Hi-P International - DBS Research 2018-08-02: 2Q18 Results Boosted By Forex Gain Despite Weak Margins

Hi-P International - DBS Group Research Research 2018-08-02: 2q18 Results Boosted By Forex Gain Despite Weak Margins HI-P INTERNATIONAL LIMITED SGX:H17

Hi-P International - 2q18 Results Boosted By Forex Gain Despite Weak Margins

  • 2Q18 results boosted by forex gain.
  • Trade war tension has created margin pressure within the supply chain.
  • FY18F/FY19F earnings cut by 23%/29% to account for lower margins.
  • Maintain HOLD, Target Price reduced to S$1.21.



Margin pressure within the supply chain.

  • The recent trade war between the US and China has created uncertainty and margin pressure within the supply chain. Hi-P is not spared. Though demand is still expected to be healthy at least for FY18F, earnings would be hit by lower margins.
  • The management is guiding for similar revenue but lower profit for FY18 as compared to FY17.



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Higher 2Q18 revenue but net profit hit by lower margins.

  • 2Q18 revenue gained 8% y-o-y and 7.4% q-o-q but net profit of S$12.3m (-18.7% y-o-y, +21.9% q-o-q) was affected by lower net margin of 4.1% vs 5.4% in 2Q17, partly offset by forex gain as compared to forex loss in 1Q18.


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 Internet of Things (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.


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.


RESULTS HIGHLIGHT


2Q18 results boosted by forex gain.

  • Hi-P registered 2Q18 revenue of S$302m (+8.0% y-o-y, +7.4% q-o-q). For this quarter, Hi-P reported a forex gain of S$1.7m (vs forex loss of S$13m in 1Q18) due to the appreciation of USD against the RMB and SGD. Net profit came in at S$12.3m (-18.7% y-o-y, +21.9% q-o-q). 
  • For 1H18, net profit was roughly in line, accounting for 20% of our current FY18F forecast, similar to 1H17's 19%.

Margin pressure:

  • Gross margin declined 2.4ppts to 9.8% as compared to 2Q17, attributed to a change in product mix and more competitive pricing while net margin eased to 4.1%, vs 5.4% in 2Q17. Hi-P faced rising competition, especially from emerging competitors in China, and also a more challenging business environment and difficult business conditions as a result of the trade war.

Healthy cash position:

  • Hi-P’s robust core business operations continued to generate positive operating cash flows amounting to S$53.5m for 1H18. This contributed to a strong cash balance of S$257.8m as at 30 June 2018, with net cash of S$62.4m.


OUTLOOK


Smartphone shipment in 2018 to ease 0.2% y-o-y; IoT to register 13.6% CAGR over 2017-2022.

  • According to the International Data Corporation (“IDC”), the worldwide smartphone market will reach a total of 1.46bn units shipped in 2018, down 0.2% from the units shipped in 2017. From there, shipments will reach 1.65bn units in 2022, the final year of the IDC’s forecast period, resulting in a compound annual growth rate (CAGR) of 2.5%.
  • Within the IoT segment, the IDC expects spending on IoT-related products to experience a CAGR of 13.6% over the 2017-2022 forecast period and reach US$1.2tr in 2022.

Expect similar profit for 3Q18 vs 3Q17.

  • Hi-P expects higher revenue but similar profit for 3Q18 as compared to 3Q17, and a stronger 2H18 vs 1H18. For FY18, the group expects similar revenue but lower profit for as compared to FY17.


EARNINGS & RECOMMENDATION


Earnings cut to account for lower margins.

  • Despite the seasonally strong third quarter, the trade war tension has created margin pressure within the supply chain. Hi-P is not spared. Net margins for 2Q18 eased to 4.1%, vs 5.4% in 2Q17. We have cut our earnings forecasts for FY18F and FY19F by 23% and 29% respectively to account for the lower margins.
  • Overall, we are expecting a slight 4% y-o-y growth in revenue for FY18F but net profit to drop 29%. The 3Q18 figure is still expected to be at least comparable to 3Q17 but 4Q18 could be weaker y-o-y on the back of lower contribution from the mobile segment due to fewer new models this year compared to last year.

Maintain HOLD, Target Price reduced to S$1.21.

  • We have lowered the valuation peg to 30% discount to peers’ average PE of 16x, vs 20% discount previously, on the back of the trade war uncertainty. We have also rolled forward earnings peg to blended FY18F and FY19F figures.
  • Coupled with the cut in earnings, our new Target Price is S$1.21 (previously S$1.80). Maintain HOLD.





Lee Keng LING DBS Group Research Research | https://www.dbsvickers.com/ 2018-08-02
SGX Stock Analyst Report HOLD Maintain HOLD 1.21 Down 1.800



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