New Customer Through M&A; Upgrade to HOLD

• The proposed acquisition SEAMCO (South East Asia Moulding Company Pte. Ltd.) provides access to a high profile UK-founded customer (Customer D) that presents HI-P INTERNATIONAL LIMITED (SGX:H17) with “enormous growth prospects in consumer electronics and automotive”. SEAMCO’s capabilities and production footprint appear to complement needs for Customer D’s Singapore-based EV (electric vehicle) project.
• Pending further clarity, we conservatively raise FY20-21E EPS by 8% to factor in this acquisition. ROE-g/COE-g Target Price rises to SGD1.21, on unchanged 1.5x FY19 P/B.
• Upgrade to HOLD from SELL.

Accretive in the Short Term…

• Hi-P International (SGX:H17) is buying Singapore-based SEAMCO for USD31m, valuing the high precision plastics manufacturer at 4x FY18 P/E. This deal would have been FY18 EPS accretive by 9.7%, and is fully cash funded. See Hi-P's announcements.
• Hi-P claims that SEAMCO’s thermoplastics and thermoset components are unmatched for a specific, but unannounced product category. SEAMCO won Customer D’s best supplier award in 2015, its inaugural year, suggesting a strong working relationship. Customer D is well known for its bladeless fans, cordless vacuums and unique hair dryer/styling products.

…and Opens Doors for the Long Term

• SEAMCO’s capabilities and production footprint appear to complement Customer D’s product plans over a longer horizon – including for the EV project. Customer D is expected to complete an EV factory in Singapore in 2020 and launch its EV in 2021.
• Customer D has recently moved its headquarters to Singapore, and employs 1,100 people in its facilities that produce motors. This underscores Singapore’s importance to its long-term strategy. Growth potential from Customer D is not yet factored into our forecasts, pending clarity on growth dynamics from management.

Upside Risk to 3Q19 Guidance

• Despite the challenging outlook, we see a possibility that 3Q19 net profit guidance to be similar y-o-y (3Q18: SGD33.8m) may be revised upwards, if Hi-P’s yield during production ramp up of the key wireless customer’s new smartphones were decent. This is due to signs of favourable reception of the smartphones so far.
• Sustained demand strength may also limit pricing pressure in 4Q19. Conversely, weaker than expected momentum in Hi-P’s other businesses are downside risks.

Forecast Revision

• We assume SEAMCO will be consolidated in FY20, and contribute around SGD8m of earnings p.a. for FY20-21E. This is lower than SEAMCO’s SGD10m earnings in FY18, to reflect our conservatism due to insufficient information on growth dynamics. Hi-P may provide more colour during their 3Q19 results briefing on 31 Oct. See Hi-P's share price.
• Our ROE-g/COE-g Target Price is based on 1.5x FY19E P/B, in turn based on FY19-21E average ROE of 14.1% and LTG of 2%.

SEAMCO Opens Door to Automotive

• While SEAMCO’s current focus is on high-end components and modules for consumer electronics, we see this acquisition as a step towards entering the automotive market.
• Hi-P has telegraphed its interest towards M&A in automotive and medical fields since 2017. Over the past several quarters, the interest for automotive appear to have taken priority over medical. It is also likely that SEAMCO has a strong working relationship with Customer D, as it won Customer D’s best supplier award in 2015. SEAMCO was founded in 2015, and brings together the manufacturing expertise of two UK companies – Stechford Mouldings (founded 1930) and Euromoulds (founded 1986). Both produce moulded components for the automotive industry. From a footprint perspective, SEAMCO and Customer D’s EV factory are based in Singapore. This eases logistics time, effort and costs.
• Plastics for automotive applications enjoy a structural tailwind from increasingly stringent fuel efficiency requirements globally. According to Automotive Plastics, plastics account for 50% of a car’s volume, and only 10% of a car’s weight. For EVs, engineered plastics can be used for battery related applications – such as trays and sealing.

Source: Maybank Kim Eng Research - 10 Oct 2019