Broker's take: Maybank Kim Eng downgrades Hi-P International to 'sell' amid tech sector volatility

MAYBANK Kim Eng is downgrading Hi-P International from "hold" to "sell" and expecting its price to fall to S$0.68, citing the stock's vulnerability to margin pressures and a downturn in consumer sentiment.

The brokerage firm lowered its target price for Hi-P to S$0.68, down 21 per cent from S$0.84. As at 2.31pm, Hi-P's shares were trading 3.11 per cent lower at S$0.935.

In Tuesday's report, analyst Lai Gene Lih said volatility in Singapore's tech sector could persist given the US-China trade war and macro uncertainties. He said that Maybank is lowering target prices (derived using the net asset value approach) across their Singapore tech coverage to factor in cuts to earnings forecasts and higher costs of equity.

However, Hi-P is the most vulnerable, in comparison to other stocks with stronger resilience such as Valuetronics and Venture Corp, said Mr Lai.

First, Hi-P's revenue mix makes it vulnerable to a material decline in global consumer sentiment. For example, Mr Lai pointed to how Apple, Hi-P's largest customer with 40-50 per cent contribution to revenue, had guided for lower revenue last week. Maybank estimates that 80 per cent of its revenue comes from consumer discretionary electronic products and that at least 30-40 per cent has short life cycles of one to three years.

Second, pricing pressure could persist as volumes remain weak. Mr Lai said: "Economies of scale could also drop as it diversifies its product mix amid weaker volumes."

He also noted that Hi-P will be incurring one-off costs for a relocation of its resources to its Thailand and Nantong facilities.

Hence, barring a strong rebound in volumes that could alleviate pricing pressure, Hi-P's stock is likely to face another year of headwinds, said the analyst.