Hi-P

Drop in 3Q07earnings despite strong sales Hi-P reported 98% qoq decline in net profit to S$0.3m in 3Q07 despite strong 30% qoq growth in revenues. 3Q07 is profitable but net profit dropped significantly. The fall in earning is mainly dragged down by a) provision of S$11.1m (S$7.8m for FY07, S$3.3m for FY06) for inventory obsolescence with several customers in Wireless Telecommunications (WL), Consumer Electronics and Electrical (CE) and Computing business units, and b) a mainly VAT related one-off recognition of costs (S$7.0m). Stripping out the one-time loss of S$18.1m in 3Q07, net profit would have risen 40% qoq to S$18.4m. (2Q07: 13m). The performance also suffer from c) a continued losses at Poland of S$7.8m due to production yield issues and higher-than-expected operating costs, and d) a S$3.2m forex conversion loss due to the weakening US dollar. Segment sales recovers. Sales of S$262.3m came in above our forecast of S$214m. WL (53.9% of sales) business was up 45.1% qoq to S$141.5m, mainly driven by MOT’s gradually recovery and contribution from Nokia in 3Q07. Sales of CE (38.5% of sales) rose 14% qoq, thanks to the rising revenue contribution from Poland. Computing, Automotive, Medical and Others (CA: 7.6% of sales) business also increased 29.9% qoq to S$20m on the back of existing customers rebounded. The cash cycle days improved to 46 days with shorten in inventory from 83 to 60 days, and the company expects cash cycle days can achieve 35 days in the future. 4Q07 revenue to be similar, or slightly higher than 3Q07. Hi-P expects 4Q07 sales to be similar to 3Q07’s with a higher net profit. The full year 2007, the company expects higher revenue but lower profit compared with 2006. This is mainly due to a) teething problem in Poland takes longer time to resolve, and b) MOT is gradually recovery, would move into mass production by 2008. We reduce our FY07 forecast 30% to 45.2m. Teething problem in Poland. Hi-P secured strong orders from Braun including orders to manufacture a series of kitchenware products, but the teething problem may take longer time to resolve. The company expects Poland plant to breakeven by Q2 FY08 with a) better yield through put, b) improvement of staff experience/efficiency with training programme, and c) rising price. We believe start-up losses could reduce 60%-70% in 4Q07. New Strategy, a Integrated Electro-Mechanics Solution Provider. Instead of taking profits from just satisfactions customers’ requirements (e.g. mobile phone casing), the company decided to move beyond to be complete solutions provider in market segments. This will help customers reduce time-market as they deal with only one supplier offering a one-stop solution for electro-mechanics assemblies. Hi-P will enhance its capabilities by more focused with formation of new corporate roles e.g. R&D. Production for Nokia (low cost phone, N series etc.) is still a small position, it could increase to 10% of total sales in 2008.