HI-P INTERNATIONAL LIMITED (SGX:H17)
Hi-P International - Lowers Guidance Again
2nd guidance cut this year; Slash Target Price 34%
- HI-P International lowered its earnings guidance for the second time this year. It now expects lower sales and profit in 3Q18 on a y-o-y basis in contrast to its earlier guidance of higher revenue and similar profit.
- We are concerned industry headwinds are hitting HI-P much harder than expected. Consequently, we slash our EPS by 25-32% for FY18-20E. Our ROE-g/COE-g Target Price is cut to SGD0.84, now based on 1.2x FY18E P/B (previous 1.8x), based on FY18-20E average ROE of 10.4% and COE of 9%.
- HOLD.
A double-whammy on margins
- HI-P blamed the guidance cut on:
- a delay in billing for certain production tools;
- lower yields for products undergoing ramp-up; and
- lower market demand for certain products.
- The latter two reasons may be a double-whammy that further accelerates a fall in HI-P’s profitability. HI-P’s margins are already under pressure given its large fixed cost base amid an environment of fierce pricing competition.
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Demand outlook seems to have deteriorated fast
- 3Q is typically seasonally the strongest as HI-P ramps up production to meet seasonal holiday demand. In Aug-18, management had indicated that the pace of the 3Q18 ramp-up was healthy.
- Since management has not quantified the impact of weaker demand we are worried the latest guidance cut is a sign the demand outlook has deteriorated much faster than we anticipated.
Volume disruption still the key risk
- We believe HI-P’s performance in 4Q18 still largely hinges on the reception of the smartphones launched recently by its key wireless customer.
- A key downside risk to our forecasts is if actual volumes miss management’s already tempered internal forecasts.
- On the flipside, strong demand of the customer’s cheapest phone model in this year’s launch may provide a positive surprise to our FY18 estimates.
Forecast Changes
- We slash our FY18-20E EPS by 25-32% reflecting expectations of a weaker demand outlook. Gross margins have been cut 0.9-1.2ppt to reflect lower manufacturing yields and a possible worsening of pricing pressure as the demand outlook weakens.
Lai Gene Lih
Maybank Kim Eng Research
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https://www.maybank-ke.com.sg/
2018-10-15
SGX Stock
Analyst Report
0.84
DOWN
1.270
