Hi-P International

CIMB RESEARCH on 21 Oct 2012

WE sense that Hi-P's profit guidance last Friday evening signalled considerably weaker Q3 2012 results than we had feared. It seems the company's turnaround has been pushed back, and we now believe that its prospects may not be as positive as we had previously thought.

We lower our FY12-14 core EPS forecasts further by 44-78 per cent to reflect our change in view. Our price target is now reduced from 95 cents to 70 cents as we change our valuation basis for Hi-P to 1x 2012 P/B. We downgrade the stock from "neutral" to "underperform".

Following our rating downgrade to "neutral" last Friday, Hi-P released its new profit guidance for Q3 2012 and the full year. For Q3 2012, Hi-P now expects to report lower revenue than Q3 2011, mainly due to lower orders resulting from delays in project start-up from existing and new customers. As a result, profit in Q3 2012 will also be lower versus Q3 2011. For the full year, Hi-P now expects lower revenue and profit for FY12 versus FY11. Previously, during its Q2 2012 results release, Hi-P guided for higher revenue for Q3 2012 versus Q3 2011, and higher profit in FY12 versus FY11.

We were already expecting the supply constraints for the iPhone 5 and weakness in other major customers to affect Hi-P; however, the magnitude of the fall in earnings appears to be much larger than expected as Hi-P's announcement indicated that projects from more than one customer was delayed. Given that Hi-P spent a record capex of $180 million for FY12, with less profit to show for them than FY11, we are now sceptical on its ability to generate the kind of profits we were expecting from the recently announced $300 million capacity expansion in China. Hence, we broadly lower our revenue assumptions for FY12-14.

We also push back our assumptions for the launch of BlackBerry 10 by one quarter. The bigger cut in earnings results from the weaker operating leverage on lower component sales.

We are now much less certain about Hi-P's long-term prospects. We believe 2H13 would be a better time to relook at the stock, when visibility should improve. Historically, Hi-P has bought back shares at book value level, hence we think the stock could find support at 69 cents (Q2 2012 book value per share).

UNDERPERFORM