Upgrade to HOLD as Risks Appear Priced-in

• We further slash FY20-22E earnings for Hi-P International (SGX:H17) by 15-26% to factor in prospects of lower volumes and increased margin pressure, amid incremental supply chain disruptions in 1H20 and potential demand weakness in 2H20. Consequently, we cut our ROE-g/COE-g Target Price to SGD0.78, now on 1x FY20E P/B (prev: 1.2x).
• Fundamentally, we now see risk-reward about balanced and upgrade the Hi-P International to HOLD.
• Key risk to our view is if we have under estimated margin pressures.

P&L Structure Unfavourable Amid Challenging Times

• While the current revision appears aggressive following a round of cuts in Feb-20, we believe it is realistic. Because Hi-P International is seasonally heavy in 2H due to its consumer electronics exposure and has high fixed costs through the year, we believe incremental supply chain disruptions may result in further negative operating leverage.
• We do not rule out that Hi-P International may barely break even in 1H20.
• Amid weakening economic fundamentals, demand for Hi-P International’s products in 2H20 may be soft too, which would make it more difficult to offset the expected protracted weakness in 1H20.
• Click view full report button below to see forecast changes and sensitivity analysis details.

Strong Balance Sheet; FY20 DPS May Have Risks

• Due to a strong balance (net cash to equity of 35%, strongest since 2010), we have kept our DPS assumptions intact. However, we see downside risks to our FY20E DPS as
  1. FCF does not cover dividend, and
  2. Hi-P International has historically exhibited tendencies to conserve cash during challenging times.
• Hi-P International has generally maintained a respectable cash conversion cycle track record, although we note that customers are on average taking longer to pay their creditors. This is in part because Hi-P International has been broadly able to match receivables turnover with its payables turnover.
• Based on a snapshot of customers, we note potential liquidity vulnerabilities for Keurig, P&G and Colgate. We estimate these customers collectively contribute around 20% of Hi-P International's FY20E revenue

Valuation

• We upgrade to HOLD because the share price appears to have largely priced in our aggressive earnings cuts. Hi-P International is currently trading at 1.1x FY20E P/B, around 0.5SD below its long term mean of 1.6x.
• Historically, 0.5x forward P/B, or 1SD below mean has been a good support (e.g. GFC and exiting Yota-induced downturn in late 2016). Hi-P International is trading at 12.3x forward P/E, near the 4-year mean. Click view full report button below to see peer comparison table.
• During the GFC, Hi-P International’s forward P/E troughed at 3x, coinciding with 2SD below mean. For reference, Chairman Mr. Yao bought a 22% stake in Hi-P International from Molex in 2017 at SGD0.98/share.

Source: Maybank Kim Eng Research - 29 Mar 2020