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