Hi-P downgraded by DBS as trade-war fears turn earnings outlook cloudy

China yuan coins

DBS downgraded Hi-P to Hold from Buy, saying the contract manufacturer’s earnings outlook has turned cloudy amid trade-war fears.

“We like Hi-P for its ability to ramp-up production to ride on the cycle, strong cash-generating capabilities and exposure to the IoT segment. However, we are now adopting a neutral stance on lower earnings visibility,” DBS said in a note on Thursday.

“The recent trade war between the U.S. and China has created uncertainty for manufacturing companies, especially those with manufacturing plants in China. Hi-P, with six out of 13 manufacturing plants in China, is not spared,” it added. “Coupled with the unfavourable forex movement, earnings momentum going forward could be hit.”

It cut its 2018-19 earnings forecasts by 15-16 percent, adding that it expected a higher forex loss in the first quarter amid a weaker U.S. dollar against the Singapore dollar, coupled with a weaker Singapore dollar against the Chinese yuan.

The bulk of Hi-P’s revenue is in U.S. dollars, but the overhead is mainly in Chinese yuan, with the Singapore dollar the reporting currency, DBS noted. “Thus Hi-P is expected to be hit both on the revenue front and also on the expense side,” it said.

DBS cut its target price to S$1.88 from S$2.48 after applying a 20 percent discount to peers’ price-to-earnings ratio of 16 times 2018 earnings, compared with the previous 10 percent discount.

The stock ended Thursday down 6.25 percent at S$1.80, marking a more than 35 percent drop from its March 16 intraday high of S$2.79.