Q Tech (1478.HK) released its 2026 interim results, reporting revenue of RMB 9.923 billion for the first half, a 12.4% year-on-year increase. However, gross margin contracted by 0.8 percentage points to 6.6%, primarily due to stalled specification upgrades in mid-to-low-end smartphone camera modules and rising marginal costs from lower capacity utilization in its biometrics module business. Net profit attributable to shareholders declined 10.5% year-on-year to RMB 276 million.

Shipment volumes increased steadily across all business segments during the period, driving top-line growth, while gross margin performance varied by segment. In the smartphone business, the company demonstrated robust supply chain resilience. Despite a year-on-year decline in global smartphone shipments, intensifying competition in the mid-to-low-end market, and a slowdown in high-spec product upgrades, smartphone camera module shipments surged 30.1% year-on-year. This drove segment revenue up 11.8% to RMB 7.487 billion, although gross margin fell 1.6 percentage points to 6.1% due to the stagnant specification improvements in mid-to-low-end modules.

In the non-smartphone segment, combined shipments of IoT and automotive camera modules and LiDAR products reached 12.315 million units, a substantial 52.3% year-on-year increase that exceeded the company's early-2026 guidance. Automotive revenue surged 117.3% year-on-year to RMB 288 million, with combined shipments of automotive camera modules and LiDAR up 65.0% to 4 million units. During the period, the company secured supplier qualification certifications from 40 global automakers and established partnerships with 7 leading global Tier-1 suppliers. The segment's gross margin improved dramatically to 7.6%, up from a negative 9.5% in the same period last year. IoT revenue grew 13.8% year-on-year to RMB 2.018 billion, with IoT camera module and LiDAR shipments rising 46.9%. IoT gross margin remained broadly stable at 6.0%, a slight decrease of 0.2 percentage points year-on-year.

The accelerating adoption of multimodal perception and interaction, combined with a medium-to-long-term cyclical recovery and increasing smart technology penetration, is expected to drive both volume and price growth for camera modules. On the smartphone front, despite the year-on-year decline in global handset shipments in 26H1 due to surging memory chip prices inflating BOM costs, the rapid proliferation of foldable phones and AI Agent smartphones that are reshaping human-machine interaction are creating rigid demand for high-pixel, telephoto, and miniaturized periscope modules. This trend, coupled with an anticipated new replacement cycle around 2028-2029, is expected to fuel smartphone optical upgrades.

In the automotive sector, advanced driver-assistance systems are transitioning from a differentiating feature to standard equipment. According to CIC, L2+/L3 vehicle penetration is projected to reach 68.3% by 2030, with the global LiDAR solution market expected to reach USD 41.3 billion, representing a CAGR of 63.7% from 2025 to 2030. This opens substantial headroom for automotive optics. In the IoT segment, the company is well-positioned to benefit from continued volume growth in smart glasses, agricultural drones, and handheld smart imaging devices.

The company is building a moat in optical sensing and display technologies while strategically expanding into optical connectivity to create a new growth trajectory. Within its core optical sensing and display businesses, the company leverages its first growth curve in cameras, biometrics, LiDAR, and AR light engines, while integrating downstream components such as drivers, ICs, algorithms, lenses, and equipment. It is simultaneously expanding into upstream applications including cameras, XR, and robotics as a second growth curve, adhering to an integrated intelligent vision strategy. In the forward-looking optical connectivity space, the company is leveraging its expertise in precision coupling, packaging and testing processes, and self-developed AOI equipment to actively pursue full in-house development and manufacturing of FAU, MLA, EIC/PIC, and glass substrates.

Given the higher-than-expected decline in smartphone camera module ASP and gross margin driven by memory price increases, the company has revised its 2026-2028 net profit forecasts downward by 28%, 32%, and 36% to RMB 629 million, RMB 747 million, and RMB 883 million, respectively. However, considering the potential for sustained substantial growth in the non-smartphone camera module segment and the strategic deployment in optical connectivity, the "Buy" rating is maintained.

Key risks include potential declines in smartphone demand and camera module specification downgrades due to memory price increases, intensified competition in the camera module industry, slower-than-expected growth in IoT and automotive camera module businesses, and risks related to tariff policy changes.