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Hi-P International: A Singapore-Listed Apple Wildcard Proxy

November 05, 2012 | About:
Hi-P International Limited (HIP.SP) is a global vertically integrated contract manufacturer serving the wireless telecommunications, consumer electronics and computing and automotive industries. Hi-P International Limited was listed on the Main Board of the Singapore Exchange on Dec. 17, 2003. Founded in 1980, Hi-P is a leading supplier of electro-mechanical modules to the telecommunications, consumer electronics and computing industries. Its diversified service offering ranges from industrial and product design, manufacture, assembly, ancillary value-added services such as surface decoration finishing and precision metal stamping as well as turnkey contract manufacturing.

Hi-P has an extensive footprint with 15 manufacturing plants globally located across Singapore, the People’s Republic of China (Shanghai, Suzhou, Xiamen, Tianjin and Chengdu), Thailand and Poland. Hi-P also has marketing and engineering-support centers in the U.S. and Taiwan. Hi-P's largest customers include smartphone and tablet computer companies Apple (AAPL), Motorola and RIM (RIMM).

The Apple Connection

Hi-P has been supplying parts to Apple for the iPod for a certain period of time. Based on channel checks by sell-side research analysts, it is believed that Hi-P currently supplies metal and plastic parts to Apple and also does partial assembly for some of its products. One clue given was Hi-P’s recent acquisition of Computer Numeric Control (CNC) machines.

Is It Cheap?

- Trading at 1.25x P/NTA, a 29% premium to its five-year average P/NTA of 0.97

- ROE (trailing twelve months) was 2.1% and ROE (five-year average) was 12.4%

- Dividend yield 3.1%

- Book Value Growth (five years) 10.1%

Is It Safe?

- Total Gross Debt to Equity Ratio was 23.5%, in net cash position.

Hi-P has historically maintained a strong balance sheet. Hi-P’s debt-to-equity ratio ranged from 1% to 6% for 2007 to 2010 before it increased to 20% in 2011.

- Working capital metrics remain healthy.

Receivable days (trailing 12 months) of 77 days and inventory days (trailing 12 months) of 54 days are decent.

- Historical valuations have fluctuated with the fortune of its major customer at point in time.

Biggest customer for Hi-P has undergone a transition over the years from Motorola, to RIM, and now possibly Apple.

- Chinese labor costs no longer cheap.

Hi-P which has a significant manufacturing base in China is suffering from the same issues as other Chinese manufacturers: inflation and rising labor costs. Last year, there was a labor strike at Hi-P's Shanghai factory during a consolidation exercise.

- Downstream demand and production schedule lumpy.

As a pure upstream component supplier, Hi-P is at the mercy of downstream demand.

- Size matters

Hi-P is not as large and as fully integrated as its other Asian and U.S. contract manufacturing EMS peers.

Is It Quality?

- Ability to work with the biggest players in town testament to quality.

Historically, Hi-P's customer list included Apple, RIM, Motorola, Braun (P&G), Nike (Nike’s new product FuelBand), Colgate-Palmolive, Seagate, etc.

- Geographical spread.

15 manufacturing plants located across five locations in China (Shanghai, Chengdu, Tianjin, Xiamen and Suzhou) as well as, Poland, Singapore and Thailand, minimizes any negative impact from problems at any specific plant or location, e.g. Thailand floods were a major boon for HDD component companies which mostly had plants located in Thailand

- Hi-P has had a dividend payout ratio greater than 40% from 2009-2011.

In closing

The first nine months of 2012 net profit of S$2.4 million is a 93% fall from the first nine months of 2011 net profit of S$35.5 million as a result of unanticipated delays in customers’ programs (analysts suspect it to be the pushback of its metal casing business for iPhone 5 as well as the delay in Blackberry 10). Management expects the situation to improve as some of the delayed programs are being delivered in the last quarter of 2012 and beyond into 2013.

Although Hi-P has ambitions of being the next Foxconn (Foxconn was a component supplier before becoming the largest electronic contract manufacturer), the current uncertain earnings outlook coupled with unattractive valuations will deter me from taking a position now. But Hi-P is definitely a stock on the watchlist of those who are optimistic about the prospects of Apple.

Disclosure: Not vested.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap deep-value cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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