Key findings:

• Q Tech’s revenue rose 40% to 7.68 billion yuan in the first half of the year, while profits rose 454% to 115 million yuan.
• The company’s research and development spending during this period amounted to just 3.7% of sales, well below competitor Sunny Optical’s spending of up to 7% in recent years.

By Ken Lo

A recovering smartphone market is highlighting rising sales and profits for manufacturers of lenses and camera modules, which are key components of most models. First industry leader Optician Sonja (2382.HK) published a positive profit warning late last month and now rival Q-Technology (Group) Co., Ltd. (1478.HK) also released a glowing first-half report, saying revenue rose 40% to 7.68 billion yuan ($1.07 billion) in the half-year period and profit more than quintupled to 115 million yuan.

Q Tech’s latest results show that its sales volume in the first half of 2024 rose 30.8% year-on-year, partly due to rising sales of camera modules for automotive and IoT applications. Equally important, the company saw a 1.8 percentage point increase in gross margin to 5.2% on its optical lenses and camera modules, which account for 95% of revenue, enabling the big jump in profits. The company attributed the strong performance to a recovering global smartphone market that allowed it to better utilize its capacity. It also attributed a growing share of its revenue to higher-value products, which typically have higher margins.

Q Tech and Sunny Optical are major competitors in their respective fields. They make lenses, camera modules and other optical components that power not only smartphones but also digital cameras, surveillance cameras and other consumer electronics. Q Tech also makes fingerprint recognition modules, but this business area accounts for only 5.2 percent of its revenue.

Their large overlap means that the two companies often serve the same customers, as they both supply lenses for smartphone manufacturers such as Apple, Samsung, Oppo, Vivo and Xiaomi. This explains why the two are similar not only in terms of products, but also in terms of revenue and profit trends. This parallel is reflected in the fact that Q Tech’s net profit fell by 52% in 2023 and Sunny Optical’s also fell by 54% over the same period.

Q Tech says it has targeted the high-end market and expanded its product offerings there. This is reflected in the 49.2% of sales coming from camera modules with a resolution of 32 megapixels and above. The growing share of high-end product sales has strengthened the company’s reputation as a market leader while increasing its profit margins. However, Q Tech is still a few steps behind Sunny Optical, whose lead in the high-end market is reflected in higher R&D spending and better gross margins.

Spending gap in research and development

In the first half of this year, Q Tech spent only 286 million yuan on research and development, accounting for 3.7% of its total revenue of 7.68 billion yuan. Sunny Optical spent significantly more money, spending 2.57 billion yuan on research and development out of revenue of 31.7 billion yuan, accounting for 8.1% of total revenue. On a broader scale, Sunny Optical’s research and development spending has averaged around 7% of its total revenue in recent years, twice that of Q Tech.

Sunny’s greater emphasis on product development is also reflected in the two companies’ differing margins. Q Tech reported a net margin of 1.5% and a gross margin of 5.2% in the first half of 2024, well behind Sunny Optical’s net margin of 3.6% and gross margin of 14.5% last year. This seems to show that the large gap in R&D translates directly to each company’s ability to negotiate better prices with their customers.

In addition to its half-year results, Q Tech also released monthly figures showing that it sold about 33.43 million mobile phone camera modules in July, up 1.5% month-on-month and 5.5% year-on-year, reflecting the ongoing recovery of the Android smartphone market. Sales of smartphone camera modules also performed well in the first seven months, totaling 248.6 million units, for a monthly average of 35.51 million units sold. However, we should also point out here that sales in June and July were below this average, at about 32 million units.

The company said that as the market recovers, its customers have begun to upgrade the specifications of their products more aggressively to meet needs as diverse as low-light photography, long-distance shooting, video recording, and wide-angle, macro and shake-free photography. At the same time, phone makers are offering more models with high-end features such as periscope cameras, high-magnification optical image stabilization, variable apertures and large-format sensors with ultra-high pixel density. All of this poses further challenges for companies like Q Tech and Sunny Optical to push the boundaries of their optical products.

Although they still account for a relatively small portion of Q Tech’s overall revenue, sales of fingerprint recognition modules also saw strong growth momentum in July, with 14.04 million units sold, up 8.3% month-on-month and 58% year-on-year. The latest monthly figures for this category were also well above the average monthly sales of 10.45 million units in the first seven months of the year. In addition, demand for smartphones with ultrasonic and optical fingerprint recognition modules has been steadily increasing, further benefiting companies like Q Tech whose products can meet this demand, according to its interim results.

Given the overall boom in smartphone sales as well as demand from IoT, automotive and extended reality (XR) sectors, several brokerages are bullish on Q Tech, believing that these trends will help the company achieve further major revenue gains. BOCI recently upgraded its rating on Q Tech to Buy and raised its price target to HK$5.70 from HK$3.60 previously, representing an upside potential of 23% from the stock’s current price.

While Q Tech sees itself as an equal to Sunny Optical, it can only truly compete on equal terms with Sunny Optical if it invests more money in product development. Otherwise, Sunny Optical could continue to lead in the upper segment of the lens and module spectrum.

Sunny Optical’s better positioning is reflected in its greater attractiveness to shareholders, who may also like the company’s ability to continue paying dividends over the past three years, even though Q Tech has suspended its dividend since 2020. The attractiveness gap is reflected in the two companies’ price-to-earnings (P/E) ratios. Q Tech’s forward P/E for 2024 is currently 15.3, significantly lower than Sunny’s 22.8.

This article was written by an unpaid outside contributor. It does not represent Benzinga’s reporting and has not been edited for content or content.