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Hi-P upgraded to 'hold' as Maybank KimEng awaits lower entry point and better earnings clarity

Samantha Chiew
Samantha Chiew • 2 min read
Hi-P upgraded to 'hold' as Maybank KimEng awaits lower entry point and better earnings clarity
SINGAPORE (June 12): The ongoing US-China trade war has effected some of Singapore’s tech stocks. One of which is Hi-P International, according to Maybank Kim Eng.
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SINGAPORE (June 12): The ongoing US-China trade war has effected some of Singapore’s tech stocks. One of which is Hi-P International, according to Maybank Kim Eng.

The research house has upgraded its recommendation on Hi-P to “hold” from “sell” previously with an unchanged target price of $1.22, as the negatives have been priced in. And since late-April, the stock has dropped by 22% due to a broad sector sell-off.

In a Monday report, analyst Lai Gene Lih says, “However, the escalation of the US-China trade war has reduced our conviction that Hi-P can achieve guidance of flat FY19E earnings, for which we expect 2H to account for 70-80% of the full year. As such, we await a lower entry point and better clarity on earnings before considering a more positive stance on the shares.”

Based on the stock’s current price, the analyst estimates that FY19-21 EPS cuts of about 10% would bring the stock back to “sell” territory.

Amid a cloudy outlook, Hi-P’s earnings are at risk and cause for concern as it typically makes 70% to 80% of its FY earnings in 2H.

“As such, we recommend investors stay on the side-lines until the late July/early Aug 2019 2Q19 results, and as Hi-P prepares for the holiday season production ramp-up in 3Q19. However, uncertainty for 4Q19 performance may linger, as this hinges on the demand of the key wireless customer’s smartphones launched later this year,” says Lai.

The analyst’s scenario analysis of a 19% y-o-y decline in FY19 earnings results in an ROE/COE fair value of $1.00, based on 1.3 times FY19 book.

The analysis assumes a decline in the demand for its key customer’s phones in China as a result of the US-China trade war (ie, if consumers decide to boycott the product); revenue vulnerability to a material deterioration in global consumer sentiment, as Hi-P’s products largely comprise of discretionary consumer electronics; and intensifying pricing and cost pressure.

Currently, the stock is trading 10 times FY19 earnings, not far from global peers’ 9.2 times and the stock’s own thee-year mean of 8.8 times. But if the scenario analysis plays out, Lai expects the stock to trade at 12.3 times, 1 standard deviation above its three-year mean.

As at 12.30pm, shares in Hi-P are trading 1.48% lower at $1.33, or 1.5 times FY19 book with a dividend yield of 2.5%.

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