Hi-P International - DBS Research 2019-02-22: Rising Above Peers

HI-P INTERNATIONAL LIMITED (SGX:H17) | SGinvestors.io HI-P INTERNATIONAL LIMITED (SGX:H17)

Hi-P International - Rising Above Peers

  • Hi-P’s FY18 results above expectations despite challenging market conditions. 
  • Management guiding for similar revenue and profit for FY19 as compared to FY18. 
  • Raised earnings forecasts for FY19F/FY20F by 41%/36%. 
  • Maintain HOLD with a higher Target Price of S$1.12. 



Commendable performance amid challenging market conditions.

  • HI-P INTERNATIONAL LIMITED (SGX:H17) has proven so far that it is able to maintain its top line amid the challenging environment due to the trade war uncertainties. Even though the group faces pricing pressure from its customers, it is able to mitigate by securing more projects.
  • Margin pressure is expected to persist going forward, as the group continues to explore opportunities to relocate out of China. Thus, we are maintaining our HOLD call. Our Target Price is raised to S$1.12, on the back of the upward revision in earnings.


FY18 results above expectations.

  • Revenue was flat despite the trade war uncertainties, as Hi-P was able to secure more projects to compensate for the pricing pressure. Core earnings, exclude divestment gain, was 14% above our expectations.


Where We Differ:

  • We are less bearish, as key segments Mobile and Consumer Electronics are still seeing healthy orders.


Potential catalyst:

  • Stronger-than-expected production ramp-up and demand; better operational efficiency to improve margins.
  • Further strengthening of USD as the bulk of Hi-P’s revenues are in USD while overheads are in RMB.
  • Positive outcome from US-China trade deal.


Key Risks to Our View:

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


WHAT’S NEW - FY18 results above expectations despite challenging market conditions


FY18 results above expectations.

  • Hi-P's FY18 revenue eased marginally by 1.7% y-o-y to S$1.4bn, despite challenging market conditions and economic uncertainty. Though Hi-P was impacted by pricing pressure, it made up by having more projects. Gross profit margin declined 1.7ppts from FY17 to 14.6%. This was attributed mainly to price competition, rising labour costs and lower manufacturing yield for certain new products in the initial ramp-up phase.
  • Overall, FY18 net earnings of S$100.9m, which include a pretax gain of S$6.1m from the dilution of its stake in subsidiary Hi-Flex (Suzhou) Electronics, were down 17% y-o-y. Excluding the divestment gain, net profit of about S$95m is about 14% above our expectations.
  • On a q-o-q basis, Hi-P's 4Q18 revenue and net profit are higher than the traditionally strong 3Q by 17.2% and 32.5% respectively.
  • A final DPS of 4 Scts has been declared, bringing total dividends for FY18 to 5 Scts, which works out to 40% payout ratio.
  • Balance sheet is strong; net cash position as at December 2018 improved to S$118m (+65% y-o-y).

Management guidance:

  • The management is guiding for similar revenue and profit for FY19 as compared to FY18. On a q-o-q basis, the group expects similar revenue and lower profit for 1Q19 as compared to 1Q18.
  • Meanwhile, 2H19 is expected to register higher revenue and profit as compared to 1H19.


Outlook and Strategy


Slower growth for smartphones; IoT still expected to grow at double digits.

  • According to the International Data Corporation ("IDC"), worldwide smartphone shipments are expected to return to low single-digit growth in 2019 through to 2022. Within the IoT segment, IDC expects worldwide spending on IoT reach US$745bn in 2019, +15.4% y-o-y. IDC expects worldwide IoT spending to maintain a double-digit annual growth rate throughout the 2017-2022 forecast period.

M&A to expand manufacturing footprint and to venture into other business segments.

  • On the back of the trade war uncertainties, Hi-P is expanding its operations outside of China in countries such as Thailand. It is also looking to accelerate these initiatives by exploring M&A. Besides expanding manufacturing footprints, Hi-P is also exploring opportunities for growth in automotive, medical and IoT ecosystems via M&A.


Earnings and Recommendation


Raised earnings forecasts for FY19F/FY20F by 41%/36%.

  • Hi-P has proven so far that it is able to maintain its top line amid the challenging environment due to the trade war uncertainties. Even though the group faces pricing pressure from its customers, it is able to mitigate this by securing more projects. As such, we have raised our revenue forecasts for FY19F and FY20F by 25-26%.
  • Going forward, we expect the group to continue facing pricing pressure. Thus, gross profit margin could ease slightly to 14.5% in FY19F and 14.2% in FY20F, from 14.6% in FY18. As the group continues to explore opportunities to relocate out of China, relocation expenses and also labour costs could he higher. Thus, we expect lower net margins of 6.6% and 6.4% for FY19F and FY20F respectively, vs 7.2% in FY18.
  • Overall, net earnings for FY19F were raised by 41% to S$94.4m, down 7% from FY18, in the absence of the divestment gain. For FY20F, earnings were upped by 36%.
  • We have not factored in any potential contribution from M&A. We had underestimated Hi-P’s ability to secure more projects and its efforts to improve operational efficiency.

Share price supported by potential M&A activities.

  • In late November last year, Hi-P announced that a controlling shareholder is considering a possible transaction involving the shares of the company. Since then, Hi-P's share price has been holding above the S$0.80 level. We have been highlighting that Hi-P could be a takeover target as its free float in the market is small.
  • Executive Chairman and Chief Executive Officer, Mr Yao Hsiao Tung has an 83% stake in the company. Furthermore, with its entrenched relationship with key customers, Hi-P could be an attractive target for global companies looking to build a base in Asia.


Maintain HOLD with a higher Target Price of S$1.12.

  • We are maintaining our HOLD call despite the steep upward revision in earnings, as the market conditions going forward remains challenging. Target Price is raised to S$1.12, on the back of revisions in earnings.
  • Our Target Price of S$1.12 is still pegged to 20% discount to peers' average of 12x FY19F PE.





Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-02-22
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.12 UP 0.800



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