Hi-P International

CIMB Research, May 7

DESPITE an impairment loss from a fire at one of its factories, Hi-P reported better-than-expected Q1 2013 results as its product mix improved and material costs fell. The outlook has turned sunny once again and we expect significant upward earnings revisions by the market.

Q1 2013 core net profit was 47 per cent of consensus FY2013 numbers and 48 per cent of ours. Given the outperformance and more upbeat guidance, we bump up our FY2013-15 forecasts by 102 per cent on average and revert to a target 2014 PE of 14 times, the three-year average (previously 0.9 times P/B). Our target price rises from $0.64 to $0.86. We upgrade Hi-P from "underperform" to "outperform", with these results being a potential catalyst.

OUTPERFORM

Hi-P International

DBS GROUP RESEARCH on 6 March 2013

Q4 2012 net profit of $15.6 million comfortably beat our $10 million estimate as gross margin of 10.7 per cent was significantly better than the 7.3 per cent recorded in 9M 2012, due to a change in product mix. For the full year, however, net profit dived 60 per cent y-o-y to $17.9 million on the back of a 3 per cent drop in revenue to $1.167 billion. This is the third year of declining earnings.

Management expects both revenue and profit to improve in FY2013 but they have guided for a loss in Q1 2013 as seasonally lower volumes and lower Apple orders are unlikely to cover a higher cost base. Going by past quarterly performances, it appears that Hi-P's break-even sales are higher at more than $280 million. To be profitable, sales have to exceed break-even level or more cost-cutting is needed. Based on typical seasonality and new product launches from Blackberry, we expect breakeven in H1 2013 and a steep ramp up in H2 2013.

We have cut FY2013F earnings by 32 per cent to factor in lower margin assumptions.

We believe Hi-P's share price reflects most of the downside risk after correcting 20 per cent since our downgrade last October. But, it is too early to turn positive as earnings have yet to stabilise. We have lifted TP to 71 cents as we roll over to 1x FY2013 P/BV. We upgrade the stock rating to "hold" on valuation grounds.

HOLD

Hi-P International

DMG & PARTNERS RESEARCH on 6 Nov 2012

Hi-P reported a weak set of Q3 with $3.0 million PATMI on the back of $271.7 million revenue. The disappointing results are largely attributable to a couple of delayed projects which we believe to involve with Apple, Research-in-Motion (RIM) and Amazon. Management sounded positive over the briefing and shared that outlook has improved as most of the delayed projects have commenced since early Q4. Going forward, we see a close correlation between Apple and Hi-P's share price performance with Hi-P's growing exposure to Apple's products. Therefore, we are taking a cautious stance in view of Apple's weakening share price amid intensifing competition. We lower our FY2012 and FY2013 estimates by 29.7 per cent and 4.5 per cent respectively. Maintain "neutral" with a lower TP of $0.74 pegging blended FY2012/2013 earnings to 13x forward P/E.

During the results briefing, management shared that there were three to four projects that were delayed, resulting in the disappointing performance. We believe that the projects involve with Apple's iPhone 5, RIM's Blackberry 10 as well as Amazon's Paperwhite. Similar to our channel checks, management explained that the delay was not due to Hi-P's capabilities but rather the disruption of the supply chain. Nonetheless, most of the projects have resumed in Q4 with the last major one still pending.

We observed that there was a close correlation between Apple's share price performance and Hi-P's for the past one year with the growing exposure. Despite the delay of the new metal casing business, we estimate that Apple's revenue contribution to Hi-P had surpassed 30 per cent in Q3 FY2012. And we expect this percentage to increase further to 50 per cent with the programme resuming and the new Nantong plant starting to carry out the final assembly work next year. In view of Apple's recent weak share price movement with intensifying product competition, we are taking a cautious stance towards Hi-P's short term performance.
NEUTRAL

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

Hi-P International

DMG on 25 July 2012

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

Hi-P International

Kim Eng on 17 May 2012

Background: Hi-P provides contract manufacturing services and electro-mechanical modules to the telecommunications, consumer electronics and electrical, computing, life sciences and medical, and automotive industries. It has 15 manufacturing plants globally, located over five sites in China (Shanghai, Tianjin, Suzhou, Chengdu and Xiamen) and in Thailand, Mexico, Poland and Singapore.

Why are we highlighting this stock? As expected, Hi-P reported a big fall in profits in 1Q12 to just $1.5m. However, Hi-P expects a stronger 2H in 2012 and for full year net profit to exceed FY11’s SGD45m. Assuming 1H12 net profit of SGD10m, it would have to earn SGD35 in 2H12, and if this momentum continues, FY13 results could certainly exceed FY10’s peak of SGD67m. As the stock has retreated in the last few weeks and is currently hovering around the 200-day moving average, it may be worthwhile to take a bet on Hi-P on further weakness.

Valuations starting to reflect reality. At the recent peak of SGD1.05, Hi-P was valued at 20x FY11 earnings! Granted that earnings were at depressed levels, this was absolutely on the over-priced side for an old-world manufacturing stock. It has now fallen back to a more reasonable valuation, its long-term historical mean of 12x. If earnings can recover to FY10 peak levels, the stock would be trading at its long-term mean again. Any further weakness would suggest undervaluation for the stock.

• Capex burst may be a leading indicator. Hi-P expects to spend SGD180m in 2012 to expand its production capacity and accelerate its automation program. This is almost two times what it spent in FY11 and FY10 combined! To some extent, this is driven by its problems with labour costs in China and the need to automate to lower costs. However, it also suggests Hi-P is optimistic enough on future orders to justify this level of capex. Specifically, management mentioned new business opportunities for wireless, computing & peripherals, home appliances, sports digital devices and personal grooming devices.

Hi-P International

DMG & Partners Securities on 27 Feb 2012

Hi-P's Q4 results of $9.4 million profit after tax and minority interests (-73.7 per cent y-o-y) and $442.1 million revenue (+22.8 per cent) are in line with our estimates. Going forward, the group announced an ambitious 2012 capex plan of $180 million to enhance its existing business and to venture into metal casing business. We believe that the increase in revenue contributions from another customer will cover the revenue fall from major customer Research in Motion (RIM). Maintain BUY with an unchanged TP of $1.22.

Hi-P planned to deploy a capex of $180 million in FY2012, which is higher than our initial estimates of $110 million. Within, 30 per cent of the amount will be channelled into developing the new metal casing ($54 million) business while the rest will be used to enhance its existing business. Given a solid net cash balance of $220.3 million ($0.27/share) and healthy operating cash flow of $101.5 million ($0.12/share) as of end FY2011, the group will have little difficulties in funding this ambitious plan.

Management had confirmed that portion of the $65.5 million capex spent in FY2011 was used to purchase Computer Numerical Control (CNC) machines, with the first batch arrived and installed. More shipments are expected to arrive in the next two quarters, getting ready for the new metal casing business commencing in the second half of the year. At an average cost of $100,000 per machine, we now expect the company to possess 700 to 800 CNC machines by then.

The main reason for Hi-P's poorer-than-expected performance is mainly due to its largest customer (over 50 per cent of FY2011 revenue) RIM's lacklustre performance. Moving on, management guided a bullish outlook, expecting another customer to take up RIM's fall in revenue contribution. We continue to believe that this up-and-rising customer will enable the group to achieve a record performance this year.
BUY