Further margin expansion & cash generation in 2Q. Core net profit, excluding impairment charges and forex losses, came in at S$21m (-28% yoy, +7%qoq), better than our S$18m projection. Sales of S$178m was below our S$200m forecast but gross margin improved to 22.8%(1Q09: 20%; 2Q08: 18%), benefiting from a better product mix, more value-added processes and effective cost control. Hi-P generated S$70m FCF in Q2 as cash cycle shortened to 40 days from 56 in 1Q09. Net cash increased to S$251m, c. 40% of market cap.

3Q09 expected to be weaker y-o-y & q-o-q. We expect S$15m net profit in 3Q09, a decline of 41% y-o-y and 6% q-o-q. In view of the delay in ramp up of new programs (smartphones, notebooks and MP3 players) to 4Q09, we have cut our full year sales forecast by 13% but raised gross margin assumptions by 1%pt to19% due to stronger margins in 2Q09.

S$56m flexible printed circuit acquisition. This acquisition (max flex capacity: 300k sqf) is in line with the group¨s integrated strategy and customers are positive on this new expansion. However, FPC will not contribute till FY10 and management expects start up expenses to be incurred in 4Q09/1Q10.

Maintain Buy, only 4.5x FY09 PE if net of cash. Valuations remain compelling at 6x FY09 earnings vs historical average of 9x PE multiple. If net of cash, stock is even cheaper at 4.5x PER with 3-4% yield. Maintain Buy, with slightly lower target price of S$0.76,still pegged at 9x blended FY09/10 earnings.