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.
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