Hi-P's 2Q results came in within our expectation. It reported a net loss of S$2.1m on the back of S$251.8m revenue (+9.5% YoY). Taking off the one-off charges of closing down its non-core production facility in Mexico, it would have achieved breakeven. Gross margin remain at a low of 7.1% similar to that of the 1Q's mainly attributable to 1) performing low-margin assembly work that bundled with the lucrative component orders coming in the 2H, 2) increased labour costs and 3) overheads expenses in preparation for the 2H ramp up. Going forward, as 1) equipments necessary for the 2H ramp up are in place, 2) production yield for the new products are at satisfactory level and 3) management's upbeat confidence in delivering strong profitability in 2H, while taking Research in Motion (RIM)'s further decline of contribution into consideration, we believe that the stock is currently undervalued. Reiterate BUY with an unchanged TP of S$1.15.

700 CNC machines. Thus far, managementhas spent 108.4m in purchasing machineries and upgrading their facilities in the 1H. After the spending, Hi-P now possesses 700 CNC machines which are exactly in line with our original forecasts. Out of which, 500 machinesare dedicated for the new metal casing business. The group plan to spend another S$70m in the 2H, meeting the guidance of S$180m capex plan for the entire year.

Yield at satisfactory level. We attempted to ask for more information with regards to the yield of the new metal casing business during the analyst briefing. While management remain tight-lipped, they did share explicitly that the recent push-back of orders was due to other component supplier within the supply chain (which we believe to be Sharp for the in-cell touch panel) as Hi-P has no problem in ramping up production as per customer's requirements. As such, we reasonably infer that their production yield has reached a satisfactory level.

Successfully diversified away from RIM. Management also shared that during 1H, RIM's revenue contributionhas drastically fallen by 80% YoY. Given that RIM accounted for more than 60% of the group's revenue in FY11, we can deduce that RIM contributed less than 20% in 1H.

Source: OSK