Overvalued; Downgrade to SELL From HOLD

• Hi-P’s share price has gained 47% since 22-Feb (post-results), outperforming SGX-listed peers. Except for the resignation of the deputy CEO (see Hi-P's announcements dated 31-Mar-2019), there were no material announcements to suggest a shift in fundamentals.
• Amid guidance for flat y-o-y earnings, the stock appears overvalued at 14x FY19E P/E vs global peers' at 10.5x, and its own 1SD above 3-year mean of 12.3x. Hence, we downgrade Hi-P International (SGX:H17) to SELL from HOLD. ROE-g/COE-g Target Price stays at SGD1.22, based on 1.5x FY19E P/BV.
• Prefer Valuetronics (SGX:BN2) (Rating: BUY, Target Price: SGD1.05, see report: Valuetronics - Printed Circuit Box Assembly Allocation Risks Priced In) for Singapore tech sector exposure.
• Risks include stronger-than-expected sales volumes and material contract wins.

Share Price Imply Lofty 20-23% FY18-21E EPS CAGR

• We see two possible reasons for the outperformance.
  • First, the market may be potentially expecting a share transaction involving Hi-P shares from majority shareholder, chairman and CEO, Mr. Yao (see Hi-P's announcements dated 27-Nov-2019). Regardless of whether a transaction materializes, this does not affect our fundamental valuation of the stock.
  • Second, the market may be pricing-in a stronger than expected fundamental outlook. However, guidance for 1Q19E/FY19E earnings to be lower/flat y-o-y have not been changed.
• To justify the current Hi-P’s share price, our ROE-g/COE-g methodology implies that Hi-P will have to deliver FY18-21E earnings CAGR of 20-23%. In view of still challenging operating environment, we believe such earnings expectations may be difficult to achieve.
• See attached PDF report for Hi-P’s peers comparison table. 

Succession-planning Hiccup

• In addition, the market may also be concerned about potential uccession-planning challenges at Hi-P. Deputy CEO, Mark Su, has resigned to pursue other interests, after only 5 months into his job. This is Hi-P’s second high-profile management departure in 1-2 years.
• In Feb-18, former COO Yong Inn Nam resigned 4 months after his appointment.

Risks to Our View

• While the worst may appear over for Hi-P, we believe Hi-P’s share price has run ahead of fundamentals.
• Risks to our view include:
  1. stronger-than-expected volumes from new customers and allocations; and
  2. potential material contract wins not yet in management’s guidance.

Source: Maybank Kim Eng Research - 08 Apr 2019