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Hi-P – A Proxy To Apple And Xiaomi?
Perspective | 10 December 2014
Related stocks:
H17
By: Ernest Lim
Articles (134) Profile

Hi-P recently caught my attention as it has been conducting several share buybacks in the past one month.

Secondly, Hi-P’s chart formed a bullish double bottom formation with the breakout of the neckline at $0.690 on 24 Nov.

Thirdly, Apple’s (Hi-P’s customer) market capitalisation hit US$700 billion on 25 Nov 2014 on optimism over iPhone 6 sales and new Apple products.

Fourthly, an article dated 7 Nov 2014 on Financial Times reportedly cited that Xiaomi (Hi-P’s customer) is seeking to raise US$1.5 billion in new capital at a valuation set to exceed US$40 billion. The above factors prompted me to take a closer look into Hi-P.

Description Of Hi-P

Hi-P is an integrated contract manufacturer to customers in mobile phones, tablets, household & personal care appliances.

It has 14 manufacturing plants globally located across five locations in China (Shanghai, Chengdu, Tianjin, Xiamen and Suzhou), and in Poland, Singapore and Thailand.

Readers can refer to the company website http://www.hi-p.com/ for more information.

Investment merits

4QFY14F Results May Be Strong
Hi-P 3QFY14 net profit was $10.8 million, up 243 percent from $3.1 million a year ago. However, due to their weak 1HFY14, 9MFY14 registered a net loss of $4.5 million.

Analysts are expecting that Hi-P’s FY14F net profit would be around $12.3 million – $12.5 million. This suggested a strong turnaround in 4QFY14F net profit to be around $17 million, up 57 percent quarter on quarter (“qoq”).

Riding The Coattails Of Apple And Xiaomi
Although the smart phone industry is challenging where product life cycles are short, the entire industry is growing.

According to Strategy Analytics, a total of 320.4 million smartphones were shipped in 3Q2014, up 27 percent on a year on year comparison.

Out of these 320.4m smartphones, Apple and Xiaomi shipped a total of 57.3m smartphones, up 47 percent from last year. This is likely to benefit Hi-P to some extent.

In addition, Hi-P is one of the two approved suppliers for the stainless steel body frame for Xiaomi’s Mi4.

According to UOB Kay Hian writeup on 4 Dec, Hi-P’s production yield for Xiaomi’s Mi4 has increased from 20-30 percent to the current yield of more than 60 percent.

The successful ramp up is likely to gradually reverse the operating loss from manufacture of the stainless steel body frame for Xiaomi’s Mi4. Furthermore, it is likely to open more doors to new customers and business opportunities.

Other Customers Also Gaining Traction
Russian President Vladimir Putin gave China’s President Xi Jinping a dual-screen YotaPhone 2.

What is significant is that Hi-P is the original design manufacturer (ODM) of YotaPhone 1 & YotaPhone 2. YotaPhone 2 was officially launched on 3 Dec in London.

YotaPhone 2 will also be scheduled for launch in China & other Asian countries (in early 2015) and in 20 European countries by end 2015. If YotaPhone gains traction, this is likely to be another growth driver for Hi-P.

Share Buybacks At Increasingly Higher Prices
Hi-P has been doing several share buybacks since last month. Based on Table 1 below, total shares accumulated since last month amounted to 903,000 shares at an average price of $0.691 (including fees).

The latest three purchases occurred in the last two weeks with average prices ranging from $0.702 – 0.714.

Table 1: Hi-P’s Share Buybacks Since Nov 2014

Source: SGX, Ernest’s compilations

Investment Risks

Competition
Contract manufacturing industry is an industry with stiff competition where competitors compete on scale and cost.

Hi-P has to constantly upgrade their manufacturing capabilities and increase efficiency and production yield in order to stay ahead of competition.

Smartphone Industry – Fast Changing Industry
The smartphone industry is ever changing and customers’ preferences may change abruptly. Research In Motion’s (“RIM”) Blackberry smartphones was a case in point.

It was very popular in mid / late 2000s before customers change their preferences to other smartphones.

At that time, RIM comprised of around 25 percent of Hi-P’s revenue and as a result, Hi-P was affected by the dwindling demand for RIM’s blackberry smartphones.

Dependence On Key Customers / Industries
In terms of revenue contribution, the smartphone segment contributed about 50-60 percent of Hi-P’s overall revenue for the past three years.

Any adverse changes in the smartphone segment, especially to their large customers, will be negative to Hi-P.

Production Yield For Xiaomi Mi-4 Is Key
According to UOB Kayhian writeup on 4 Dec, Hi-P’s production yield for Xiaomi’s Mi4 has increased from 20-30 percent to the current yield of more than 60 percent which is probably at or near breakeven levels for Hi-P.

In order for Hi-P to register strong profits in 2015F, Hi-P has to increase the production yield further.

There are also other risks such as raw material cost or manufacturing costs which may crimp Hi-P’s margins.

In addition, based on Chart 1 below, it is evident that Hi-P’s share price is pretty volatile and may not be applicable to everybody.

Technical Outlook

Based on Chart 1, Hi-P seemed to have formed a bullish double bottom formation with the breakout of the neckline at $0.690 on 24 Nov.

Measured technical target price was $0.765 which was attained on 4 Dec. All the EMAs (21D, 50D, 100D & 200D) are trending higher with 21D EMA forming golden crosses with the rest.

Although there seems to be some profit taking at this time, the overall chart outlook seems bullish.

Supports: $0.690 – 0.700 / 0.680

Resistances: $0.720 / 0.760-0.765

Chart 1: Hi-P Chart Looks Bullish After The Double Bottom Formation, Coupled With Golden Crosses

Source: CIMB chart as of 5 Dec 14

Conclusion

Hi-P seems to be on the verge of a turnaround, fuelled by the popularity of Apple and Xiaomi products.

Analysts are pretty positive on Hi-P’s 4QFY14F results. Successful delivery of a good set of results in 4QFY14F and bullish guidance in FY15F are likely to be the factors for re-rating.

However, it is noteworthy that the fast changing industry, Hi-P’s dependence on key customers, stiff competition and production yield for Xiaomi Mi4 are factors to watch out for.

P.S: This is just an introduction to Hi-P. Readers are encouraged to visit Hi-P’s website http://www.hi-p.com/ and refer to the analyst reports for more information.

Ernest Lim is a CFA, CA and has worked at GIC Special Investment. He has a solid feel of the markets and financial world and is now a remisier.

Please click here for more information about this author.

Hi-P Int'l  1.230 +0.010 +0.82%   
Business: Co is an integrated contract manufacturer catering to various industries. [FY18 Turnover] Precision plastic injection moulding (PPIM) (67.3%), assembly (25.8%), mould design & fabrication (MDF) (6.9%).

Insight: May-19, 1Q19 revenue inched up 2% but gross profit... Read More


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