2nd Guidance Cut This Year; Slash Target Price 34%

• HI-P International lowered its earnings guidance for the second time this year. It now expects lower sales and profit in 3Q18 on a y-o-y basis in contrast to its earlier guidance of higher revenue and similar profit.
• We are concerned industry headwinds are hitting HI-P much harder than expected. Consequently, we slash our EPS by 25-32% for FY18-20E. Our ROE-g/COE-g Target Price is cut to SGD0.84, now based on 1.2x FY18E P/B (previous 1.8x), based on FY18-20E average ROE of 10.4% and COE of 9%. HOLD.

A Double-whammy on Margins

HI-P blamed the guidance cut on:

1. a delay in billing for certain production tools;
2. lower yields for products undergoing ramp-up; and
3. lower market demand for certain products.

The latter two reasons may be a double-whammy that further accelerates a fall in HI-P’s profitability. HI-P’s margins are already under pressure given its large fixed cost base amid an environment of fierce pricing competition.

Demand Outlook Seems to Have Deteriorated Fast

3Q is typically seasonally the strongest as HI-P ramps up production to meet seasonal holiday demand. In Aug-18, management had indicated that the pace of the 3Q18 ramp-up was healthy.

Since management has not quantified the impact of weaker demand we are worried the latest guidance cut is a sign the demand outlook has deteriorated much faster than we anticipated.

Volume Disruption Still the Key Risk

We believe HI-P’s performance in 4Q18 still largely hinges on the reception of the smartphones launched recently by its key wireless customer.

A key downside risk to our forecasts is if actual volumes miss management’s already tempered internal forecasts.

On the flipside, strong demand of the customer’s cheapest phone model in this year’s launch may provide a positive surprise to our FY18 estimates.

Forecast Changes

We slash our FY18-20E EPS by 25-32% reflecting expectations of a weaker demand outlook. Gross margins have been cut 0.9-1.2ppt to reflect lower manufacturing yields and a possible worsening of pricing pressure as the demand outlook weakens.

Source: Maybank Kim Eng Research - 15 Oct 2018