Hi-P International - DBS Research 2018-02-14: Growth Momentum To Continue

Hi-P International - DBS Vickers 2018-02-14: Growth Momentum To Continue HI-P INTERNATIONAL LIMITED H17.SI

Hi-P International - Growth Momentum To Continue

  • New records for revenue and profit in 4Q17 and FY17.
  • Improvement in margins on operational efficiency and better product mix.
  • Revised earnings up by 15% for FY18F and 18% for FY19F.
  • Maintain BUY; Target Price raised to S$2.48.



Earnings momentum remains strong. 

  • Hi-P continues to deliver strong earnings after a few consecutive quarters of strong results. It set new records for revenue and profits in 4Q17 and FY17. 
  • Going forward, we expect earnings momentum to remain strong, on the back of the new products in the Wireless and IoT segments, and also an expanding customer base. Our FY18F and FY19F earnings were raised by 15% and 18% respectively. We are now expecting EPS CAGR of 41% for FY16-19F. 
  • 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.
  • 4Q17 results: Another strong quarter for Hi-P as revenue came in at S$491.8m (+38% y-o-y; +20% q-o-q), while net profit surged to S$59.6m (+109% y-o-y; +55% q-o-q) on margin improvement. 
  • A final dividend of 4.0 Scts has been declared, bringing total dividends for FY17 to 25 Scts (FY16: 0.8 Scts).


Where We Differ:

  • We were the first broker to initiate coverage on Hi-P. We believe the market under-appreciates the potential of the capacity ramp-up, the strong cash-generating capabilities and strong earnings momentum.


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; Target Price raised to S$2.48. 
  • We apply a 10% discount to peers' PE of 16x on higher FY18F earnings to arrive at our revised target price of S$2.48, up from S$2.30 previously.


Key Risks to Our View

  • Volatile industry with shorter product life cycle. This presents risks on margins and inventories.
  • Forex exposure. Bulk of revenue in USD but overheads are mainly in RMB and the reporting currency is in SGD.


WHAT’S NEW - New records in revenue and profit for 4Q17 and FY17


Results Highlight 


FY17 revenue at all-time high of S$1.4 bn. 

  • Hi-P reported another strong set of results in 4Q17. Revenue came in at S$491.8m (+38% y-o-y; +20% q-o-q), resulting from the mass production of certain projects. Net profit surged to S$59.6m (+109% y-o-y; +55% q-o-q) as margins improved.
  • For FY17, revenue of $1,426.9m was in line but net profit beat our forecast by 18%. A final dividend of 4.0 Scts has been declared, bringing total dividends for FY17 to 25 Scts (FY16: 0.8 Scts).

Improvement in margins: 

  • 4Q17 gross profit margin increased to 19.8% from 17.9% for 4Q16 and 16.5% for 3Q17. This was mainly due to the continuous improvements in operational efficiency (better capacity utilisation, manufacturing yield improvement and effective cost controls) and improvement to product mix. 
  • FY17 gross margin improved to 16.3% from 11.9% in FY16.


Strategy 

  • Going forward, Hi-P would focus its efforts on: 
    • Targeted business development initiatives to further diversify the group’s customer base, both within the existing business segments and also to explore new industries.
    • Enhancing capacity utilisation and driving manufacturing yield improvement.
    • Increasing automation across all manufacturing locations. In terms of staff strength, it was reduced from a peak of 20,000 a few years back to between 12,000 and 15,000 now, depending on the season. It has also set up a company, solely in charge of automation.
    • Exploring inorganic growth initiatives that are synergistic to the group’s operations. Hi-P is exploring the possibility of entering the automotive segment via M&A. It reckons that automotive, especially the sensory segment, is a growth area and it needs to constantly look for new growth areas for the group.


Outlook


Industry outlook still strong. 

  • Within the global smartphone industry, the International Data Corporation ("IDC") expects the worldwide shipment for the smartphone market to reach 1.71bn units in 2021, resulting in a CAGR of 3.0%. 
  • For Internet of Things (“IoT”), IDC expects worldwide spending to reach US$772.5bn in 2018, an increase of 14.6% over the US$674.0bn that was spent in 2017.


Earnings & Recommendation 

  • For 1Q18, Hi-P is guiding for higher revenue and profit as compared to 1Q17 but lower revenue and profit as compared to 4Q17. For the full year, Hi-P expects higher revenue and profit in FY18 as compared to FY17.
  • We have revised up earnings for FY18F and FY19F by 15% and 18% respectively, on the back of the new products in the Wireless and IoT segments, and also an expanding customer base. Our new Target Price of S$2.48 (previous S$2.30) is based on a 10% discount to peers' PE of 16x on higher FY18F earnings.
  • Maintain BUY.




Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2018-02-14
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.48 Up 2.300



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