Hi-P International (HIP SP) - DBS Research 2017-11-07: 3Q17 Profit Surges On Production Ramp-up And Higher Efficiency

Hi-P International (HIP SP) - DBS Vickers 2017-11-07: 3Q17 Profit Surges On Production Ramp-up And Higher Efficiency HI-P INTERNATIONAL LIMITED H17.SI

Hi-P International (HIP SP) - 3Q17 Profit Surges On Production Ramp-up And Higher Efficiency

  • Hi-P reported strong surge in 3Q17 net profit; 2-Sct interim dividend declared.
  • Expansion in margins; succession planning announced.
  • Strong earnings momentum and industry outlook.
  • Maintain BUY, TP under review.

What’s New 

Hi-P reported strong surge in 3Q17 net profit; 2-Sct interim dividend declared. 

  • Hi-P reported a 24.9% y-o-y surge in net profit to a record quarter of S$38.4m for 3Q17, fuelled by successful production ramp-up and improvements to operational efficiency. Revenue was up 6.2% to S$411.3m.
  • On a 9-month basis, net profit jumped 138% y-o-y to S$61.9m. This accounts for about 70% of our FY17F forecast, in line, as 1H17 is traditionally a weaker half and we are also expecting another strong quarter in 4Q17. 
  • Net profit for 3Q17 would have been stronger if not for a forex loss of S$4.5m resulting from the depreciation of the US dollar against the Singapore dollar and Chinese renminbi in 3Q17. This was in contrast to the gain of S$1.6m reported for 3Q16. 
  • A 2-Sct interim DPS has been declared (3Q16: 0.4 Sct).

Expansion in margins. 

  • Gross profit margin expanded 2.4ppts to 16.5% from 14.1% in 3Q16, driven by higher capacity utilisation, manufacturing yield improvement and better cost controls.

Improvement in cash conversion cycle. 

  • The improvements to the group’s cash conversion cycle has continued its ability to generate strong positive operating cash flows, amounting to S$192.8m for 9-month 2017. This has bolstered the group's balance sheet strength and its net cash position stood at S$36.9m as at 30 September 2017 (31 December 2016: S$25.1m) despite paying dividends amounting to S$153.3m in September 2017.

Succession planning announced. 

  • Hi-P has appointed Mr Yong Inn Nam as Chief Operating Officer. Mr Yong has been working in Hi-P for a few years and has demonstrated a deep appreciation of Hi-P’s culture and practices. 
  • In addition to Mr Yong, the team that will form the next generation leadership is also being identified to ensure longterm sustainability.


Strong earnings momentum. 

  • Earnings for Hi-P have turned around since 2H16. The group’s strategy of diversifying its customer base continues to gain momentum while margin improvement was achieved by enhancing operational efficiency, effective cost controls and boosting productivity.
  • An improvement to capacity utilisation and strong cash flow generation have also contributed to the turnaround. We are expecting another strong quarter in 4Q17.
  • Hi-P is guiding for higher revenue and profit for 4Q17, as compared to 4Q16 and 3Q17. Revenue and profit for 2H17 and FY17 are also expected to be stronger as compared to 1H17 and FY16 respectively.

Strong industry outlook. 

  • In a recent study by the International Data Corporation (“IDC”), the worldwide smartphone market is forecast to reach a total of 1.5bn units shipped in 2017, up 1.7% from the 1.47bn units shipped in 2016. From there, shipments should rise further to 1.73bn units in 2021, resulting in a CAGR of 3.3%. 
  • The IDC sees the average selling prices of smartphones increasing by over 7% in 2017 as premium smartphones flourish in various markets. The IDC also expects global spending on the Internet of Things (“IoT”) to grow 16.7% in 2017.
  • In a separate report by Gartner, worldwide shipments of PCs, tablets and smartphones are predicted to exceed 2.35bn units in 2018, a 2% increase from 2017. This would be the highest y-o-y growth since 2015.

Earnings and recommendation 

  • We will review our earnings forecast after the results briefing today. We currently have a BUY call on Hi-P.

Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-11-07
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.670 Same 1.670