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Hi-P International – A Proxy For Apple
Corporate Digest | 01 February 2013
By: Nicholas Tan
Articles (71) Profile

Perhaps many investors would have noticed Hi-P International, a small-cap constituent in the electronic manufacturing sector, which has seen its share price moved in a “see-saw” manner over the past year on the back of news pertaining to underperformance by its more esteemed major customers in the mobile device industry.

Based in Singapore, Hi-P has over the years successfully transformed itself into a leading supplier of electro-mechanical modules to the telecommunications, consumer electronics and computing industries. It has grown in much stature to become a global player in the electronic contract manufacturing industry that even Taiwan-based behemoth Foxconn Technology is among its peers.

With a global footprint of 14 manufacturing plants spanning across the globe situated in Singapore, China, Thailand and Poland, Hi-P has established itself as a household name in the electronics manufacturing industry serving major mobile device manufacturers such as Apple, Research In Motion (RIM) and Amazon.

As of latest, Apple’s revenue contribution to Hi-P had surpassed 30 percent in 3Q12, and this is projected to potentially increase further to 50 percent with delayed projects on the iPhone 5 expected to have resumed in 4Q12.

Source: FactSet Research System – Hi-P International versus Apple share price

Close Correlation

Its fate closely tied to the mobile device industry, in particularly, Apple’s. It was not surprisingly that Hi-P’s share price performance and Apple’s had observed a close correlation for the past year, with the exposure growing on the back of more aggressive capital expenditure dedicated to its close companion.

The share price correlation occurred most prominently months prior to the red-hot anticipated launch of the new iPhone 5. Banking on the new device’s drastic features change, both Hi-P’s and Apple’s share prices trended upwards and hit their respective trading highs on 21 September 2012, which was the iPhone 5’s official release date.

Subsequently, as negative news broke-out regarding Apple’s channel partners being unable to meet its demand for the new revolutionary screen technology. This caused production delays that may have cost Apple a million or more sales in the debut weekend for the device, leading to both Hi-P’s and Apple’s share prices spiraling into an unabated downfall.

Adding to the gloom, Apple announced its weakest sales increase in 14 quarters and slowest profit growth since 2003 for 1Q13, a cause for concern which continued to weigh on its share price and Hi-P’s. With the near-term outlook seemingly bleak for Apple, we hold the opinion that this weakness in growth will reverberate to Hi-P leading to a weak order visibility for the company.

Downsizing Investment

Recent announcements from both Hi-P and Apple have confirmed that the latter is suffering from weakening demand amid a saturating smartphone market in the developed world. This led to Hi-P’s decision to cut its massive $300 million proposed production capacity expansion investment in Nantong City, which was announced recently.

In this update, Hi-P announced that it will reduce its investment size in this area from $300 million to $150 million. The pace of its construction will also be slowed. Instead of completing the entire Phase 1 development of approximately 190,000 square metres (sqm) by 2Q13, the land area will now be 100,000 sqm, with 50,000 sqm to be completed by the end of 2013.

Both CIMB Research and OSK-DMG pointed out that while the cut in capacity expansion in China leads to less risk than before, the move is a clear signal that potential orders from its key customers in the coming months may have been greatly reduced. Hence, with low to no growth opportunities going forward they concur with Hi-P management’s decision to scale down investment in order to reduce costs.

What The Near-Term Future Holds?

In addition, OSK-DMG does not expect Hi-P’s other major customers – RIM, Amazon or Motorola to be able to make up the loss of Apple’s orders. Because for RIM’s Blackberry 10, it does not believe that Hi-P will be significantly involved in the production process, and while Amazon’s Kindle Paperwhite may have decent sales thus far, the quantity ordered is significantly lesser than Apple. As for Motorola, it is faring below expectations.

Augmenting the weak sentiment, OSK-DMG further stated that the demand for Apple’s iPhone 5 may fall “drastically” in FY13 due to rising competition from Android and Windows phones, thought to be proxy to Apple’s iPhone 5, hence we advocate investors to take a cautious stance in view of Apple’s weakening share price amid intensifying competition from rivals – Samsung, Google Android and Windows Phone.

On the positive side, we note that Hi-P has a strong net cash balance position standing at $82.4 million as of 30 September 2012, and a positive cash flow amounting $216.7 million in 3Q12. This is likely to provide Hi-P with the flexibility to speed up their expansion plans to take up an increase number of orders if mobile device manufacturers unexpectedly decide to ramp-up production in the future.

Well trained in aspects of finance and business, Nicholas oversees the finance and manufacturing sectors at Shares Investment.

Please click here for more information about this author.

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