by Dubby » Mon Aug 04, 2008 1:50 pm
From Phillips:-
Hi-P now sits in the cusp of two inflection points –
(1) the smartphone industry is about to explode;
(2) Hi-P’s margins seem to have bottomed out after three painful years of heavy investment and organisational
restructuring.
The two will converge to send the stock one way – up.
Smartphones will dominate: The world is going through a shift in its perceived use of the mobile phone. Gone are the days of the simple handset, enter the smartphone – a mobile phone and personal digital assistant combined. Handset unit sales growth has tapered, but smartphone unit sales have been growing over 50% pa since 2005 – evidence that consumers are switching to smartphones (see inside for industry statistics).
The iPhone, the Blackberry, the Nokia smartphone series, these are the likes that will dominate the consciousness of the consumer for the next few years.
This is a structural change in consumer demands that this research house believes will weather current economic dislocations: changing your mobile phone is a necessary consumer exercise, changing it from a handset to a smartphone is the answer to the logical progression humankind has been taking to slowly free himself from the desk: from the desktop, to the laptop, now the smartphone.
And it will happen because the marginal cost increment of the upgrade will not be prohibitive to your pocket: telcos will subsidize it so you can have it. The iPhone 3G at US$199 is a harbinger of things to come. Even in economic troubled USA have smartphone sales surged 106% yoy for 1Q08, the fastest growing market in world.
Hi-P, whose major customer Research in Motion Ltd (RIM), maker of the ubiquitous Blackberry, will benefit given its 25% revenue exposure to the world number 2 smartphone maker. Hi-P also counts Nokia, the world’s number 1 smartphone maker, as a major customer (5% revenues). Nokia and RIM occupy the top two positions in global smartphone market share at 45.2% and 13.4% respectively for 1Q08.
Hi-P’s growing pains seem to have turned the corner: After 3 years of painful restructuring and re-positioning, Hi-P has registered three very encouraging last quarters in 3Q07 (remove one-off write-offs and P&L looks agreeable), 4Q07 and 1Q08.
Margins seem to have finally bottomed out and may be on the rise again, as capacity utilization of new plant improves and new business capabilities synergise.
Key risk: the smartphone industry is in land-grab mode, it is not a case of going head to head yet. So long as RIM and Nokia meet consumer requirements in the face of the iPhone and others, they will gain market share in absolute terms from a market that is compounding at over 50%.
If not, market shares can swing wildly to the other side, the iPhone has come from nowhere to surge to the number 3 spot worldwide (5.3%) in 1Q08 in less than a year, do not underestimate the power of Apple’s understanding of the consumer. We foresee however, both RIM and Apple, to gain at the expense of everyone else.
We recommend a BUY with a target price of $0.72 based on the current trailing 12 month P/E of 7.46x, giving a 23% upside from the current price of $0.585 (8.65x FY07 P/E, 7.46x T12M P/E, 5.18x FY08 P/E).
Vested.