Hi-P International - DBS Research 2020-02-14: Pricing Pressure Amid Challenging Outlook

HI-P INTERNATIONAL LIMITED (SGX:H17)

Hi-P International - Pricing Pressure Amid Challenging Outlook

Hi-P International's FY19 results in line; slight decline in revenue but bottomline hit by pricing pressure.
Management guiding for a weaker 1H20 vs 1H19, and higher FY20 revenue but lower profit vs FY19.
Expect positive smartphone shipment momentum but impact could be diluted by coronavirus.
Maintain HOLD with a lower Target Price of S$1.37; cut earnings by 8-11%.

Hi-P International (SGX:H17) reported a slight decline of 2.5% in FY19 revenue to S$1425m compared to FY18. Net profit, however, fell 20.4% y-o-y to S$80.3m, mainly due to pricing pressure, on the back of challenging market conditions, trade war tensions and subdued global growth. Gross profit margin declined 0.9 percentage points to 13.7% while net margin was lower at 5.9% vs 7.2% in FY18.
4Q19 numbers were weak. Revenue of S$397m was flat q-o-q but down 10.2% y-o-y. Net profit plunged 31.8% q-o-q and 50% y-o-y to S$22.4m, due to
1. the decline in revenue,
2. increasingly competitive pricing, and
3. less economies of scale.
A lower final dividend of 2 Scts (vs 4 Scts in FY18) was declared, bringing total dividends for FY2019 to 2.8 Scts (5 Scts in FY18).

Hi-P International expects a weaker 1H2020, both on revenue and profit basis, as compared to 1H2019, and 2H2020 to be stronger than1H2020. Overall, FY2020 is expected to register higher revenue but lower profit compared to FY2019.

Hi-P International continued to generate strong positive operating cash flows amounting to S$250.8m for FY19. This contributed to a strengthening financial position as net cash position improved to S$210.6m from S$120.2m in FY18.

According to International Data Corporation (IDC), following three years of contraction, the worldwide smartphone market is expected to grow 1.5% y-o-y in 2020 with shipment volumes of just over 1.4 billion, fueled by the rise of 5G. IDC expects 190 million 5G smartphones to ship in 2020, accounting for 14% of total smartphones shipped, which far exceeds the first year of 4G shipments (2010) at 1.3%.
Within the smart home devices segment, worldwide shipments of smart home devices are forecast to be more than 1.39 billion in 2023 with a five-year compound annual growth rate of 14.4% from 2018 to 2023.
However, near term, the outlook is uncertain with the onset of the coronavirus that has affected manufacturing plants in China and caused supply interruptions. Hopefully, the planned rollout of more 5G-capable devices with enhanced features would drive better replacement and upgrade demand for the 2020 cycle, and to help to minimize the impact.

The spread of the Covid-19 has impacted Hi-P International’s manufacturing operations in China through government mandated closure of its factories from 3 to 9 February 2020. Operations have gradually resumed production since 10 February 2020.
If we were to assume a worst case scenario whereby the whole technology supply chain is affected by a prolonged
period, and using SARS period as a guide, we estimate that Hi-P International’s earnings could be shaved by 10%, given that more than half of its manufacturing plants are in China.

We have cut our FY20F/21F earnings by -8%/-11% on the back of the uncertain outlook and margins pressure. Maintain HOLD with a slightly lower Target Price of S$1.37 (Prev S$1.39), pegged to a higher peers’ average of 14x (vs 13x previously), on FY20F earnings.
See Hi-P International Share Price; Hi-P International Target Price; Hi-P International Analyst Reports; Hi-P International Dividend History; Hi-P International Announcements; Hi-P International Latest News.

Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2020-02-14

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.370 DOWN 1.390