Hi-P International - DBS Research 2019-08-02: Outlook Remains Challenging

HI-P INTERNATIONAL LIMITED (SGX:H17)

Hi-P International - Outlook Remains Challenging

HI-P INTERNATIONAL LIMITED (SGX:H17)'s 2Q19 results in line; revenue down 5% but earnings up17% on improvement in margins.
Measures in place to counter trade war impact; actively exploring M&A.
Cut FY19F and FY20F earnings forecasts by 6-7%.
Maintain HOLD with a lower Target Price of S$1.32.

HI-P INTERNATIONAL LIMITED (SGX:H17) continues to work towards its growth transformation plans, and has yielded some positive results as evidenced in its recent few sets of results. However, it has yet to realise its full potential, in view of the cloudy outlook on the back of the trade war.
With the latest threat of new tariffs to be imposed on Chinese goods into the US, margins would be further hit and visibility remains low.
Coupled with management’s guidance of lower y-o-y earnings for FY19F, we have cut our FY19-FY20F earnings forecasts by 6-7%. Target Price is reduced to S$1.32 on the back of the cut in earnings. Maintain HOLD.

To reduce the impact of trade war, Hi-P International has initiated new projects in Thailand and is looking to further expand its capacity in Thailand. Hi-P International is also actively on the lookout for suitable M&A opportunities which can complement its business model and plans.

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

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,
Potential M&A.

Hi-P International's 2Q19 revenue decreased by 5.2% y-o-y to S$286.4m. This was mainly due to the deconsolidation of its flexible printed circuit board business in Suzhou, China, price pressure and lower sales volume for certain customers in the mobile segment. The decline was cushioned by an increase in demand from customers in other segments such as consumer electronic products.
Improvement in GP margin. Gross profit margin increased to 13.9% for 2Q19 from 9.8% for 2Q18. The increase was mainly due to
1. a change in product mix,
2. better cost management,
3. more effective spending on new product introduction.
Overall, net earnings were up 17.1% y-o-y to S$14.4m, accounting for 15% of our full-year forecast; in line as historically, 2Q accounted for 12-14% of the full-year numbers in the last three years. 2H earnings generally account for 70-80% of the full-year number.

Hi-P International expects higher revenue and similar profit for 3Q19 as compared to 3Q18. For the full year, the group expects similar revenue but lower profit as compared to FY18; vs previous guidance for similar revenue and profit for FY19 as compared to FY18.

According to the International Data Corporation (IDC), worldwide smartphone shipments are forecasted to grow 1.4% y-o-y in the second half of 2019 driven by 5G acceleration, a growing selection of lower-priced premium handsets, and ongoing uplift from markets like India. IDC expects 5G smartphones to experience a slow start in 2019, capturing just 0.5% of total shipments. But the ramp-up will be quick across all markets, driving 5G to account for 26.3% of worldwide shipments in 2023.
Within the smart home device segment, the IDC expects the global smart home market to register a CAGR of 14.9% from 2019-2023. This growth will be driven by the growing acceptance of connected devices within the home, including smart TVs, smart speakers, cameras, door locks, and doorbells.

To reduce the impact of trade war, Hi-P International has initiated new projects in Thailand and worked on some plans out of China to cope with customers’ business demand. Hi-P International has more than doubled its capacity expansion plan in Thailand, mainly to cater for customers’ expansion into new products. It is also planning to further increase its capacity in Thailand.
Hi-P International is actively on the lookout for suitable M&A opportunities which can complement its business model and plans. Its targets include those with facilities out of China, non-US customer base and with capabilities that can complement its existing business.

In view of the lower guidance and increased volatility following the latest development on the trade front as US escalating trade war with a 10% tariff on a further US$300bn of Chinese goods, we have lowered our earnings forecasts for FY19F and FY20F by 7% and 6% respectively.
Our Target Price is lowered accordingly to S$1.32 (previously S$1.41) as we roll over to FY20F earnings and peg our valuation to peers’ average of 12x.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-08-02

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.32 DOWN 1.410