Hi-P shares tumble after profit warning; Analyst points to fast deterioration of demand outlook

Singapore one dollar bill

Shares of Hi-P International tumbled at the open on Monday in the wake of a profit warning issued on Sunday, dropping as 10.4 percent in early trade before retracing some losses to trade down 6.56 percent at S$0.855 at 9:22 A.M. SGT.

Hi-P said in an SGX filing on Sunday that it expected lower revenue and profit in the third quarter, compared with the year-earlier quarter. With its second quarter results, the contract manufacturer had said it expected higher revenue, but similar profit for the third quarter, compared with the year-earlier period.

Maybank KimEng said on Monday that this was the second time this year that the company has lowered its earnings guidance.

“We are concerned industry headwinds are hitting Hi-P much harder than expected,” it said in a note. “The third quarter is typically seasonally the strongest as Hi-P ramps up production to meet seasonal holiday demand.”

Hi-P said the difference between its unaudited results and the previous guidance was “mainly due to delay in sales resulted from postponement in billing of certain production tools, lower manufacturing yield for certain products during initial ramp up stage, and lower market demand for certain products.”

Maybank KimEng said the latter two reasons could be a “double-whammy” that speeds a fall in profitability as Hi-P’s margins were already pressured by its large fixed cost base and fierce pricing competition.

It also noted that in August, management indicated the third-quarter production ramp-up was healthy.

“Since management has not quantified the impact of weaker demand we are worried the latest guidance cut is a sign the demand outlook has deteriorated much faster than we anticipated,” the brokerage said.

It cuts its target price to S$0.84 from S$1.27 after lowering 2018-20 earnings per share forecasts by 25-32 percent; it kept a Hold call.

For the fourth quarter, the brokerage said performance would hinge on the recently launched smartphones from Hi-P’s key wireless customer.

“A key downside risk to our forecasts is if actual volumes miss management’s already tempered internal forecasts,” it said. “On the flipside,
strong demand of the customer’s cheapest phone model in this year’s launch may provide a positive surprise.”

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