Background:
Hi-P International provides contract manufacturing services and electro-mechanical modules to the telecommunications, consumer electronics and electrical, computing, life sciences and medical, and automotive industries.
It has 15 manufacturing plants globally, located over five sites in China (Shanghai, Tianjin, Suzhou, Chengdu and Xiamen) and in Thailand, Mexico, Poland and Singapore.
Recent development:
Hi-P was recently embroiled in a high-profile labour strike by 200 of its Shanghai workers when it attempted to consolidate two of its Pudong factories. The dispute has since been settled, with offerings of higher pay and travel incentives for its workers. However, the company does not expect any negative impact on its upcoming 4Q11 results.
A gRIM year so far for major customer RIM. Hi-P’s 9M11 results have not met market expectations, mainly because of the poor performance of major customer, Blackberry phone manufacturer Research-In-Motion (RIM). Canadian-based RIM recently reported a 70% YoY plunge in 3Q profits although it remained highly profitable. In addition, it experienced significant delays in shipping its Blackberry 10 phones powered by its new QNX operating system, the seeming final straw as investors are now calling for the ouster of its two co-CEOs.
Low China costs no longer a core advantage. With a large portion of its manufacturing based in China, Hi-P has also suffered higher operating costs, especially wage-related costs. Although 9M11 revenue rose by 27% YoY, net profit grew by a significantly slower 14%. To save costs, the company is consolidating its coastal plants and moving inland. Along the way, it has experienced some hiccups, as seen by its recent labour issues. However, its grapple with rising costs does not appear to have been resolved yet, as the company expects full-year 2011 net profit to be lower than that in 2010.
Still hoping to ride smartphone and tablet tsunami. Other than RIM, Hi-P also counts among its largest customers smartphone and tablet computer companies Motorola and Apple. Motorola recently managed to claw back some mobile market share following the acquisition of the smartphone division by Google. More substantially however, Apple is expected to launch a series of new products this year that is expected to include the iPad 3 in 1Q12 and possibly, iPhone 5 later in the year.
Hi-P’s lower-than-expected 9MFY11 results were largely attributable to its top client Research In Motion’s (RIM) dismal performance. Moving forward, we expect Hi-P to carry out more orders from Motorola and Apple which would more than cover RIM’s slowdown. With the demand for mobile devices remaining upbeat and Shanghai’s strike peacefully resolved, we believe that Hi-P’s stock had hit its inflection point with the company on track to achieve record revenue next year. Upgrade to BUY with a new TP of S$0.79 pegged to 9.9x FY12P/E (5-yr historical mean).
A lacklustre year for its largest customer. RIM had recently reported a series of disappointing results with 3QFY11 net profit slumping by 70.7% YoY US$265m. Along with the poor performance, the company also announced a delay in launching its long-awaited Blackberry 10 smartphone, missing a major product window that could potentially put the business into a downward spiral. Consequently, Hi-P had experienced a slowdown in orders and margin compression.
Strike peacefully resolved. In view of the escalating costs, Hi-P had commenced its lean manufacturing initiative through consolidating its facilities. Unfortunately, the consolidation sparked a high profile unrest in Shanghai which lasted for 20 days with workers protesting against the company’s decision in relocating them. Despite not legally required, Hi-P still offered generous incentives to affected employees, including
1) two-month salaries,
2) free transportation to new facilities, and
3) one-hour pay rise to compensate the increase in travelling time. The issue had been resolved with little material financial impact expected.
Growing through Motorola’s comeback and Apple’s new products. Our channel checks indicated that Hi-P had secured jobs from Motorola related to its future models. Motorola recovered some lost ground in the smartphone market with a 0.4% increase in global market share to 2.5%. As for Apple, we suspect that Hi-P will benefit from the string of new products that the tech giant will unleash in the next three quarters.
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