Hi-P - Cuts profit guidance again (DBSV)

FULLY VALUED S$0.585

STI : 2,712.41

Price Target : 12-month S$ 0.44 (Prev S$ 0.45)

Reason for Report : Earnings revision

Potential Catalyst: Strong handset/tablet shipment, higher DPS

DBSV vs Consensus: Profits 30% below street; lower sales & margin assumptions

• 3Q11 profit to decline q-o-q against previous guidance of sequential growth

• 4Q may rebound but insufficient to support FY11 growth; FY11/12F cut by 12%/3%

• Share price has fallen >50% but valuations are not particularly compelling; Maintain Fully Valued

Weaker than expected 3Q11. Hi-P warns that net profit in 3Q11 would be lower than 2Q11, compared to previous guidance of q-o-q growth. Despite higher revenue, wage hikes and relocation expenses are hurting profits as well as a product mix change to one with more assembly work, which boosts revenue but not bottomline. We believe the ramp in assembly is for RIM’s new models. As with all new products and shift in production facilities, these transitions can affect yield and result in margin squeeze.

4Q rebound insufficient to support FY11 growth. Despite the likelihood of higher volume in 4Q11, the rebound is insufficient to offset YTD earnings decline. We therefore cut FY11/12F estimates by 11.7% and 2.6%. FY12 earnings growth is expected to stem from i) more new launches by smartphone /tablet customers; ii) recovery in operating margin post consolidation; and iii) new consumer appliances customers. But, Hi-P’s biggest risk is market share loss in the tablet/smartphone segment, either through a) further market share loss of key customer RIM and/or b) competition from Apple’s new contract manufacturer and its related supply chain. As of now, it appears that Hi-P is maintaining supplies to Apple.

Maintain Fully Valued, TP lowered slightly to S$0.44. Although Hi-P’s stock price has fallen in excess of 50% from its peak in Feb this year, valuation is not exactly compelling at < -1SD PE on FY12 earnings whereas the barometer STI has corrected close to –1.5SD FY12 PE. In view of still uncertain outlook, Hi-P’s share price may not have fully priced in all earnings risks. Hence, we maintain Fully Valued rating on Hi-P with TP of S$0.44 based on 5.5x FY12 PE (- 1SD)