Maybank Kim Eng analyst Lai Gene Lih has upgraded his call on electronics manufacturer Hi-P International to “buy” from “hold” due to its continued improvement in environmental, social and corporate governance (ESG) factors.
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Lai has, however, maintained his target price of $1.23, due to the recent correction, which may have priced in negatives such as pricing pressure and demand uncertainty.
As Hi-P’s electronics manufacturing business exposes it to industry risks such as corruption, workplace safety, fair labour practices and environmental, its rolling out of new ISO standards to "improve its monitoring and execution of environmental and anti-corruption factors” is commendable.
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Other positive factors on the counter include its “strong stance” against corruption, fair treatment of its employees and environmental exposure.
With the latter, Hi-P managed to achieve its electricity savings target in 2019, though it did not meet its greenhouse gas (GHG) targets.
“In 2018, Hi-P commenced development of the ISO 50001 Energy Management System for all its sites in China, and an internal audit is expected to be completed in FY20. Most of Hi-P’s suppliers are appointed by Hi-P’s customers, and have passed customers’ audit on environmental matters,” says Lai.
“We believe the key risk to our ‘buy’ call is if we have overestimated the rate of earnings recovery in FY21E amid a still uncertain outlook,” Lai adds.
On the other hand, CGS-CIMB analysts William Tng and Darren Ong have maintained their “hold” recommendation on Hi-P following their recent call with the company.
“Based on our understanding, orders from most of Hi-P’s key customers are healthy. We believe Hi-P is seeing domestic market demand in China, with orders for smart wearables and Internet of Things (IoT) devices from a Chinese customer,” they write in a report dated Oct 2.
“The other trend we noted is that some customers are enjoying stronger demand for their products due to the shift to work-from-home arrangements. We believe Hi-P is also experiencing stronger orders from a communications customer, which has benefitted from America’s trade war with China,” they add.
Like Lai, Tng and Ong have also maintained their target price of $1.23 on the counter.
“We believe Hi-P remains committed to its mergers and acquisitions (M&A) growth strategy, supported by a net cash balance of $197 million as at end June 2020 and 80.2 million treasury shares,” they note.
To recap, Hi-P acquired South East Asia Moulding Company Pte Ltd, a high-volume/high-precision engineering plastic components manufacturer, in 2019.
“We believe Hi-P remains interested in acquisitions that will help the company penetrate the automotive/healthcare industries. Also, given the US-China trade war, potential M&As could be a way to establish a manufacturing presence in Vietnam, Malaysia or the Philippines. As Covid-19 has restricted the ability of management to travel for due diligence, we believe any M&As will have to wait until travel between countries normalise,” they add.
Shares in Hi-P closed 1 cent lower, or 0.9% down, at $1.13 on Oct 5.
