained at the industry norm of around one month in FY14 and FY15 (Figure 45). 20

21 no. of days Technology Components Hong Kong Q Technology (Group) Company Ltd October 20, 2 Figure 45: Cash conversion cycle (100) average Inventory days Accounts receivable days Accounts payable days Cash conversion cycle (200) (300) (400) Dec-13A Dec-14A Dec-15A SOURCE: CIMB RESEARCH, COMPANY REPORT Balance sheet and cash flow Strong balance sheet. As at 31 Dec 2015, Q Tech had net cash of Rmb286m, including cash of Rmb428m and short term bank borrowings of Rmb142m. The decrease in cash in FY15 was due to the group increase in capital expenditure (Rmb306m) for capacity expansion in CCM and FRM manufacturing. We estimate the group should maintain a net cash position in FY16-18F given it has no major capex outstanding. Capex plan. Q Tech spent over Rmb300m on building the new factory (Phase II of the Kunshan factory) which is located adjacent to the existing production base for CCM and FRM capacity expansion. The new factory is expected to be completed in Mar We expect Q Tech s capital expenditure to be stable at approximately Rmb150m p.a. in FY17-18F, as it does not have any major capex plans outstanding. Figure 46: Cash projection FYE Dec (Rmb m) Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F EBITDA Less : Change in working capital Less : Capital expenditure Less : Taxation Free cash flow Dividend paid Net (debt) / cash Cash Total borrowings SOURCE: CIMB RESEARCH, COMPANY REPORT 21

22 Figure 47: Consolidated balance sheet FYE Dec (Rmb m) Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F Fixed Assets Intangible Assets Other Long Term assets Total Non-current assets Total Cash and Equivalents Inventories Accounts Receivable , , ,643.5 Other Current Assets Total Current Assets 1, , , , , ,738.7 Trade Creditors , , ,202.8 Short-term Debt Other Current Liabilities Total Current Liabilities 1, , , , ,491.9 Total Long-term Debt Other Liabilities Deferred Tax Total Non-current Liabilities Shareholders' Equity , , , , ,927.5 Minority Interests Total Equity , , , , ,927.5 SOURCE: CIMB RESEARCH, COMPANY REPORT Figure 48: Consolidated cashflow statement FYE Dec (Rmb m) Dec-13A Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F Pre-tax Profit Depreciation And non-cash Adj Change in Working Capital (487.6) (90.3) (248.6) (247.1) Tax Paid (15.8) (39.2) (38.0) (29.1) (53.1) (67.2) Other Operating Cashflow (2.0) (4.0) (3.8) (2.2) Cashflow From Operations (302.3) Capex (148.5) (158.3) (305.7) (150.0) (150.0) (150.0) Disposals of Fas/subsidiaries Acq. Of Subsidiaries/investments (286.0) Others Cash Flow From Investing (434.5) (150.0) (150.0) (150.0) Debt Raised/(repaid) (32.9) (653.8) Equity Raised/(repaid) (7.0) Dividends Paid (41.7) 0.0 (48.8) (75.2) Net Cash Interest Other Financing Cashflow (286.1) (19.6) (2.8) (4.1) (5.0) Cash Flow From Financing (722.1) 60.1 (9.2) (42.5) Total Cash Generated (394.0) 65.8 (45.3) 13.6 Change in net cash (318.2) (89.0) (24.2) Free Cashflow To Equity (406.4) (339.6) SOURCE: CIMB RESEARCH, COMPANY REPORT 22