WE BELIEVE that our Hi-P International H2 Apple story is currently taking place. Sources indicate that Hi-P has successfully begun production on the Apple orders.
Despite the profit warning recently, we are satisfied with the group's H1 performance in view of the macro headwinds.
We like the fact that Hi-P is currently transforming into an ODM (original design manufacturer) player, having successfully diversified away from Research In Motion (RIM). We reiterate our "buy" recommendation but reduce our FY2012 earnings forecast by 14 per cent to $75.4 million and reduce our target price to $1.15 (pegged to 11 times FY2012/13 blended earnings), given the absence of H1 profit contribution.
Once Q2 results are announced (on Aug 2), we believe that share buybacks will resume if the price continues to be low (below $0.75), thereby limiting downside.
Industry sources have confirmed that Taiwan contract manufacturers have begun mass production on the next generation of Apple's iPhone, which we believe will be released by October at the latest, in time for the Christmas sales. While the low yield issue for the in-cell touch panel currently acts as a bottleneck for the supply chain ramp-up, we are confident that this issue will eventually be resolved, just as with the iPad in the past. Similarly, our channel checks also indicate that Hi-P has begun production on Apple's orders.
The recent profit warning was not negative, in our opinion. In view of the negative economic outlook, RIM's woes, the slower than expected mobile device growth and the sudden slump in the IT hardware industry, we view Hi-P's ability to break even as a solid achievement. We attribute this to the fact that they have successfully diversified their revenue from loss-making RIM, which used to account for half its business.
With the acquisition of Motorola's Design Centre in Singapore back in January 2011, Hi-P has managed to retain the key human capital of the Design Centre, its valued engineers. With that, we have seen Hi-P transform itself into an ODM player with the ability to provide one-stop solutions to customers. This allows Hi-P to acquire new customers and diversify beyond its current customer base (ie, RIM). We estimate that currently 20 per cent of its revenue is ODM and expect this figure to grow.
BUY
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