Target Price: SGD0.76
Following Blackberry’s dismal results guidance and Apple’s disappointing pricing for its iPhone 5c, we are now less positive on Hi-P International (HIP)’s outlook for 4Q13 and beyond and thus, lower our earnings forecasts accordingly. We downgrade the stock to NEUTRAL and trim our TP to SGD0.76, based on a blended 13.5x FY13/14 P/E, -1 SD from its three-year historical forward P/E.
• Blackberry’s recovery seems short-lived. Blackberry announced bleak 2QFY14 preliminary results last Friday, causing its shares to tumble to a 52-week low before bouncing back following a privatisation offer. It expects to: i) report half of the projected revenue of USD1.6bn on the back of 3.7m smartphone sales (mostly Blackberry 7 smartphones), ii) write down USD930-960m worth of Blackberry 10 inventory, which will lead to USD1.0bn in operating losses, and iii) retrench 40% of its workforce in order to lower operating costs. These lead us to believe that Blackberry’s recovery story no longer holds, which could significantly affect HIP’s orders from this particular customer going forward.
• Demand for iPhone 5c not as great. While the record-breaking debut weekend sales indicate an exceptionally strong initial demand for iPhone 5s, this may not be the case for the iPhone 5c. Previously speculated to target the mid-end market, the iPhone 5c is currently priced at USD549 in the US or CNY4,488 in China. We believe the pricing makes it difficult to penetrate into the emerging market. The 24-hour lead times at Apple suggest that demand is soft (compared to the gold iPhone 5s which will only be available in October). As HIP’s production is more involved with the iPhone 5c rather than the iPhone 5s, we are now less optimistic on its outlook.
• Prospects dim. After incorporating the weaker-than-expected outlook for two of HIP’s key customers (Blackberry and Apple) – which contribute an estimated 20% of revenue each – we lower our FY14 and FY15 forecasts by 21.9% and 14.4% respectively. While we continue to see a solid 3Q and an overall stronger 2H, HIP’s sequential quarterly profit growth (as previously guided by management) may come to an end in 3Q.
Publish date: 25/09/13