Hi-P's recent profit warning came as a surprise to us as the management took a turn in guiding for a poor outlook. We attribute this to the pushback of its metal casing business for iPhone 5 as well as the delay in Blackberry 10. The fact that the situation can change so rapidly exposes Hi-P's weakness of being a pure upstream component supplier, a factor which we previously undermined. Going forward, we see the upcoming Nantong plant to take up the final assembly work so as to address the issue. Nonetheless, this will not provide any short-term performance boost. Therefore, we decided to take a cautious stance, slashing our FY12 and FY13 estimates by 64.2% and 43.9% respectively. We now expect the group to report a profit of S$5m in 3Q12. Downgrade to NEUTRAL with a new TP of S$0.80 pegging blended FY12/13 earnings to 13.1x forward P/E (5-yr historical average).

Multiple orders pushback. Hi-P's new metal casing business suffered an unexpected set back due to iPhone 5's supply chain issue. As Foxconn's final output is far less than Apple's original demand forecast given to all component suppliers, we reasonably suspect that, Hi-P, being a 3rd party source of casing components, had its orders pushed back. To compound matters, Hi-P is also hit by order delays from Research-in-Motion (RIM) with the long-awaited BlackBerry 10 now pushed back to March next year at the earliest.

Final assembly is the answer. Going forward, we believe a foray into the final assembly work is necessary to secure order visibility even if that would weigh down the overall group margin. As we mentioned in our previous report that our checks show the upcoming Nantong plant is set to carry out final assembly. Following the launch of iPad Mini, our Taiwan channel checks show that Hi-P is expected to become the 3rd source as Pegatron has insufficient capacity in Nantong to fulfil the ramp-up demand. However, Hi-P's Nantong plant will only commence production in 2H13, and is not expected to provide any short-term performance boost.

Source: OSK