OSK predicts Hi-P will dive into losses 1H13

The hefty $300m investment will be halved.

According to OSK, recent announcements from both Hi-P and Apple have confirmed the firm's worries that the latter is suffering from softening demand. This led to Hi-P’s decision to cut its massive S$300m investment, which was announced recently. 

While this will allow it to save costs, it suggest weak growth (if any) in the near term for Hi-P. We also believe that the group’s other key customers will not be able to prop up the loss of Apple’s orders as the consumer electronic space remain troubled for contract manufacturers.

In addition, Hi-P’s share price since 1 Jan 2012 has outperformed larger peers like Foxconn and Catcher, and could underperform given a murky outlook going forward.

Here's more from OSK:

We now expect Hi-P’s 4Q12 earnings to come in at S$7-8m, and dive into losses in the first half of this year. 

Apple halves its orders, while Hi-P halves its investment. Hi-P recently announced that they will be halving their original S$300m investment in Nantong and spacing it out over a few years, coinciding with news that Apple had only ordered about half the 65m iPhone 5 displays originally targeted for 1Q13.

Both announcements came as little surprise as we have highlighted both the increasing risk of Hi-P’s high stake bet in Nantong and the order cuts faced in Apple’s supply chain.

As we suspect that the plant was originally scheduled to take up an expected load from Apple, Hi-P’s additional production capacity may no longer be needed in Apple’s supply chain.

Right decision in the face of no growth. We interpret Hi-P’s recent decision to cut investment as there are low/no growth opportunities going forward. We concur with Hi-P management’s decision to scale down investment in order to reduce costs.

Contract manufacturing in the consumer electronics space appears to be in a tough spot now, as gleaned by the fact that even Taiwan-based behemoth Foxconn is looking to diversify (railway industry).

Other customers fail to make up. We doubt Hi-P’s other key customers can make up for the loss of Apple’s orders. While Amazon’s sales were decent, other customers such as Motorola were faring below expectations.

While BlackBerry 10 is still a revival catalyst for Research in Motion, we do not think that Hi-P will be significantly involved in the production of the latest model.