SINGAPORE (Nov 12): Maybank KimEng is maintaining Hi-P International at “hold” on expectations of a tough FY19.
Maybank says Hi-P’s 3Q18 PATMI of $33.8 million was ahead of its expectations as it had overestimated the margin erosion from pricing pressure and lower yields.
However, sales fell 8% y-o-y due to less high-component content projects, weaker market demand, and slower ramp-up for certain products by multiple customers.
3Q18 gross margin also fell 1.1ppt to 15.5% y-o-y due to pricing competition and lower yields.
According to the Nikkei Asian Review, Hi-P’s smartphone customer has cancelled its production boost for the cheapest model among this year’s launches, suggesting underwhelming market demand. Meanwhile, Hi-P’s smartspeaker customer is losing market share due to aggressive tactics from competitors.
Currently, Maybank does not see indications pricing will improve in FY19.
“Hi-P wants to diversify its product mix amid a market with weak volumes. This could reduce economies of scale as a wider mix requires more resources. FY19E profitability could also be weighed down by relocation costs, as some resources are shifted to Nantong and Thailand,” says analyst Lai Gene Lih in a Monday report.
Management is concerned about a weak demand environment in FY19E due to the direct and indirect effects of the trade war. As such, the company indicates sales may remain flat on a y-o-y basis. Reflecting cautiousness, the interim DPS was cut by 50% to 1 cent.
Maybank has a target price of 84 cents or 1x FY19E book.
Year to date, shares in Hi-P are down 57% to 84 cents.
