Hi-P International - DBS Research 2018-04-26: Cloudy Outlook

Hi-P International - DBS Vickers 2018-04-26: Cloudy Outlook HI-P INTERNATIONAL LIMITED H17.SI

Hi-P International - Cloudy Outlook

  • Trade war uncertainty and unfavourable forexmovement could affect earnings momentum.
  • Cut earnings for FY18F/FY19F by 15%/16%.
  • Downgrade to HOLD; Target Price cut to S$1.88.



Downgrade to HOLD. Cloudy outlook; earnings momentum could slow down.

  • The recent trade war between US and China has created uncertainty for manufacturing companies, especially those with manufacturing plants in China. Hi-P, with six out of 13 manufacturing plants in China, is not spared. Hi-P International's share price has shed about 30% from the high in March.
  • Coupled with the unfavourable forex movement, earnings momentum going forward could be hit. We have cut our earnings forecasts for FY18F/FY19F by 15%/16%. 
  • Downgrade to HOLD.


Expect higher forex loss in 1Q18. 

  • In 1Q18, the USD weakened 2% on a q-o-q basis and 6.2% y-o-y vs the SGD while the SGD also weakened 1.6% and 2.9% against the RMB during the same period. Thus Hi-P is expected to be hit both on the revenue front and also on the expense side. 
  • We expect forex loss in 1Q18 to be higher than the S$5.2m recorded in 1Q17.


Where We Differ: We were the first broker to initiate coverage on Hi-P. 

  • We like Hi-P for its ability to ramp-up production to ride on the cycle, strong cash-generating capabilities and exposure to the IoT segment. However, we are now adopting a neutral stance on lower earnings visibility.


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

  • Downgrade to HOLD; Target Price cut to S$1.88. 
  • We apply a 20% discount to peers' PE of 16x on FY18F earnings to arrive at our revised target price of S$1.88, cut from S$2.48 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 SGD.



WHAT’S NEW - Outlook clouded by trade war uncertainty and forex risks


Trade war uncertainty.

  • The recent trade war between US and China has created uncertainty for manufacturing companies, especially those with manufacturing plants in China. Though details are scant at the moment, sentiment has been hit. 
  • Hi-P, with six out of 13 manufacturing plants located in China (Shanghai, Chengdu, Tianjin, Xiamen, Suzhou and Nantong), is not spared. Hi-P's share price has shed about 30% from the high of S$2.79 in March this year.

Forex exposure – expect higher forex loss in 1Q18.

  • About 90% of Hi-P’s total revenue is in USD, but overheads are mainly in RMB as the bulk of the company's manufacturing plants are in China, and the reporting currency is SGD. Any weakness in USD vs SGD or SGD vs RMB would affect earnings. 
  • In 1Q18, the USD weakened 2% on a q-o-q basis and 6.2% y-o-y vs the SGD while the SGD also weakened 1.6% and 2.9% against the RMB during the same period. Thus Hi-P is expected to be hit both on the revenue front and also on the expense side. 
  • We expect forex loss in 1Q18 to be higher than the S$5.2m recorded in 1Q17 as during the period, though USD vs SGD weakened 3.5% vs 2% in 1Q18, SGD vs RMB strengthened 2.8% vs a weakening SGD/RMB in 1Q18.

1Q18 results are expected to be released after market close on 2 May 2018.

  • Hi-P has guided for higher revenue and profit in 1Q18 as compared to 1Q17 but lower revenue and profit as compared to 4Q17. 
  • Hi-P reported net profit of S$8.4m on revenue of S$244.2m in 1Q17, vs net profit of S$59.6m and S$491.8m revenue in 4Q17.

Adopting a cautious stance.

  • With trade war uncertainty looming, Hi-P’s customers, especially those in the Wireless and IoT segments, are generally adopting a cautious stance, providing more realistic/lower production forecasts and are more cautious in price negotiations. These two segments account for about 30% of total revenue. 
  • The Consumer Electronics division, which accounts for about 40% of top line, is still seeing stable demand.


Earnings & Recommendation

  • We adopt a cautious stance and cut earnings for FY18F and FY19F by 15% and 16% respectively on the back of the cloudy outlook, despite the management’s guidance during FY17 results (albeit before the trade war issue) of a higher FY18 vs FY17. Customers are now generally less willing to commit to orders, thus earnings visibility is affected.
  • Our new Target Price of S$1.88 (previously S$2.48) is based on a 20% discount to peers' PE of 16x (vs 10% discount previously) on FY18F earnings. As such, we downgrade Hi-P to HOLD.





Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2018-04-26
SGX Stock Analyst Report HOLD Downgrade BUY 1.88 Down 2.480



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