Hi-P International - DBS Research 2020-04-01: Supply Disruption + Margin Pressure

HI-P INTERNATIONAL LIMITED (SGX:H17)

Hi-P International - Supply Disruption + Margin Pressure

Weaker mobile phone sales partly mitigated by the less volatile Consumer Electronics.
Hi-P International (SGX:H17) may see small loss in 1Q20; strong USD to cushion impact.
Cut FY20F/FY21F earnings by 21%/10% on lower revenue and margin assumptions.

The COVID-19 pandemic has hit the business world at an unprecedented scale and speed. It has caused the closures of businesses, the stoppage of factory outputs, and the disruption to global manufacturing industries and their supply networks. The issue is compounded with the lockdown orders and the restriction in movements, leading to a demand crisis.

Apple's iPhone shipments in China plunged more than 60% in February, when the coronavirus outbreak first started. With the widespread of the virus to the rest of the world, iPhone sales in 2020 is expected to be weak. Apple is now unable to meet the revenue guidance it provided for the March quarter. Apple had forecast revenue of US$63-67bn for 2Q FY Sep 2020, vs revenue of US$58bn in 2Q19.
The Consumer Electronics segment, which accounts for the bulk of about 40% of Hi-P International's total revenue, is less volatile. We are now expecting flat-to-lower single-digit negative growth, vs our previous expectation of stable single-digit growth.

With more than half of its factories in China affected by the shutdown, 1QFY20F performance would be weak. Though the group is drawing down on its inventory to tide over this period, the whole supply chain, including Hi-P International’s customers, are affected. Thus, Hi-P International could register a small loss in 1QFY20F.

Note that the group has cut dividend for FY19 to 2.8 Scts, from 5 Scts in FY18, partly to be prudent and also for potential M&A.
On the M&A front, targets would include companies that are strong in the technology know-how and can complement Hi-P International’s existing business.

Hi-P International’s free float in the market is small, as Executive Chairman and Chief Executive Officer, Mr. Yao Hsiao Tung, now owns about 84% of the company. Furthermore, there is still no concrete succession plan in place.
We continue to believe that with its entrenched relationship with key customers, which include some of the world’s biggest names in mobile phones, tablets, household and personal care appliances, Hi-P International could be an attractive target.

We have cut FY20F/FY21F earnings by 21%/10%, on lower revenue and weaker margin assumptions. Our Target Price is reduced to S$0.85 (previously S$1.37), pegged to a lower peers’ average of 11x vs 14x previously, in line with the de-rating, 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.

The USD vs RMB and SGD have strengthened c.2-6% YTD. Hi-P International is a beneficiary of a strong USD as the bulk of its revenues are in USD while overheads are in local currencies.