Continual Improvement in ESG Factors; Upgrade to BUY

• Upgrade Hi-P International (SGX:H17) to BUY from HOLD with unchanged ROE-g/COE-g Target Price of SGD1.23 (1.4x FY21E P/B) as the recent correction may have priced in negatives such as pricing pressure and demand uncertainty.
• Hi-P International’s electronics manufacturing business exposes it to industry risks including corruption, workplace safety, fair labour practices and environmental.
• Hi-P International is rolling out new ISO standards to improve its monitoring and execution of environmental and anti-corruption factors. Hi-P International states it is in full compliance of environmental, labour and governance laws.

Strong Stance Against Corruption

• Key governance risks include corruption, which Hi-P International takes a strong stance against. As Hi-P International’s customer base is largely American and European, it complies with the US Foreign Corrupt Practices Act and the UK Bribery Act.
• In 2019, there were no substantiated cases of corruption. Hi-P International intends to implement the ISO37001 Anti-bribery Management System to improve its anti-corruption process.

Fair Treatment of Employees

• Hi-P International is an equal-opportunities employer, and its policies also include voluntary employment (i.e. non-forced labour), prohibition of child labour, and humane treatment. This is important as the supply chain that Hi-P International is exposed to has faced allegations of mistreatment of labour in recent years. Hi-P International has established Hi-P College to boost internal knowledge sharing online.

Environmental Exposure

• Hi-P International’s greatest environmental exposure is via energy and the emission of greenhouse gases (GHG). Hi-P International managed to achieve its electricity savings target in 2019, although it did not meet GHG targets.
• In 2018, Hi-P International commenced development of the ISO 50001 Energy Management System for all its sites in China, and an internal audit is expected to be completed in FY20. Most of Hi-P International’s suppliers are appointed by Hi-P International’s customers, and have passed customers’ audit on environmental matters.
• We believe the key risk to our BUY call is if we have overestimated the rate of earnings recovery in FY21E amid a still uncertain outlook.

Source: Maybank Kim Eng Research - 29 Sep 2020