Hi-P International - CGS-CIMB Research 2019-09-09: Striving For Sustainable Growth

HI-P INTERNATIONAL LIMITED (SGX:H17)

Hi-P International - Striving For Sustainable Growth

Established in 1980, HI-P INTERNATIONAL LIMITED (SGX:H17) is a one-stop manufacturing solutions provider.
The company is net cash at end-Jun 2019 and management has guided that it is looking for M&A opportunities to grow the business further.
Based on Bloomberg consensus forecasts, Hi-P is trading at CY20F P/E of 10.5x versus the tech manufacturing sector’s average CY20F P/E of 11.1x.

HI-P INTERNATIONAL LIMITED (SGX:H17) started in 1980 as a tooling specialist in Singapore and has since grown to become a one-stop manufacturing solutions provider. Its key product segments are wireless telecommunications, consumer electronics, computing and peripherals, the Internet of Things (IoT), medical devices and industrial devices.
Hi-P is able to support customers from product development, component manufacturing to complete product assembly.

Hi-P has 12 manufacturing plants globally located across five locations in the People’s Republic of China (Shanghai, Chengdu, Xiamen, Suzhou and Nantong), Poland, Singapore and Thailand. Hi-P also has marketing and engineering support centres in PRC, Singapore, Taiwan, Germany and the US. According to the management, the group is looking to expand its manufacturing presence to other geographies.

Hi-P has a net cash balance sheet and has been paying dividends for the past five years. As at end-Jun 2019, Hi-P was in a net cash position of S$149.2m or S$0.186 per share.
Hi-P also had 83m treasury shares (10.32% of the shares outstanding excluding treasury shares) as at end-Jun 2019. Other than dividend payment and capex needs, management has guided that it is actively looking for M&A targets to grow the business.

Based on Bloomberg consensus estimates, over the past five years, Hi-P traded at an average forward P/E multiple of 8.63x and an average forward P/BV of 1.33x, It is currently trading at CY20F P/E of 10.5x (based on Bloomberg consensus estimates), in line with the tech manufacturing sector average of 11.1x (based on our estimates for local companies in the sector under our coverage).
Hi-P’s CY19F P/BV of 1.51x (based on Bloomberg consensus estimates) is lower than the sector average of 1.64x (based on our estimates), while its CY19F dividend yield of 3.2% (based on Bloomberg consensus estimates) is lower than the sector average of 4.4% (based on our estimates).
In terms of ROE, Hi-P’s CY19F ROE is 15.1% (based on Bloomberg consensus estimates), higher than the sector average of 13.5% (based on our estimates).

HI-P INTERNATIONAL LIMITED (SGX:H17) is an Electronics Manufacturing Services (EMS) provider. Hi-P started in 1980 as a tooling specialist in Singapore. Today, Hi-P provides one-stop solutions to customers in various industries, including wireless telecommunications, consumer electronics, computing and peripherals, the Internet of Things (IoT), medical devices and industrial devices. Hi-P is able to support customers from product development, component manufacturing to complete product assembly.
The Group has 12 manufacturing plants located across five locations in the People’s Republic of China (Shanghai, Chengdu, Xiamen, Suzhou and Nantong), Poland, Singapore and Thailand. Hi-P also has marketing and engineering support centres in the PRC, Singapore, Taiwan, Germany and the USA.
The Group’s customers include companies involved in mobile phones, tablets, household and personal care appliances, computing and peripherals, the IoT, medical devices and industrial devices. According to the management, consumer electronics products accounted for 35% of FY18 revenue, while wireless products and computer and computer peripherals accounted for 20% of revenue each. IoT products and accessories accounted for 20% of revenue.

Hi-P’s three main operating segments are:
1. Precision plastic injection moulding (PPIM);
2. Mould design and fabrication (MDF); and
3. c) Provision of sub-product assembly and full-product assembly services (Assembly).
In FY18, the PPIM segment contributed 67% of revenue, followed by the Assembly segment with a 26% contribution. The MDF segment accounted for 7% of FY18 revenue. In terms of operating profit breakdown, the PPIM segment contributed 92% of FY18 operating profit while the Assembly segment and the MDF segment contributed 4% and 3% of FY18 operating profit, respectively.
The PPIM segment is also the most profitable segment. In FY18, this segment’s operating profit margin was 12% versus 4% for the MDF segment and 1% for the Assembly segment.
In terms of revenue breakdown, based on the geographical location that customers are billed in, the People’s Republic of China accounted for 51% of FY18 revenue. The US and the rest of Americas accounted for 31% of FY18 revenue. In FY18, approximately 13% of its revenue was both billed to customers located in the US and shipped to the US.

In FY18, Hi-P’s four major customers accounted for 82% of its revenue in the PPIM segment. At the group level, these four customers accounted for 55% of FY18 revenue. In the Assembly segment, seven major customers accounted for 69% of the revenue in FY18. At the group level, these seven customers accounted for 18% of FY18’s total revenue.
Management guided that one major customer (wireless and computing device company) accounted for slightly less than 50% of FY18 revenue. Another three companies involved in personal care and lifestyle products each accounted for 7-8% of FY18 revenue.

In its 2Q19 results announcement, Hi-P guided that the expansion of its Thailand plant as well as new project launches in its Thailand plant have commenced as scheduled. The group will strive to penetrate into new products via existing sales efforts as well as acquisitions.
In its 2Q19 results press release, Hi-P said it is actively pursuing M&A opportunities. Hi-P is continuing to strengthen its sales force in the US, Europe and Asia and on the production front, it is committed to increasing automation.
In terms of financial performance, Hi-P expects:
1. Higher revenue and similar profit for 3Q19F compared to 3Q18;
2. Higher revenue and profit for 2H19F compared to 1H19; and
3. Similar revenue but lower profit for FY19F as compared to FY18.

Over the past five years, Hi-P traded at an average historical forward P/E multiple of 8.63x and an average forward P/BV of 1.33x (both based on Bloomberg consensus estimates).
In comparing Hi-P (based on Bloomberg consensus estimates) to the broader tech manufacturing sector (based on our estimates for local companies under our coverage), we observe the following: Hi-P is currently trading at a CY20F P/E of 10.5x, in line with the tech manufacturing sector average of 11.1x. Hi-P’s CY19F P/BV of 1.51x is lower than the sector average of 1.64x while its CY19F dividend yield of 3.2% is lower than the sector average of 4.4%.
In terms of ROE, Hi-P’s CY19F ROE is 15.1%, higher than the sector average of 13.5%.

William TNG CFA CGS-CIMB Research | https://www.cgs-cimb.com 2019-09-09

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