HI-P INTERNATIONAL LIMITED (SGX:H17)
Hi-P International - A Decent Set Of 1H2020 Results Despite COVID-19; Margin Pressure To Persist
- A decent set of 1H2020 results despite COVID-19.
- Management revised up profit guidance for FY20F.
- Raised Hi-P International's earnings for FY20F/FY21F by 27%/14% but still expecting weaker margins.
- Maintain HOLD with higher Target Price of S$1.34.
Worst could be over, operations have normalised and demand is strong, but margin pressure still persists.
- Hi-P International (SGX:H17) reported a decent set of 1H2020 results despite the severe impact of COVID-19 on the group’s business, especially in February 2020. The worst is over now. Operations have since normalised and demand remains strong.
- We believe that given Hi-P International’s track record and its strong relationship with its key customers, coupled with plans to target new customers, the group should continue to generate higher revenue.
- However, given the competitive landscape, margin pressure could still persist. Though the supply chain has generally recovered, but customers are still not willing to commit to orders way in advance as the economic outlook remains uncertain. That could lead to higher costs for Hi-P International to fulfil orders given a shorter lead time.
A decent set of 1H2020 results despite COVID-19
Stable revenue despite COVID.
- Despite COVID-19 disruptions, Hi-P International's revenue declined only 5.1% y-o-y to S$543.8m for 1H2020. The weak 1Q20 was cushioned by higher revenue for 2Q20.
Lower gross margins but net margins boosted by government subsidies, cost control measures and forex gain.
- Hi-P International's gross profit margin contracted to 12.6% for 1H20 from 13.3% for 1H19. The decline was mainly due to
- lower revenue,
- disruptions for the group’s China operations in February 2020 due to COVID-19, and
- inventory provision of S$1.9m for 1H20 compared to a reversal of S$3.4m for 1H19.
- We expect gross margin to improve in 2H20 as the group ramp up production during the peak period especially in 3Q. Overall for FY20F we project gross margin of 13.6%, a tad lower than the 13.7% in FY19. Though the supply chain has generally recovered, but customers are still not willing to commit to orders way in advance as the economic outlook remains uncertain. That could lead to higher costs for Hi-P International to fulfil orders given a shorter lead time.
- Net margins, however, managed to improve to 4.5% from 4.4% in 1H19. This was mainly due to government subsidies granted to the group, several cost-control measures and forex gain of S$0.5m as compared to a net forex loss of S$2.7m in 1H19.
- Overall, Hi-P International's 1H20 net profit of S$24.2m (-3.3% y-o-y) accounted for 39% of our FY20F forecast, which is slightly better than the 31% in 1H19 and 22% in 1H18.
Healthy cash balance.
- Hi-P International generated healthy operating cash flows amounted to S$40.6m for 1H20. This contributed to balance sheet strength as the group remained in a net cash position of S$196.9m as at 30 June 2020. (31 December 2019: S$210.6m).
Management revised up profit guidance for FY20F.
- Hi-P International expects higher revenue and similar profit for 2H20 as compared to 2H19. Revenue and profit for 2H20 is also expected to be higher than 1H20.
- For FY20, the group now expects higher revenue and similar profit, vs. its previous guidance of higher revenue and lower profit as compared to FY2019. The higher profit guidance is premised on a base-case scenario rather than on a worst-case basis. There are less uncertainties now given that operations have normalised as compared to the previous guidance made in February during the peak of the COVID-19 impact in China.
Smartphone market still weak, expected to return to growth only in 1Q 2021; personal computing devices to fare better.
- According to the International Data Corporation (IDC), the worldwide smartphone market is forecasted to decline 11.9% y-o-y in 2020 with shipments totalling 1.2bn units.
- Smartphone shipments are expected to decline 18.2% in the first half of the year as the macroeconomic impact of the COVID-19 pandemic continues to affect consumer spending. Global smartphone shipments are not expected to return to growth until the first quarter of 2021.
- IDC expects personal computing devices sector to fare better, will not suffer as much from the rapid contraction in economic performance as many other sectors, as they are key to working from home for so many workers.
Corporate transformation project to sharpen competitive edge and leadership planning.
- Hi-P International has re-organised its management structure into two business units, one that focuses on Greater China and the other on its overseas business. This will enable the group to better service its customers and grow the businesses, on top of achieving better leadership planning.
Exploring outsourcing and targeting new customers.
- Going forward, Hi-P International could explore outsourcing to tide over the peak period, especially in 3Q. Given the uncertain economic outlook, customers are less likely to commit to orders way in advance. Hence Hi-P is given shorter lead time to fulfil orders.
- In order to reduce its reliance on its key customer, Hi-P International is also targeting some MNCs in China that are servicing the domestic market. Hence in the longer term, this would be beneficial to the group.
Revised Hi-P's earnings for FY20F/FY21F by 27%/14%, maintain HOLD.
- We are revising Hi-P International's earnings for FY20F/FY21F by 27%/14%. We believe that given Hi-P International’s track record and its strong relationship with its key customers, coupled with plans to target new customers, the group should continue to generate higher revenue.
- However, given the competitive landscape, margins pressure could still persist. Margins were under pressure in the past two to three years, especially after the onset of trade war. Coupled with the COVID-19 impact, we continue to expect further margin squeeze.
- On the back of the higher earnings and rolling forward to FY21F earnings, our target price for Hi-P International rises to S$1.34 (S$0.85 prev.) – now pegged to a higher peer average of 13x (vs. 11x previously), in line with the re-rating of the technology sector.
- At current PE of 13.1x, stock is trading at +0.5 SD of its 5-year mean forward PE.
- Maintain HOLD.
- 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.
- We would turn more positive if Hi-P International can gain more traction with new customers, and to reduce reliance on its key customer, which contributes c.40% to 50% of total revenue.
Lee Keng LING
DBS Group Research
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https://www.dbsvickers.com/
2020-08-03
SGX Stock
Analyst Report
1.34
UP
0.850
