Hi-P International - Maybank Kim Eng 2019-06-10: Not Quite There Yet

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HI-P INTERNATIONAL LIMITED (SGX:H17)

Hi-P International - Not Quite There Yet

Upgrade to HOLD on valuation

• We upgrade HI-P INTERNATIONAL LIMITED (SGX:H17) to HOLD from SELL as the negatives are now priced in based on our unchanged Target Price after the 22% Hi-P International share price decline since late-Apr.
• However, the escalation of the US-China trade war has reduced our conviction that Hi-P International can achieve guidance of flat FY19E earnings, for which we expect 2H to account for 70-80% of the full year. As such, we await a lower entry point and better clarity on earnings before considering a more positive stance on the shares.
• Our ROE-g/COE-g Target Price of SGD1.22 is based on 1.5x FY19E P/B.

Scenario analysis

• Our scenario analysis of a 19% y-o-y decline in FY19E earnings which results in an ROE-g/COE-g fair value of SGD1.00, based on 1.3x FY19E P/B.
• Our analysis assumes:
  1. a decline in the demand for its key customer’s phones in China as a result of the US-China trade war (ie, if consumers decide to boycott the product);
  2. revenue vulnerability to a material deterioration in global consumer sentiment, as Hi-P International’s products largely comprise of discretionary consumer electronics;
  3. intensifying pricing and cost pressure.

Await clarity

• Based on current share price, we estimate that FY19-21 EPS cuts of around 10% would bring the stock back to “Sell” territory.
• Amid an increasingly cloudy outlook, we are concerned of increased earnings risk given Hi-P International typically makes 70-80% of full-year earnings in 2H. As such, we recommend investors stay on the side-lines until the late Jul/ early Aug-19 2Q19 results, and as Hi-P International prepares for the holiday season production ramp-up in 3Q19.
• However, uncertainty for 4Q19 performance may linger, as this hinges on the demand of the key wireless customer’s smartphones launched later this year.

• See also report: Singapore Technology Sector - Maybank Kim Eng 2019-06-10: Finding Its Bearings.
• Other technology companies:
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Valuation

• Hi-P International is trading at 10x FY19E P/E, not far from global peers’ 9.2x and its own 3-year mean of 8.8x. However, if our scenario analysis plays out, Hi-P International would be trading at 12.3x, which is near 1SD above its 3-year mean.

Lai Gene Lih CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-06-10

SGX Stock Analyst Report HOLD UPGRADE SELL 1.220 SAME 1.220