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Hi-P International - Disappointing bite of the Apple

kiasutrader
Publish date: Fri, 14 Dec 2012, 03:28 PM

Our recent channel checks reveal some worrying developments for Apple suppliers, prompting us to review the Hi-P situation. Thought to be a proxy to Apple's iPhone 5, we  believed  that  the  group  now  has  been  overwhelmed  by  how  fast  things  have changed in the technology industry. In view of 1) iPhone 5's failure to meet demand expectations, 2) overcompensated supply of iPhone 5 components, and 3) increased risk for Hi-P's high stake bet in China, we are slashing our FY12 and FY13 earnings forecasts  by  51.0%  and  48.6%  respectively.  The  share  prices  of  its  Taiwan-based peers are taking a hit today, and we believe that Hi-P will follow suit. Downgrade to SELL with a new TP of S$0.59 based on 0.88x P/B (-0.5x S.D. 5-yr historical P/B).

iPhone 5 fails to meet demand expectations Originally, the market had high expectations for the iPhone 5. However, recent newsflow indicate that demand for iPhone 5 would now be  unable  to  meet  earlier  expectations.  Also,  we  note  that  Android  and  Windows  phones have been gaining momentum in the past period, attacking Apple's market share. In view of the challenges ahead, we believe that demand for Apple's iPhone 5 may fall drastically next year.

Overcompensated supply of components for iPhone 5?  When iPhone 5's supply chain was  initially  thought  to  be  facing  component  shortages,  suppliers  had  ramped  up production. This is reflected in the strong November sales data from component suppliers in the supply chain. Our channel checks now show that there may be an excessive level of stocks due to the lower-then-expected demand. December shipment for components such as  display  appears  to  have  taken  a  hit  thus  far.  The  supply  chain  is  now  worrying  due  to deteriorating  order  visibility  going  forward.  Therefore,  we  are  now  expecting  an  inventory correction to lead to order cuts in 1Q13, posing significant business risk for Hi-P.

Risks increase for Hi-P's high CAPEX bet. The risks for Hi-P recent S$300m investment in its Chinese plant appears to have increased significantly. We believe that a large part of the production capacity was dedicated to Apple. However, the latest news indicate that this may not have been the right bet for Hi-P as Apple moves to shift production back to the US. Apple's latest moves are to bring iMac's manufacturing back to the U.S. and we suspect that  this  is  only  the  beginning  and  merely  a  sign  that  other  products  may  follow.  Other possible customers to fill this capacity gap include RIM and Motorola.
Source: OSK

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