Highlights

Hi-P International - Challenges Persist

Date: 07/01/2019

Source  :  Maybank Kim Eng
Stock  :  Hi-P       Price Target  :  0.68      |      Price Call  :  SELL
        Last Price  :  1.42      |      Upside/Downside  :  -0.74 (52.11%)
 


Another Year of Headwinds; Downgrade to SELL

  • We downgrade HI-P INTERNATIONAL LIMITED (SGX:H17) to SELL from HOLD and cut our ROE-g/COE-g Target Price to SGD0.68. We:
    1. cut FY18-20E EPS by 2-4% after its biggest customer revised its revenue guidance downwards, and
    2. increase our COE assumption from 9% to 10.3% for increased volatility in the stock.
  • De-rating catalysts are expected from:
    1. pricing pressure,
    2. relocation costs in 2019, and
    3. a potential material deterioration in global consumer sentiment.
  • We prefer VENTURE CORPORATION LIMITED (SGX:V03) and VALUETRONICS HOLDINGS LIMITED (SGX:BN2) for sector exposure. Risks to our view include a strong rebound in volumes that could alleviate pricing pressure.

Vulnerable to Consumer Sentiment Downturn

  • Our earnings cuts mainly reflect lower revenue guidance from Hi-P’s largest customer, which accounts for 40-50% of its revenue. This customer has cited unexpected weakness in Greater China and believes the US-China trade war is partly to blame.
  • We believe Hi-P’s revenue mix makes it vulnerable to a material decline in global consumer sentiment. We estimate that 80% of its revenue comes from consumer discretionary electronic products and that at least 30-40% has short life cycles of 1-3 years.

Margin Pressure

  • Pricing pressure could persist as volumes remain weak. Economies of scale could also drop as it diversifies its product mix amid weaker volumes.
  • Lastly, Hi-P will be incurring one-off costs for a relocation of its resources to its Thailand and Nantong facilities.

Earnings Revisions

  • We shave FY18-20E earnings by 2-4% following cuts in sales guidance by Hi-P’s largest customer, which we estimate account for 40-50% of its revenue. The customer has cited unexpected weakness in Greater China, which it believes was partly caused by the US-China trade war.
  • We estimate that 80% of Hi-P’s revenue comes from consumer discretionary electronic products. At least 30-40% is products with short life cycles of 1-3 years. In our view, this makes Hi-P vulnerable to a downswing in consumer sentiment globally.

Valuation

  • Our ROE-g/COE-g Target Price is now based on 0.8x FY19E P/BV, from 1x previously. We increase our beta assumption from 1x to 1.2x to factor in increased volatility of the stock.
  • Our Target Price implies 9x FY19E P/E, in line with global EMS peers’ 8.4x average.
  • A key risk to our call is a strong rebound in volumes.

Source: Maybank Kim Eng Research - 07 Jan 2019

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Labels: Hi-P

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