According to Lai, Hi-P has selectively moved way from unprofitable assembly projects to focus on stable ones with higher profitability from blue-chip customers such as Apple, Keurig, and Colgate.
In addition, Hi-P has also moved on from losses in FY15 due to $74.4 million in inventory write-offs after a deal with Russian firm Yota Devices went south.
Hi-P’s electronics unit had then jumped headfirst – without doing adequate due diligence – into a contract to co-design and produce a dual-screen smartphone for Yota. But the Moscow-based company failed to take delivery of the phones.
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“Hi-P’s returns over the past decade had fluctuated with the market share losses of Motorola, Nokia, Blackberry, and the Yota delinquency. We see the stability of current projects contributing positively to a more stable ROE profile ahead,” says Lai.
Lai estimates that some 80% of Hi-P’s revenue is now contributed by blue-chip customers.
And the strategy seems to have worked. In the 3Q ended September, Hi-P saw its earnings grow 24.9% to $38.4 million, on the back of an improved product mix and greater operational efficiency.
Its revenue rose 6.2% to $411.3 million, from $387.3 million a year ago.
See: Hi-P posts 25% surge in 3Q earnings to $38.4 mil
“With the bulk of revenue right-sizing done, we think ROEs should be more stable in future years. We forecast FY17E-19E average ROEs of 21.9%, compared to the 13% average in FY04-16,” says Lai.
In addition, Lai projects Hi-P’s earnings per share (EPS) growth to come in at 19% and 20% in FY18 and FY19, respectively. This will be on the back of revenue CAGR of 13.7%, driven by the ramp-up of products and allocation gains from key customers.
As at 3.02pm, shares of Hi-P are trading 8 cents higher, or up 4.6%, at $1.83. This implies an estimated price-to-earnings ratio of 11.0 times and a dividend yield of 2.4% in FY18.
