HI-P (Lim&Tan)

S$1.01-HIPS.SI

􀁺 Hi-P is revising down their previous forecasts for 2Q 2011 performance.

􀁺 Management had previously (in early May 2011) forecasted that 2Q2011 sales and profit to be better on a year on year (yoy) and quarter on quarter (qoq) basis, but are now changing their forecast and are expecting lower sales on a qoq basis (quarter ago sales was $243mln) and significantly lower profit on a qoq basis (quarter ago’s profit was $17.9mln).

􀁺 While sales may be higher on a yoy basis (year ago’s sales was $181mln), profit may or may not be higher than last year’s $12.4mln.

􀁺 The weaker than expected performance was due to delay of projects of major customers, higher labor & raw material costs, change in product mix with more lower margined assembly business. The higher labor costs reflects rise in minimal wages in China as well as higher headcount in preparation for business expansion in 2H 2011.

􀁺 As a result of the above warning, 1H 2011 profit is only estimated to be around $30.3mln, representing only 32% of full year consensus estimate versus their normal split of 40/60. This suggests meaningful cuts in consensus forecasts needed after this warning.

􀁺 While we had highlighted the above risk factors in our last note dated 5 May 2011, we had underestimated the severity of them and regrettably had only downgraded our call to HOLD instead of SELL.

􀁺 The consoling factor is that its closely compared to peers such as Venture and Hon Hai has since then also fallen in a similar quantum versus Hi-P’s 10% decline. The STI index is about unchanged since then, implying underperformance of the sector compared to the index.

􀁺 Given Hi-P’s profit warning, its PE is on longer meaningful given uncertain earnings outlook and the high base comparisons last year.

􀁺 As compared to Venture which provides a yield of 6.4%, Hi-P’s yield of 3-4% is also not attractive.

􀁺 We are thus downgrading Hi-P to SELL.