Hi-P disappointing bite of the Apple

Our recent channel checks reveal some worrying developments for Apple suppliers, prompting us to review the Hi-P situation. Thought to be a proxy to Apple’s iPhone 5, we believed that the group now has been overwhelmed by how fast things have changed in the technology industry.
In view of
1) iPhone 5’s failure to meet demand expectations,
 2) overcompensated supply of iPhone 5 components, and
3) increased risk for Hi-P’s high stake bet in China, we are slashing our FY12 and FY13 earnings forecasts by 51.0% and 48.6% respectively.

The share prices of its Taiwan-based peers are taking a hit today, and we believe that Hi-P will follow suit. Downgrade to SELL with a new TP of S$0.59 based on 0.88x P/B (-0.5x S.D. 5-yr historical P/B).

iPhone 5 fails to meet demand expectations Originally, the market had high expectations for the iPhone 5. However, recent newsflow indicate that demand for iPhone 5 would now be unable to meet earlier expectations. Also, we note that Android and Windows phones have been gaining momentum in the past period, attacking Apple’s market share. In view of the challenges ahead, we believe that demand for
Apple’s iPhone 5 may fall drastically next year.

Overcompensated supply of components for iPhone 5? When iPhone 5’s supply chain was initially thought to be facing component shortages, suppliers had ramped up production. This is reflected in the strong November sales data from component suppliers in the supply chain. Our channel checks now show that there may be an excessive level of stocks due to the lower-thenexpected demand. December shipment for components such as display appears to have taken a hit thus far. The supply chain is now worrying due to deteriorating order visibility going forward. Therefore, we are now expecting an inventory correction to lead to order cuts in 1Q13, posing significant business risk for Hi-P.

Risks increase for Hi-P’s high CAPEX bet. The risks for Hi-P recent S$300m investment in its Chinese plant appears to have increased significantly. We believe that a large part of the production capacity was dedicated to Apple. However, the latest news indicate that this may not have been the right bet for Hi-P as Apple moves to shift production back to the US. Apple’s latest moves are to bring iMac’s manufacturing back to the U.S. and we suspect that this is only the beginning and merely a sign that other products may follow. Other possible customers to fill this capacity gap include RIM and Motorola.