Hi-P upgraded to Buy by DBS despite trade war uncertainty

China yuan coins

DBS upgraded Hi-P International to Buy from Hold despite trade war uncertainty, saying the stock’s valuations have become attractive after its around 46 percent tumble this year.

Hi-P is trading at 9.3  and 9.2 times price-to-earnings for 2018 and 2019, DBS estimated in a note on Tuesday, adding that was attractive compared with peers’ 15 and 12 times, respectively. DBS also noted Hi-P was trading below its historical average forward price-to-earnings ratio.

Still, DBS noted that uncertainty over the trade war will persist.

“With the majority of its manufacturing plants in China, Hi-P is vulnerable to the trade tariffs,” it said. “U.S. companies importing goods from China will have to pay an additional 10 percent levy now and the tax will rise to 25 percent from the start of 2019, unless the two countries
reach a trade pact.”

DBS said it has already factored in the potential trade war hit into its forecasts, noting it has cut its earnings estimates by around 40 percent since the U.S. began its trade war.

“Our scenario analysis shows that fiscal 2019 earnings could fall by 17 percent in a worst case scenario, but there should be minimal impact on our current fiscal 2018 numbers,” DBS added.

But it also noted that Hi-P won’t face the full impact of the U.S. tariff hit as it will be spread across the whole technology supply value chain, as well as on end consumers.

In a scenario analysis of the potential trade war hit, assuming 25 percent of Hi-P’s products are affected by tariffs based on 24 percent of its customers being based in the U.S. in 2017, revenue for fiscal 2018 and 2019 would be shaved by 0.3 percent and 3.1 percent respectively, it said.

“We expect Hi-P to put in place some measures to mitigate the impact of the trade tariff,” DBS added, noting that could include negotiations with U.S. customers, relocating production outside China or changing how internal costs are charged among subsidiaries. DBS noted Hi-P already has facilities outside China, including in Singapore, Poland and Thailand.

It added that it would review its forecasts once third-quarter results were in.

It raised its target price on Hi-P to S$1.30 to S$1.21, based on peers’ average 12 times price-to-earnings and after rolling forward its earnings peg to 2019 estimates.

The stock ended Wednesday up 8.0 percent at S$1.08.

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