Hi-P International - DBS Research 2019-05-03: Resilient Amid Challenges

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

Hi-P International - Resilient Amid Challenges

  • Improvement in Hi-P International's 1Q19 revenue and net profit vs 1Q18.
  • Lower GP margins on price pressure and shift in product mix.
  • Potential M&A activities to remain supportive of share price but near-term focus is on building the business.
  • Maintain HOLD with a higher Target Price of S$1.41.



Resilient amid challenging outlook.

  • HI-P INTERNATIONAL LIMITED (SGX:H17) has again proven thus 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 partially mitigate this by enhancing operational efficiencies to minimise the drop in margins.
  • Going forward, the outlook remains cloudy and margin pressure is expected to persist. Thus, we are maintaining our HOLD call but raised our Target Price to S$1.41.
  • Potential M&A activities could remain supportive of share price but this could be put on hold in the near term as the group is channeling its resources towards building its business amid the challenging market.


1Q19 results in line; improvement in revenue and net profit.

  • Revenue and net profit were higher vs 1Q18 but gross margins were affected by price pressure and a change in product mix.
  • Management is guiding for lower 2Q19 revenue but similar profit as 2Q18, and is maintaining its guidance of similar revenue and profit for FY19 vs FY18.


Where We Differ:

  • We are less bearish, as Hi-P International has proven thus far to be able to maintain top line amid challenges in the market and working towards enhancing operational efficiencies to improve margins.


Potential catalyst:

  • Better operational efficiency to improve margins.
  • Strengthening of USD as the bulk of Hi-P International’s revenues are in USD while overheads are in RMB.
  • Positive outcome from US-China trade deal.


Valuation:

  • Maintain HOLD with a higher Target Price of S$1.41.
  • We maintain our HOLD call but raise our Target Price to S$1.41. We have removed the 20% discount to peers’ average of 12x FY19F PE, given Hi-P International’s resilience thus far to the challenging environment and its efforts to enhance margins.


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 - Y-o-Y improvement in 1Q19 revenue and net profit


Improvement in revenue and net profit as compared to last year.

  • Despite challenging market conditions, Hi-P International reported a 2% y-o-y gain in 1Q19 revenue to S$286.8m while net profit increased 6% to S$10.7m. The numbers account for 20% of our FY19F revenue forecast and 11% of net profit, similar to 1Q18 - in line as 1Q is traditionally a lull period.
  • A net forex loss of S$5.3m was recorded for 1Q19, vs a net loss of S$13m in 1Q18.

Lower GP margins.

  • Gross margin declined 0.8 percentage points to 12.6%. This decline was attributable to price pressure and a change in product mix with the production of more low-margin high-component-content assembly products in 1Q19 as compared to 1Q18.

Improvement in net cash position.

  • Hi-P International has pared down some of its debt as at end-1Q19. As a result, net cash position improved to S$132.3m vs S$117.5m as at end-4Q18.

Management guidance:

  • The management is guiding for lower revenue but similar profit for 2Q19 as compared to 2Q18. In 2Q18, gross profit margin was lower at 9.8%. Various company initiatives are expected to beef up margin to normalize at above 10%.
  • No changes in guidance for similar revenue and profit for FY19 as compared to FY18. Meanwhile, 2H19 is expected to register higher revenue and profit as compared to 1H19.


Outlook and Strategy


Enhancing operational efficiencies to improve margins.

  • Hi-P International continues to work on automation and computerisation with artificial intelligence aided to enhance system flows. The group plans to reduce reliance on labour force and eliminate unnecessary paperwork, and thus improve margins.

Strengthening sales force to penetrate new products.

  • Amid the challenging market, Hi-P International hopes to penetrate different product fields through organic or inorganic ways. It has expanded its sales force in the US and Europe and is working on strengthening its sales force in Asia.

Expansion of Thailand plant for new products.

  • Hi-P International has more than doubled its capacity expansion plan in Thailand, mainly to cater for customers’ expansion into new products. So far, in terms of customers’ relocation out of China, Hi-P International is seeing more of customers starting their new products out of China instead of relocating their existing products.

Mixed performance for its major customers.

  • Hi-P International expects to generate similar revenue from its key customer in the Mobile segment, by covering more products and increasing allocation, to offset the anticipated lower demand. For the Consumer Electronics segment, most of its key customers are still expected to clock in at least single-digit growth.

Weak smartphone sales; IOT and wearables to do well.

  • According to the International Data Corporation (IDC), worldwide smartphone volumes are forecast to fall by 0.8% in 2019 to 1.39bn units. However, the smartphone market will begin to pick up momentum with y-o-y growth of 2.3% expected in the second half of the year.
  • Within the smart home devices segment, the IDC expects the market to grow 26.9% y-o-y in 2019. Similarly, the worldwide market for wearable devices is forecast to grow 15.3% y-o-y by the end of 2019.


Earnings and Recommendation


Maintain HOLD call with a higher Target Price of S$1.41.

  • We maintain our earnings forecasts and HOLD call but raise our Target Price to S$1.41. Our Target Price is still pegged to peers’ average of 12x on FY19F earnings but we have removed the 20% discount, given Hi-P International’s resilience thus far to the challenging environment.
  • Hi-P International has continued to prove 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 partially mitigate this by enhancing operational efficiencies to improve margins.
  • Going forward, trade war uncertainties are expected to continue to cloud Hi-P International’s outlook. Thus, its gross profit margin could ease slightly to 14.5% in FY19F and 14.2% in FY20F, from 14.6% in FY18.

Potential M&A activities to remain supportive of share price but near-term focus is on building the business.

  • Hi-P’s share price had doubled to a high of S$1.81 in March since late November last year, when the company officially announced that a controlling shareholder is considering a possible transaction involving its shares. Furthermore, there is still no succession plan in place, after Deputy CEO, Mark Su’s resignation in March this year.
  • We continue to believe that with Hi-P International’s entrenched relationship with key customers, it could be an attractive target for global companies looking to build a base in Asia. However, in the near term, the group is channeling its resources towards building its business amid the challenging market. Thus, M&A activities could be put on hold for now.





Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-05-03
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.41 UP 1.120



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