Hi-P   

Results

Handset pullback is more severe than expected. Citigroup is cutting its estimates by 12-21% over 2006-08E to reflect lower volume assumptions for the handset business. It forecasts '06E EPS declining 16% yoy (ROE to fall from 28% to 19%) and 3% EPS CAGR over 05-07E, sharply lower than consensus expectations of +15%.

Hi-P has seen handset volume decline rapidly, due to lost market share and a slowdown in end-market demand. Utilization at its Tianjin plant has now fallen to ~30% from +70% in 1Q06, thus 2Q06 and 3Q06 look set to see continued consecutive sequential sales decline, not acceleration.

With the slowdown in activities, start-up costs are not likely to reduce in 2H06 due to aggresive capex this year ($110 m). Pricing pressure has also intensified, attributed to the rise in resin prices. Its operating margin is estmated erode further by 5.1% to 10% this year.

Hi-P is benefitting from Gillete and Whirlpool product launches, but is not sufficient to offset softness in the handset business.

It has cut its price target by 30% to $0.80.

 

Issued a profit warning and guided for 1Q06 profit of $14 mln, suggesting severe margin pressure. Appears to be struggling with its aggressive product roadmap as it simultaneously launches new products/services. Startup losses can't be discounted. At $1.20, it was trading at 06 PER of 15x with decline in profit and ROE set to fall sharply 28% ('05) to 21% ('06E). Long term investors may become disillushioned with a 2nd consecutive year of flat earnings and 4 straight quarters of earnings disappointment.

 

Hey gallen, Since you post so often... how about you just do a daily summary on your buy-sell recommendations for us?

 

Results commentary and TA at http://kelongstocks.blogspot.com For China Essence, posting will be available tomorrow at 8:30am