FULLY VALUED S$0.605
STI : 3,210.67
Price Target : 12-month S$ 0.47
Weak results, worsening financials
• Net profit of S$3.1m met lowered expectations, margins collapsed on higher proportion of assembly work
• Working capital cycle has weakened, first ever net debt position of S$42m
• Guidance points to weaker 2H13, no recovery in sight
• Maintain Fully Valued and S$0.47 TP
Stagnant profits despite strong sales growth. Hi-P reported PATMI of S$3.1m in 3Q13, flat vs 3Q12 despite a strong 34.5% jump in sales to S$365.2m. On a q-o-q comparison, net profit plunged 71.2% although revenue still grew 28%. Gross margins fell to 6.5% from 8.8% in 3Q12 and 10% in 2Q13 due to higher cost of materials as a result of more high level assembly work, as well as increased labour costs and higher inventory provisions. Balance sheet has deteriorated. For the first time since listing, Hi-P has turned net debt, with borrowings of S$41.8m, as cash conversion cycle stretched to a record 82 days due to lower inventory turn and longer collection period of 88days. YTD, Hi-P has incurred capex of S$45m vs initial full year budget of S$80m.
Guiding for lower 4Q13, 2H13 < 1H13. Hi-P expects lower sales and profits in 4Q13 vs 4Q12 and maintains guidance for lower earnings in 2H13 compared to 1H13, even though sales are forecast to grow h-o-h. Although smartphones and tablet volumes are expected to continue to increase, Hi-P may not enjoy the full benefits yet as the company remains focused on customer diversifications and continued streamlining of cost structure and production capacities. Near term, earnings would inevitably be impacted by costs of rising automation which is necessary to combat China’s long term trend of rising labour costs.
Maintain Fully Valued with TP of S$0.47. Upside surprises would be a swift and profitable ramp up of new programmes.
Publish date: 01/11/13