FY19 Earnings Guidance Cut; Downgrade to SELL With Target Price -6%

• HI-P INTERNATIONAL LIMITED (SGX:H17)'s 2Q19 PATMI rose 17% y-o-y, despite a 5% drop in revenue, surpassing our expectation of flat y-o-y. This was largely due to a favourable shift in product mix.
• Amid an increasingly cautious outlook, Hi-P now guides for FY19 earnings to be “lower” y-o-y from “similar” previously. We cut FY19-21E EPS by 4-7% to reflect management’s revised guidance. Our ROE-g/COE-g Target Price falls to SGD1.15, based on an unchanged 1.5x P/B.
• With 14% downside to our revised Target Price, we downgrade Hi-P to SELL.

GPM Boosted by Product Mix, Cost Management

• Hi-P's 2Q19 gross margin normalised to 13.9% (+4.1ppt y-o-y) due to:
  1. shift in product mix;
  2. better cost management; and
  3. deconsolidation of a lossmaking unit.
• In 2Q18, Hi-P sold higher than usual volumes of metal components, which yield lower margin than plastic counterparts. These positive factors more than offset the effects of pricing pressure and softer volumes from some customers.

Pricing Pressure, Lower Scale of Efficiencies Drag

• Despite now guiding to lower earnings y-o-y, guidance for revenue was maintained at flat y-o-y. Management expects the profitability drag to come from:
  1. pricing pressure – we believe primarily from its key wireless customer; and
  2. reduced scale of efficiencies – as to maintain top line Hi-P has to aggressively build its breadth of projects, as volumes per project falls due to the increasingly cautious climate. This requires Hi-P to strengthen its project management and sales teams.
• Management are closely evaluating several candidates for M&A. We see a possibility that a deal could be announced in several months, which presents both upside and downside risks.

Better Than Expected Execution Is Upside Risk

• We believe Hi-P could outperform our earnings expectations if it is able to win wallet share. This could happen if its yields and/or time to market surpasses competitors’, especially during the holiday season production ramp-up in 3Q19.
• At 12x FY19E P/E, Hi-P appears overvalued against 10x for global peers and near 1SD above its 3-year mean of 13x. Accordingly, we downgrade to SELL.

Source: Maybank Kim Eng Research - 4 Aug 2019