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