QUECTEL WIRELESS(603236)：PREANNOUNCED 2Q22 EARNINGS GROW RAPIDLY;PROFITABILITY IMPROVES

　　Preannounces 1H22 earnings up 105% YoY
　　Quectel Wireless preannounced its 1H22 results, estimating revenue grew about 55% YoY to Rmb6.69bn and net profit attributable to shareholders increased about 105% YoY to Rmb274mn. In 2Q22, Quectel Wireless estimates its revenue rose around 48% YoY to Rmb3.63bn and attributable net profit grew about 106% YoY to Rmb150mn. The results are largely in line with market expectations.
　　The firm attributes earnings growth to: 1) its efforts to improve the product structure, increase product categories, and boost the growth of 5G modules, automotive modules, smart modules, LTE modules, antenna, and original design manufacturing (ODM) businesses; and 2) stronger profitability bolstered by economies of scale.
　　Trends to watch
　　We think Quectel Wireless, as a leading manufacturer, will be the first to benefit from the booming internet of things (IoT) demand. Data from Ministry of Industry and Information Technology (MIIT) shows that three operators saw their terminal user base for cellular IoT increase to 1.59bn at end-May 2022 (up 196mn from end-2021). We think the penetration rate of IoT will increase as the Internet of Everything (IoE) grows. We expect Quectel Wireless to be the first to benefit from industry development, as the company is a global leader in cellular communication modules with channel, product, and cost advantages.
　　Proactively diversifies its product lines to boost growth. The company has launched various 5G and automotive products to diversify communication module products. Meanwhile, it is developing integrated and digitalized businesses based on those products, including antenna, QuecCloud IoT cloud platform, ODM, and smart city digital integration. According to Counterpoint, the firm seized a 38.1% market share measured by shipment in 1Q22, indicating its global leadership. In our opinion, the firm is diversifying and improving communication module products, which should boost its revenue growth and enhance customer stickiness. We expect the company to maintain its leadership in the module sector over the long term.
　　Sound expense control; stronger profitability thanks to economies of scale. Based on the preannounced results, we estimate the firm’s net margin came to 4.1% in 2Q22, up 1.2ppt YoY or 0.1ppt QoQ. We expect its profitability to improve on the back of revenue growth, sound management, channel advantages, replication of R&D results, and economies of scale.
　　Financials and valuation
　　We raise our 2022 and 2023 net profit forecasts by 7% and 5% to Rmb646mn and Rmb947mn, as: 1) we remain upbeat on the prospects for the cellular communication module sector and the firm’s leading position; 2) we think the preannounced 2Q22 results demonstrate the firm’s ability to maintain growth despite COVID-19; and 3) the firm’s economies of scale start to kick in as its revenue increases. The stock is trading at 36.3x 2022e and 24.7x 2023e P/E. We maintain an OUTPERFORM rating and our ex-rights target price of Rmb166.15. Our target price implies 48.6x 2022e and 33.1x 2023e P/E, offering 34% upside.
　　Risks
　　Intensifying sector competition; tight supply of raw materials; disappointing development of Internet of Vehicles.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。