Hi-P International - DBS Research 2019-10-31: Persistent Margin Pressure

HI-P INTERNATIONAL LIMITED (SGX:H17)

Hi-P International - Persistent Margin Pressure

Hi-P’s 3Q19 results broadly in line; margins weakened.
Management lowers guidance for FY19 revenue.
Strong cash position; continues to be on the lookout for M&A targets.
Trimmed FY19F/FY20F earnings forecasts by 10%/3%; maintain HOLD with a slightly higher Target Price of S$1.39.

Though HI-P INTERNATIONAL (SGX:H17) is able to generate higher volumes from its key customers in the mobile and consumer electronics segment, the group is hit by lower ASPs and margins. With the persistent margin pressure, coupled with management’s guidance of lower y-o-y revenue and earnings for FY19F, we have trimmed our FY19-FY20F earnings forecasts by 3-10%.

To reduce the impact of trade war, Hi-P has initiated new projects in Thailand and is looking to further expand its capacity there. With its strong cash position, Hi-P is also actively on the lookout for suitable M&A opportunities which can complement its business model and plans, and has recently acquired SEAMCO, which can help the group to gain new customers and increase its product offerings.

Hi-P reported a 5.4% y-o-y increase in revenue to S$397.5m for 3Q19. Gross profit, however, declined marginally by 3% y-o-y to S$56.5m on weaker margins. The decline in gross profit margin to 14.2% from 15.5% for 3Q18 was driven by price pressure, higher labour content arising from more complex manufacturing processes and more stringent quality controls required by customers for certain products along with higher tooling amortisation costs. The mobile segment saw good volume but lower average selling price (ASP). The consumer goods segment was stable. See Hi-P International Announcements.
Overall, net profit of S$32.9m was down 2.7% y-o-y but more than doubled q-o-q as 3Q is traditionally a strong quarter. In 3Q19, Hi-P also booked in a forex gain of S$10.6m, vs S$4.0m in 3Q18.
For the 9-month period, net profit accounts for 66% of our FY19F forecasts, broadly in line as 4Q is also a seasonally strong quarter.
An interim DPS of 0.8 Scts (1.0 Scts in 3Q18) has been declared. This was lower than the 1.0 Scts declared last year as the group prefers to preserve cash for M&A activities and for working capital purposes. See Hi-P International Dividend History.

Hi-P expects lower revenue and profit for 4Q19 as compared to 4Q18. For the full year, the group has lowered its guidance for revenue. It now expects both lower revenue and profit for FY19 as compared to FY18; vs previous guidance for similar revenue and lower profit for FY19 as compared to FY18. This is the second time that Hi-P is lowering its expectations for FY19. In the last quarter, Hi-P lowered its guidance on profit.
The lower guidance is mainly due to lower ASP as a result of pricing pressure from customers on the back of the uncertain outlook. Volume is still expected to be decent.

According to the International Data Corporation (IDC), worldwide smartphone shipments are forecasted to show signs of a market recovery in the second half of 2019 and into 2020, pushing smartphone shipment growth back into positive territory. IDC expects shipment growth to reach 1.6% in 2020.
Within the smart home devices segment, the worldwide market is expected to grow 23.5% y-o-y, with a 5-year compound annual growth rate (CAGR) of 14.4% to year 2023.

With its net cash pile of S$179.8m, Hi-P 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 can provide the group with quick access to new industries, including automobile and medical players.

Hi-P recently announced the proposed acquisition of SEAMCO which will allow the group to gain new customers, increase product offerings and strengthen technological capabilities. This is also part of the group’s strategy to mitigate the impact from trade war as SEAMCO’s facility is mainly in Singapore and its major customer is in Europe, and not in the US.
One of SEAMCO’s key strength is in providing plastic parts for motors to be used in various industries including consumer products. It also has a strong working relationship with its major customer in Europe, and is a niche supplier for parts in the motor space for this customer. With Hi-P’s geographical footprint and financial muscle, more synergistic effect could be derived from the merged entity.

We have tweaked our earnings forecasts for FY19F/FY20F by -10%/- 3% as we trimmed our revenue and margin assumptions, partly offset by the slight contribution from newly acquired SEAMSO.
SEAMCO reported a net profit of US$7.1m (c.S$9.8m) for FY November 2018, which accounts for 9.7% of Hi-P’s FY December 2018 net profit of S$100.9m.
Our new Target Price is slightly higher at S$1.39 (previously S$1.32), pegged to a higher peers’ average of 13x vs 12x previously, on FY20F earnings. See Hi-P International Share Price; Hi-P International Target Price.

We are less bearish, as Hi-P has proven thus far to be able to generate higher volumes amid challenges in the market and working towards enhancing operational efficiencies to improve margins.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-10-31

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.39 UP 1.320