Hi-P International - DBS Research 2017-08-05: Riding On Smart Trend

Hi-P International - DBS Vickers 2017-08-05: Riding On Smart Trend HI-P INTERNATIONAL LIMITED H17.SI

Hi-P International - Riding On Smart Trend

  • Hi-P's recent 1H17 results should help to remove scepticism on Hi-P’s earnings delivery.
  • Expect strong momentum in 2H17 to continue in FY18.
  • Optimising capacity utilisation; ramping up production for new products.
  • Maintain BUY, Target Price raised to S$1.45.



Riding on the growth trajectory in the smartphone and IoT markets. 

  • Hi-P is in a sweet spot now as more than half of its earnings are derived from the Wireless (smartphone) and Computer Peripherals (IoT segment, e.g. smart home) segments, which are expected to continue to do well in the next one to two years. 
  • The strong earnings momentum since 2H16, on the back of operational efficiency, new customers and new product launches, further reinforce our conviction.

Optimising capacity utilisation. 

  • Capacity utilisation has improved from < 40% in 1Q17 to about 60% now. 
  • With the continued ramp-up in production, we expect utilisation rate to peak at about 70% by the September/October period. Thereafter, utilisation should average at about 60% in FY18. 


What's New


Strong surge in 2Q17 net profit; 19-Sct interim dividend declared. 

  • Hi-P reported net profit of S$15.1m (+80% q-o-q, +98% y-o-y) for 2Q17. 1H17 net profit of S$23.5m accounts for 34% of our FY17F earnings, which is above our expectations as we are expecting a much stronger 2H17, which should be at least comparable, if not stronger than 2H16. 
  • In 2H16, Hi-P reported net profit of S$59.2m. 2Q17 revenue of S$279.5m (+14.5% q-o-q, -2.0% y-o-y) was stable. 
  • An interim DPS of 19 Scts has been declared, vs a total of 0.8 Scts paid for the whole of FY16. 

Expansion in net margins. 

  • Net margin expanded 2.7ppts y-o- y to 5.4% in 2Q17. This growth was driven by a combination of improved operational efficiency and fewer high component content assembly products. 
  • On a q-o-q basis, net margin expanded by a smaller 2.0ppts, as the group incurred higher labour costs during 2Q17 while gearing up for a ramp-up in production for the second half of the year. 

Strong net cash position. 

  • Backed by strong cash flows generated from operations, the group improved from a net debt position in 2Q16 to a net cash position of S$154.2m as at June 2017. 
  • Cash on hand increased to S$255.2m from S$120.7m in December 2016. 

Succession planning a top priority now. 

  • Executive Chairman and Chief Executive Officer, Mr Yao Hsiao Tung, now owns an 83% stake in Hi-P, after acquiring 22% from the second largest shareholder, Molex International in mid- June this year. 
  • To ensure the long-term sustainability of Hi-P, the group has placed succession planning as a top priority and is nurturing talented individuals within the organisation. 
  • In the near term, Hi-P hopes to reveal the next generation of leadership to lead the group forward. 


Outlook and Recommendation 


Riding on the growth trajectory for smartphones and IoT. 

  • The Smartphone and IoT segments are expected to continue to do well in the next 1-2 years. Hi-P is capitalising on this trend, with the ramp-up in production. The company is expected to expand production, in particular at its Suzhou plant, in preparation for orders from new customers, and also new products from existing customers. 
  • With the expected ramp-up in production, we forecast utilisation rates to reach 60-70% in the next 1-2 years, from the current 40-50%. 

Management guiding for higher profit for FY17 as compared to FY16. 

  • Hi-P expects similar revenue and profit for 3Q2017 as compared to 3Q2016. For 2H17, the group expects higher revenue and profit as compared to 1H2017. 
  • Overall, Hi-P expects similar revenue but higher profit for FY17 as compared to FY16. 


Where we differ: 

  • We are the only broker covering Hi-P. We believe the market under-appreciates the potential of the capacity ramp-up and the strong cash-generating capabilities. 
  • The strong results in 1H17, which is traditionally a much weaker period compared to 2H, should remove the market's scepticism on Hi-P. 


Potential catalyst: 

  • Stronger-than-expected production ramp-up and demand would help to boost sales while better operational efficiency would help to improve margins.


Valuation


Reiterate BUY; up TP to S$1.45. 

  • Our FY17F and FY18F earnings were raised by 23% and 32% respectively, after factoring in further ramp-up in production and improvement in margins. 
  • We have pegged a PE valuation of 13x for Hi-P, vs 12x previously as peers have re-rated after the strong results from Apple. 
  • We maintain a 10% discount to peer average, given its smaller scale. Our target price works out to S$1.45, up from S$1.07 previously.

Key Risks to Our View

  • Cyclical nature of business. Products for some of its major customers are cyclical in nature.
  • Macroeconomic uncertainty. Any prolonged macroeconomic uncertainty would postpone consumer consumption, which in turn would drive down revenue further.




Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-08-05
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.45 Up 1.070



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