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Highlights:
- Unlike other rapidly growing technology industries, HP recognized that the personal computer and printer market has reached a mature stage. In late 2022, the company launched a three-year "Future Ready" transformation plan aimed at reducing structural costs and increasing investments in high-growth areas, striving to maintain long-term profitability.
- Considering the company's negative cash conversion cycle, which ideally involves "receiving cash before shipments," along with its stable business and cash flow performance, as well as a favourable leverage level, we believe that the company poses low credit risk in the short to medium term.
- Currently, the yield to maturity for HP's USD 2025 and 2027 bonds is 5.7% and 5.4% respectively , making them an attractive option for investors to consider.
Company Background
Hewlett-Packard (HP), founded in 1984, is a multinational technology company that primarily focuses on the development, production, and sales of computers, printers, and related products. The company is currently listed on the New York Stock Exchange (stock code: HPQ.US) with a market capitalization of approximately USD 28.6b.
The company's main business is divided into two segments: Personal Computer Systems and Printing, which respectively accounted for 67% and 33% of the 1QFY24’s revenue (see Chart 1). Both segments cater to both commercial and consumer markets. Additionally, the Printing Supplies segment encompasses consumables such as ink, toner cartridges, and 3D printing materials, which are used repeatedly.
Chart 1: HP Revenue Distribution
As of the end of 2023, HP held the second position globally in terms of personal computer (PC) shipments, with Lenovo ranking first (See Table 1). HP's market share of 20% provides the company with a significant scale advantage. Despite a decline in global PC shipments following a pandemic-induced surge, HP's decline was relatively modest compared to its competitors, indicating its resilience in the market.
Table 1: 2023 Personal Computer Market Data
Company | 2023 Market Share | 2022/23 YoY Shipment Growth |
Lenovo | 23% | -13.2% |
HP Inc. | 20% | -4.3% |
Dell Technologies | 15% | -19.7% |
Apple | 8% | -22.2% |
Asus | 7% | -18.0% |
Others | 27% | -13.5% |
Total | / | -13.9% |
Source: International Data Corporation, iFAST Compilations Data as of 31 December 2023 | ||
"Future Ready" Transformation Plan Could Help Maintain Long-term Profitability
In 1QFY24 (Nov 23 to Jan 24), HP recorded an overall operating profit margin of approximately 9.8% (see Chart 2). The revenue from the Personal Computer Systems segment amounted to around USD 8.8b, reflecting a 4% YoY decline. Despite the decline, the segment maintained a stable operating profit margin of 5.2%. The Printing segment's revenue decreased by 5% to USD 4.4b, but it still maintained a relatively high operating margin of 18.9%.
On a different note, HP experienced a 21% decline in free cash flow for FY23 (Nov 22 to Oct 23), bringing it down to USD 3.1 billion. However, the company's free cash flow remains at a relatively high level. Overall, HP has demonstrated stable revenue and cash flow performance.
Chart 2: HP's Revenue and Operating Profit Margin
Unlike other rapidly growing technology industries, HP's management has long recognized that the personal computer and printing markets have entered a mature stage with limited growth potential. Considering the downward cycle of personal computers and weak demand in the printing market, the company launched the three-year "Future Ready" transformation plan at the end of 2022. This plan aims to streamline personnel, reduce structural costs, and increase investments in high-growth areas to maintain long-term profitability.
The "Future Ready" plan targets a minimum of USD 1.4b in operational expense savings by the end of FY25. These savings will be reinvested in areas that offer accretive margins, such as gaming, consumer subscriptions, hybrid systems, and industrial graphics. By 2023, the company had already achieved savings of over 40%, in line with the plan's progress. Although the plan has not yet reduced the company's total operating expenses (which increased by 5% to around USD 8.1b), it provides an opportunity to identify new growth engines while effectively managing cost increases, thus contributing to the company's long-term development.
"Receiving Cash Before Shipments" and A Healthy Leverage Ratio
It's worth noting that as HP has great bargaining power against upstream and downstream suppliers, they consistently maintain a negative cash conversion cycle (the average time taken by a company to pay suppliers and receive cash from customers during the production and sales process). In 1QFY24 (Nov 23 to Jan 24), this indicator stood at -29 days, reflecting an ideal business model of "receiving cash before shipments" (See Chart 3). This model provides several advantages, including efficient inventory management and robust capital turnover. The overall cash flow management is rather ideal.
Chart 3: HP's Cash Conversion Cycle
Despite HP's acquisition of Poly (a workplace collaboration services provider) for a total cost of USD 3.3b in 2022, which increased the company's debt levels and leverage ratio, the company has actively been reducing its debt since then. In 2023, the company initiated a tender offer and proactively repurchased approximately USD 1.1b in principal value of bonds.
By the end of January 2024, HP's total debt had decreased to USD 9.7b, marking a 12% reduction compared to the end of FY22 (Oct 22). Despite a slight decline in overall revenue due to softening demand and downward pressure, the company has explicitly stated its intention to maintain its debt/EBITDA ratio below 2 times. Additionally, HP boasts a relatively high level of free cash flow, with a net debt/free cash flow ratio of a low 2.3 times. Since the company has a negative equity value, we use its net debt/ market capitalisation ratio as a proxy to its net gearing metric. The 26% level reflects their favourable leverage position.
Furthermore, HP's interest coverage ratio stands robust at 8.0 times, and the majority of its debts are long-term, providing ample time for the company to arrange refinancing if necessary. Overall, HP's credit risk is relatively low.
Table 2: HP’s Credit Metrics
Oct 2022 | Oct 2023 | Jan 2024 | |
Cash Reserve (billion USD) | 3.1 | 3.1 | 2.4 |
Total Debt (billion USD) | 11.0 | 9.5 | 9.7 |
Net Debt/ EBITDA (times) | 1.5x | 1.5x | 1.6x |
Net Debt/ FCF (times) | 2.0x | 2.1x | 2.3x |
Net Debt/ Market Capitalisation (%) | 29% | 24% | 26% |
Cash/ Short-term Debt (times) | 14.4x | 13.5x | 6.7x |
Interest Coverage Ratio (times) | 22.7x | 8.3x | 8.0x |
Source: Company's report, iFAST Compilations | |||
Bond Investment
Currently, HP holds a credit rating of BBB/BBB+ (S&P/Fitch). Both of its USD bonds also carry an investment-grade credit rating of BBB/BBB+ (S&P/Fitch).
Considering HP's stable business and cash flow performance, along with its favourable leverage level, we assess the credit risk for HP's short- to medium-term bonds as relatively low. The yield to maturity for its 2025 and 2027 bonds is currently 5.7% and 5.4% respectively (See Table 3). Compared to similar-sized and rated peers, HP's bond offers higher returns and is noticeably more attractive than Dell’s, making it an attractive option for investors to consider.
Table 3: HP Bond Information
Bond | Tenor (years) | Yield to Maturity |
| HPQ 2.200% 17Jun2025 Corp (USD) | 1.2 | 5.7% |
3.9 | 5.4% | |
Source: Bondsupermart Data as of 15 April 2024 | ||
Corporate Risks
Rising wages, supply chain constraints, and the "deglobalization" trend have the potential to increase HP's average production costs. This could further impact the already low-profit margins in the hardware industry (the company's current operating profit margin ranges from 8% to 10%), thereby affecting its overall profitability.
The computer industry is characterized by intense competition, with competitors actively introducing innovative technologies to gain market share. Traditional printing services, which are already experiencing declining demand, face the risk of being replaced by alternative solutions. If HP fails to achieve significant technological breakthroughs or strategic deployments in these two markets, it may lose its existing business advantages. This could potentially force the company to increase capital expenditures or incur expenses related to acquisitions, impacting its cash flow performance.
Moreover, in the event of a global economic recession, there may be a decrease in consumer demand for personal computers and printers. This could lead to heightened price competition, putting pressure on HP's revenue and profit margins.
Conclusion
Unlike other rapidly growing technology industries, HP recognized that the personal computer and printer market has reached a mature stage. In late 2022, the company launched a three-year "Future Ready" transformation plan aimed at reducing structural costs and increasing investments in high-growth areas, striving to maintain long-term profitability.
Considering the company's negative cash conversion cycle, which ideally involves "receiving cash before shipments," along with its stable business and cash flow performance, as well as a favourable leverage level, we believe that the company poses low credit risk in the short to medium term.
Currently, the yield to maturity for HP's USD 2025 and 2027 bonds is 5.7% and 5.4% respectively, making them an attractive option for investors to consider.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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