Hi-P International (HIP SP) - Maybank Kim Eng 2018-02-15: Pleasant Margin Surprise

Hi-P International (HIP SP) - Maybank Kim Eng 2018-02-15: Pleasant Margin Surprise HI-P INTERNATIONAL LIMITED H17.SI

Hi-P International (HIP SP) - Pleasant Margin Surprise


FY17 beat on margin surprise; thesis intact; Target Price +15% 

  • Hi-P’s FY17 core PATMI of SGD121.5m (+122.8 y-o-y) was 16% above our full-year estimate due to a positive margin surprise in 4Q17. FY18E EPS growth of 17% y-o-y should be driven by further ramp up for Amazon Echo and new models from a key wireless customer. 
  • Our thesis that Hi-P is entering a phase of strong growth and stable returns is intact. We raised FY18/19E EPS by 13%/10% to reflect new margin assumptions. Target Price is also raised by 15% to SGD2.43 as we roll forward valuation to FY18E on 3.2x P/B, based on FY18-20E avg. ROE: 24% and COE: 9%.



Revenue momentum strong 

  • 4Q17/FY17 revenue grew 37.8%/9.3%, driven by ramp-up of new business and allocation gains. Volumes for Amazon Echo exceeded Hi-P’s internal estimates. For the key wireless customer, strong volumes for 2017 flagship models offset weaker performance for the ultra-flagship model.
  • Hi-P expects to participate in all model launches of this customer in 2018. Hi-P has also been a beneficiary from Amazon’s (Not-Rated) strategic ambitions for Alexa, in our view. The wireless, and IOT & accessories segments account for 14ppt of our 17% FY18E revenue growth.


Profitability maintained in FY18E 

  • FY17 gross margin of 16.3% (+4.4ppt y-o-y) was driven by a confluence of improved utilisation and yield, as well as a better product mix. Product mix was driven by a shift towards higher-profitability components, and a move away from the assembly of unprofitable wireless products. 
  • SG&A decreased to 5.5% of total sales (FY16: 6.9%) thanks to strong cost control and the absence of bad debt write-offs and provisioning. 
  • We envisage Hi-P could maintain an 8.5% net margin in FY18E, as positive effects from improved volumes and yield cancel out headwinds in pricing pressure and currency moves.


Succession planning concerns us

  • COO Yong Inn Nam’s resignation was a surprise to us, considering he was promoted only in Nov’17. We are concerned by this as we are not privy to the inner workings within the ranks of senior management, and the impact, if any, on its long-term direction. 
  • However, we see little risk to our forecasts. This is because strong teamwork between sales and execution functions has been the key driver of Hi-P’s performance.


Four takeaways from 4Q17 & FY17 results 

  • Hi-P’s core net profit of SGD121.5m (+122.8% y-o-y) beat our full-year estimate by 16%. This was driven by a positive margin surprise in 4Q17. FY17 revenue of SGD1.43b (+9.3% y-o-y) was in line.
  • Four takeaways from this set of results, and implications to outlook: 

Revenue drivers are overall positive: 

  • 4Q17 revenue was stronger by 37.8% YoY and 19.6% q-o-q. This was driven by the ramp for internal components for the key wireless customer, plastic parts for Amazon Echo, and smart-locks for Ofo. Management shared that volumes for its key wireless customer were strong for 2017 flagship models, which more than offset volume weakness from the 2017 ultra-flagship model. Amazon Echo volumes were stronger than expected.
  • FY18E outlook: Management guided that the list of internal components Hi-P supplies to its key wireless customer is still lengthening, and Hi-P is participating in all models in the 2018 launch from this customer. The allocation gains are expected to be enough to offset a potential decline in end-market demand volume. Given a 13.5% smart-home penetration rate in the US (estimated by Statista), there remains ample room for Amazon Echo to grow, in our view. Consumer Intelligence Research Partners says that US Echo-users spend 70% more on Amazon per year than normal Amazon shoppers, which reinforces the view that Amazon remains strongly incentivised to accelerate Echo adoption. Echo was also launched to 82 new countries from just seven in Dec ’17, which could also bode well for volumes.

Factors that drove margin: 

  • FY17 gross margin of 16.3% (+4.4ppt y-o-y) was driven by a confluence of improved utilisation and yield, as well as a better product mix. Hi-P right-sized its business in FY17 to move away from unprofitable smart-phone assembly to focus on more profitable projects, including the products that have undergone production ramp up. 
  • In terms of yield, the improvement largely came from CNC machining and metals stamping operations. Due to cost efficiencies and lower bad-debts written off and provisioning, total SG&A came in at 5.5% of sales (FY16: 6.9% of sales).
  • FY18E outlook: At the gross margin level, our FY18E assumption is a more conservative 15.8% vs. 16.3% for FY17 to factor in currency headwinds and pricing pressure. However, this should be offset by operating leverage from improved volumes. On balance, we envisage that Hi-P could maintain its 8.5% net margin in FY18E.

Dividends: 

  • Hi-P announced a final DPS of SGD4cts (4Q16: SGD0.4cts), which brought full-year payout to SGD25cts (2016: SGD0.8cts). 
  • Currently, we do not see major obstacles to management’s hint of SGD6cts DPS in FY18E.

Succession planning: 

  • Hi-P also announced the surprise resignation of COO Mr Yong. He has been with Hi-P for 2-3 years and was promoted to COO in Nov ’17 – as part of succession planning by the company. 
  • We see little risk to our forecasts at this juncture, as business development and execution efforts have been and will continue to be driven by strong teamwork between the functions. However, we are concerned by this as we are unaware of the inner workings between the ranks of senior management, and the implications of this, if any, on the long-term strategy.


Swing Factors


Upside

  • Better-than-expected orders and execution from existing projects.
  • New customer wins and new projects.
  • Improved communication regarding strategy, as well as cost control efforts.

Downside

  • Micro- and macro-driven risks that negatively affect end-demand of products Hi-P participates in.
  • Market share losses and/or payment defaults from customers.
  • Sudden and steep declines in the USD (revenue exposure), against the CNY (operating exposure) and SGD (reported currency).






Lai Gene Lih Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-15
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.43 Up 2.110



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