HI-P INTERNATIONAL is expecting its FY2014 net profit to exceed FY2013, thanks to its appointment as one of only two suppliers for Xiaomi’s new flagship Mi 4 mobile phone's premium stainless steel frame.
The Mi 4 features killer specifications that give other top-selling smartphones a run for their money.
Xiaomi employs a sales strategy that is very unlike other smartphone makers such as Samsung and Apple.
Xiaomi prices the phone almost at bill-of-material prices, which means it retails at a fraction of the price of the competition.
Its price competitiveness for top-notch quality has propelled it to one of the top 5 spots for smartphone vendors in China within the short 4 years that the company has been around.
Industry insiders expect Xiaomi to overtake Lenovo to become the second largest smartphone vendor in China, behind Samsung.
To make profits, Xiaomi sells a model for up to 18 months, instead of 6 months as practised by Samsung, to profit from the fall in the costs of components that occurs over time.
When Xiaomi identified Hi-P and Foxconn as the two suppliers for the Mi 4 stainless steel case, Hi-P’s stock price surged by 8.6% to reach a high of 69 cents over the two weeks leading to its results announcement on Tuesday.
“The project that we are handling for Xiaomi is very critical for us,” said Hi-P’s executive chairman Yao Hsiao Tung at the Group’s results briefing yesterday (Tuesday) at The Fullerton.
“Because of its aesthetic requirements, the metal components manufacturing process is more difficult than for other mobile phone metal parts in the market,” he added.
According to Xiaomi, Mi 4’s metal casing requires 40 193-step procedures and is processed in a CNC machine 8 times.
Hi-P's 2Q results and plans for investing in production lines for Xiaomi components
Hi-P narrowed its 2QFY2014 loss after tax to S$3.0 millon (1QFY2014: S$12.3 million). This is its 3rd consecutive quarter of net loss.
“We expect FY2014 net profit to exceed FY2013, but revenue will be lower,” said Mr Yao.
Net cash doubled to S$72.1 million as at 30 June over the past 6 months (S$35.7 million as at 31 December 2013).
“The major part of our capex budget in 2HFY2014 will go to our metal components manufacturing facilities,” said Hi-P Deputy CEO Tay Ewee Liang.
Hi-P has budgeted for a capex of S$115 million for FY2014, of which S$22.6 million has already been incurred during 1HFY2014.
On Monday, OSK-DMG upgraded Hi-P to 'Buy' with a target price of 87 cents (from 67 cents).
Below is a summary of questions raised at the results briefing and the replies provided by Mr Yao, Mr Tay, CFO Samuel Yuen and COO Gary Ho.
Q: You expect 2HFY2014 revenue to be lower but net profit to be higher. Where is your higher margin for 2HFY2014 coming from?
This year, we have higher loading due to orders from existing customers as well as new customers like Xiaomi. We will also have better cost management.
Q: Please give more details about your Xiaomi orders.
Mi 4 was launched on 22 July and will go to market this month through various mobile service operators. We are one of two suppliers of metal casing components for Mi 4.
Q: Do you foresee any learning curve for the Xiaomi component production?
Q: What are your chances of gaining market share?