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Description of Hi-P
Hi-P is an integrated contract manufacturer to customers in mobile phones, tablets, household & personal care appliances. It has 14 manufacturing plants globally located across five locations in China (Shanghai, Chengdu, Tianjin, Xiamen and Suzhou), and in Poland, Singapore and Thailand.
Readers can refer to the company website http://www.hi-p.com/ for more information.
Investment merits
4QFY14F results may be strong
Hi-P's 3QFY14 net profit was S$10.8m, up 243% from S$3.1m a year ago. However, due to the weak 1HFY14, 9MFY14 registered a net loss of S$4.5m. Analysts are expecting Hi-P’s FY14F net profit to be S$12.3m – 12.5m. This suggests a strong turnaround in 4QFY14F net profit of around S$17.0m, up 57% quarter on quarter (“qoq”).
Riding the coattails of Apple and Xiaomi
Hi-P is one of the two approved suppliers for the stainless steel body frame for Xiaomi’s Mi4. Photo: http://www.techinasia.com/Although the smart phone industry is challenging where product life cycles are short, the entire industry is growing. According to Strategy Analytics, a total of 320.4m smartphones were shipped in 3Q2014, up 27% on a year on year comparison. Apple and Xiaomi shipped a total of 57.3m smartphones, up 47% from last year. This is likely to benefit Hi-P to some extent.
In addition, Hi-P is one of the two approved suppliers for the stainless steel body frame for Xiaomi’s Mi4. According to UOB Kayhian writeup on 4 Dec, Hi-P’s production yield for Xiaomi’s Mi4 has increased from 20-30% to the current yield of more than 60%. The successful ramp up is likely to gradually reverse the operating loss from manufacture of the stainless steel body frame for Xiaomi’s Mi4. Furthermore, it is likely to open more doors to new customers and business opportunities.
Other customers also gaining traction
Russian President Vladimir Putin gave China’s President Xi Jinping a dual-screen YotaPhone 2. What is significant is that Hi-P is the original design manufacturer (ODM) of YotaPhone 1 & YotaPhone 2. YotaPhone 2 was officially launched on 3 Dec in London. YotaPhone 2 will be scheduled for launch in China & other Asian countries (in early 2015) and in 20 European countries by end 2015. If YotaPhone gains traction, this is likely to be another growth driver for Hi-P.
Share buybacks at increasingly higher prices
Hi-P has been doing several share buybacks since last month. Based on Table 1 below, total shares bought since last month amounted to 903,000 shares at an average price of $0.691 (including fees). The latest three purchases occurred in the last two weeks with average prices ranging from $0.702 – 0.714.
Table 1: Hi-P’s share buybacks since Nov 2014
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Source: SGX, Ernest’s compilations
Investment risks
Competition
Contract manufacturing is an industry with stiff competition where competitors compete on scale and cost. Hi-P has to constantly upgrade its manufacturing capabilities and increase efficiency and production yield in order to stay ahead of competition.
Smartphone industry - Fast changing industry
The smartphone industry is ever changing and customers’ preferences may change abruptly. Research In Motion’s (“RIM”) Blackberry smartphones is a case in point. It was very popular in mid / late 2000s before customers changed their preferences to other smartphones. At that time, RIM comprised around 25% of Hi-P’s revenue and as a result, Hi-P was affected by the dwindling demand for RIM’s Bblackberry smartphones.
Dependence on key customers / industries
In terms of revenue, the smartphone segment contributed 50-60% of Hi-P’s overall revenue for the past three years. Any adverse changes in the smartphone segment, especially to their large customers, will be negative for Hi-P.
Production yield for Xiaomi Mi-4 is key
According to UOB Kayhian writeup on 4 Dec, Hi-P’s production yield for Xiaomi’s Mi4 has increased from 20-30% to the current yield of more than 60% which is probably at or near breakeven levels for Hi-P. In order for Hi-P to register strong profits in 2015F, Hi-P has to increase the production yield further.
There are also other risks such as raw material cost or manufacturing costs which may crimp Hi-P’s margins. In addition, based on Chart 1 below, it is evident that Hi-P’s share price is pretty volatile and may not be applicable to everybody.
Technical outlook
Chart 1: Hi-P has a 52-week trading range of 52-78.5 c. Chart: Bloomberg.Based on Chart 1, Hi-P seemed to have formed a bullish double bottom formation with the breakout of the neckline at $0.690 on 24 Nov.
Measured technical target price was S$0.765 which was attained on 4 Dec. All the EMAs (21D, 50D, 100D & 200D) are trending higher with 21D EMA forming golden crosses with the rest. Although there seems to be some profit taking at this time, the overall chart outlook seems bullish.
Supports: $0.690 – 0.700 / 0.680
Resistances: $0.720 / 0.760-0.765
Conclusion
Hi-P seems to be on the verge of a turnaround, fuelled by the popularity of Apple and Xiaomi products. Analysts are pretty positive on Hi-P’s 4QFY14F results. Successful delivery of a good set of results in 4QFY14F and bullish guidance in FY15F are likely to be the factors for a re-rating of the stock. However, it is noteworthy that the fast changing industry, Hi-P’s dependence on key customers, stiff competition and production yield for Xiaomi Mi4 are factors to watch out for.
P.S: This is just an introduction to Hi-P. Readers are encouraged to visit Hi-P’s website http://www.hi-p.com/ and refer to the analyst reports for more information.
Recent story: HI-P INTERNATIONAL: To benefit from Russian YotaPhone2, says OSK
