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1、Dec-11,Oct-12,Dec-12,Feb-12,Apr-12,Jun-12,Aug-12,1,377.40,60.30,2.41,130,Thailand,Initiating CoverageBuy(initiation),21 December 2012KCE Electronics(KCE)European Car Demand Driving Growth,Share price:Target price:,Bt10.20Bt12.90(initiation),We project that KCEs 2013 net profit will reach a new high
2、of THB604m,upby 259%YoY,due to the increased efficiency of the KCE Technology,whichstems from the installation of more advanced technological equipment sincethe flood.Apart from the existing customers that have placed many repeat,Chatchai JindaratChatchai.jmaybank-ke.co.th(02)658 6300Stock Informati
3、onDescription:The core business of the Company is theproduction and distribution of painted circuit boards(PCBs)manufactured from an epoxy glass copper lead laminate.TheCompany is now able to produce high quality and complexmultilayer boards.The PCB is the foundation component ofcomputers,automotive
4、 industry,telecommunication devicesand most electronic equipment.KCE was listed on SET inAugust 1988.,orders,there has also been an increased demand for European cars in Asia,which is the main revenue source in Europe for KCE.We are initiatingcoverage with a Buy rating and a TP of THB12.90,based on
5、a 2013 PER of10 x with an average dividend yield of 5%per year.Revenue is less exposed to the world economy.Although the US andEuropean economies remain weak,the main revenue stream for KCEcomes from European auto component sales:the weakened euro has drivenEuropean car demand upward and thus KCEs s
6、ales are growingsignificantly.Three to four new customers are expected to place orders,thusfurther strengthening KCEs revenue in 2013.We estimate KCEs revenue tobe USD259m,or THB7.907b(with the exchange rate of THB/USD at 30.50),which is an increase of 18%YoY.The replacement of equipment at the KCE,
7、Ticker:Shares Issued(mn):Market Cap(US$mn):3-mth Avg.Daily Turnover(US$mn):SET Index:Free float(%):Major Shareholders:Aongkosit FamilyMr.Panja SenadisaiKey IndicatorsROE annualised(%)Net cash(Btmn):NTA/shr(Btmn):Interest cover(x):Historical Chart,KCE469151.91%32.444.6225.6(3,230)7.74.8,Technology pl
8、ant has also reduced rejects and waste,which have alsocontributed to a higher gross margin.We thus expect the 2013 gross marginto be 19.7%,above the average margin of 19%.Acquiring a new business to strengthen existing lines.In 3Q12,KCEacquired CT(97%),a producer of Alkaline Etching chemicals for PC
9、Bs.KCE also sold used Alkaline Etching chemicals(waste)back to CT forabstracting Copper Sulphate.Gross margin is driven by the fact that itcan easily outsource its feedstock and gain revenue from waste.CT cancontribute around THB68m/year to KCE.We thus forecast that the 2013normalised profit will su
10、rge by 259%YoY to reach a new high ofTHB604m,from the low base of last year,with an implied EPS ofTHB1.29.Earnings become interesting once again Initiate with Buy.Weexpect a strong 2013 earnings growth outlook and high repeat orderswith higher profitability.The current valuation is based on a 2013 P
11、ER ofjust 7.9x,lower than SMT at 8.8x and SVI at 10.1x.We expect the 2013Fdividend to be THB0.51,or a 5.0%yield.We value KCE at a PER of 10 x,lower than the peak PER of 2010 at 14x and our 2013 target price isTHB12.90,representing a 26%upside.We thus recommend Buy.,80,KCE Summary Earnings TableFYE:D
12、ec 31(Btmn)2010,2011,2012F,2013F,2014F,30-20,RevenueEBITDARecurring Net ProfitRecurring Basic EPS(Bt)EPS growth(%)DPS(Bt),7,4481,2794530.96264.90.45,7,307751460.10-89.90.20,6,815889530.1117.50.40,7,9071,4036041.291,031.30.51,7,9861,4596601.419.30.56,Performance52-week High/Low,KCE,SETBt10.70/Bt4.74,
13、PEREV/EBITDA(x)Div Yield(%)P/BV(x),10.65.04.41.8,105.38.12.01.9,89.66.73.91.6,7.93.95.01.3,7.33.45.51.2,Absolute(%)Relative(%),1-mth14.67.9,3-mth27.519.9,6-mth70.046.7,1-yrs106.557.0,YTD113.461.0,Net Gearing(%)ROE(%)ROA(%)Consensus Net Profit(Btmn),185.920.26.1-,212.15.31.4-,157.923.17.2748,107.925.
14、69.2626,94.316.06.6619,Close price 17 Dec 2012 Source:Company reports and KELIVE Research estimates.SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS,KCE Electronics(KCE)Company profileProducer and distributor of printed circuit boardsKCE is a producer and distributor of printed ci
15、rcuit boards(PCB),anepoxy fibreglass board with power conductors(lead and copper)totransfer electricity to integrated circuits(ICs)for electrical appliances.KCE produces two types of boards:1)Double Sided PCBs2)Multi-layer PCBs that require higher technology(421 layers).As a component in mobile phon
16、es and computers,the PCB is used inmany industries such as the auto and telecom sectors.,DOUBLESIDED PTH PCBEPOXY FIBRE GLASS,MULTI-LAYER PCBPREPREG,Subsidiaries1.K.C.E.International Co.,Ltd is a producer and distributor ofPCBs and Double-Sided PTH.KCE holds a 99.99%stake.2.KCE Technology Co.,Ltd is
17、 a producer and distributor ofMultilayer(4-6 layers)PCBs.KCE holds a 100%stake.3.Thai Laminate Manufacturing Co.,Ltd is a producer of copperclad laminate(Laminate)and Pre-Impregnated Fibre Glass(PREPREG),which are the main materials used in PCBproduction.KCE and the above two subsidiaries hold a 100
18、%stake.4.KCE(Thailand)Co.,Ltd is a distributor of PCBs in Thailand.KCEholds a 60%stake.5.Thai Business Solution Co.,Ltd is an installer of ERP systemsand computer control systems.The company is also a distributorof computers and related equipment.KCE holds a 49%stake.,21 December 2012,Page 2 of 13,K
19、CE Electronics(KCE)Revenue breakdown and materialsThe main KCE revenue(98%)comes from PCB sales,while the rest(2%)comes from Preprag sales(main material in PCB production)andERP systems installation.Revenue from PCB sales is divided into threegroups:1.Single-sided PCBs.2.Double-sided PCBs:2 electron
20、ic circuit sides used in electricalappliances,computers,and TVs.3.Multi-layer PCBs:requiring higher technology in production andmainly used in the auto industry and contribute the highest grossmargin.By region,KEC exported 61%of products to Europe,followed by Asia(24%),and the US(16%)in 2011.Copper,
21、a key material used,accounts for 60%of total costs,or 29%ofCOGS.Volatile copper prices can pose a risk for KCEs earnings.,Chart 1:Revenue breakdown by product,Chart 2:PCB revenue breakdown by country,0.5%,1.5%,100%,80%,24%,23%,24%,60%,40%,61%,59%,61%,20%,98.0%,0%,16%2009,18%2010,16%2011,PREPREG,PCB,
22、Serv ice,-USA,-Europe,-Asia,Source:Company reports.,Source:Company reports.CustomersAbout 65%of customers are in the auto sector followed by consumption(12%),industrials(10%),with telecom,mechanical equipment,and thecomputer industry at 13%.Although the main customers(European carproducers)are facin
23、g a crisis,KCEs products are sold worldwide;thus,KCE has experienced a limited impact from the euro debt crisis.Chart 3:Revenue breakdown by customer category13%10%,21 December 2012,12%Automotiv e ElectronicsIndustrial ElectronicsSource:Company reports.,65%Consumer ProductOther(Telco,Med,Com),Page 3
24、 of 13,-,-,-,-,-,-,-,-,KCE Electronics(KCE)Acquiring new business to strengthen growthOn 19 September,KCE announced the acquisition of a 97.25%-stake inChemtronic Technology(Thailand)Co.,Ltd(466,800 shares)at a price ofTHB500/share(2011 PER 4x and a PBV of 2x)for a total cost ofTHB233.4m.The cost of
25、 THB40m was partially obtained from internalcash flow,with the rest(THB193.4m)from banks.KCE will be able torecognise its revenue from CT starting from 4Q12.Chemtronic Technology(Thailand)Co.,Ltd profileMain products1.Alkaline etching chemicals sold to KCE at 500 tonnes per month.2.Copper oxide,a re
26、cycled product,for etching:this is the rawmaterial for producing Copper sulphate(CuSO4)with an outputof 250 tonnes/month.3.Copper Sulphate(CuSO4)is a raw material in the feed businesswith an output of 300 tonnes/month.Chart 4:KCE and its relationship with ChemtronicsCT Clients,KCE,Etching after used
27、,CT,CopperOxide,Coppersulfate,Betagro groupThai food feed millVet AgritechSaha farmKrungthai feed mill,Alkaline etching,PP groupCV.Makmur Jaya,AbadiGremont AgrochemSource:KCE,KELIVE Research.Main customers1.40%of revenue comes from exports and 60%from domesticsales2.Customer listDomestic customers a
28、re the Betagro group,Thai Feed Mill,Vet Agritech,Saha Farms,Krungthai Feed Mill,and the PP group.Foreign customers are CV.Makmur Jaya Abadi(Indonesia)and GremontAgrochem(Malaysia).Benefits from CT acquisition1.Profit sharing:As CTs net profit is expected to be THB70m/year,KCE will receive around THB
29、68m/year or THB15-20/quarter(ourestimate is THB17m/quarter).2.Convert scrap disposal costs to revenue.3.Indirect outsourcing benefit as CT is a distributor of AlkalineEtching chemicals used by KCE,which will thus lower productioncosts and reduce the need for raw material outsourcing.4.Help lower the
30、 volatility of copper prices.Changes in copperprices will impact KCEs earnings;however,this will benefit CT,as CT can adjust product prices up or down,depending upon thecopper price movements.These issues are likely to increase the KCE gross margin by 1%from thecurrent level of 18-19%to 19-20%.,21 D
31、ecember 2012,Page 4 of 13,KCE Electronics(KCE)Big changes in 2012Expect 4Q12s norm profit to surge by 309%QoQKCE posted a normalised loss of THB227m during 4Q11-2Q12(excluding flood compensation and F/X gains)as the flood closed theKCE Technology plant at the Hi-tech Industrial Estate in late 2011.K
32、CETechnology is the main PCB production plant:revenue from this plantaccounts for 40-50%of total revenue.The flood also drove expensesupward;we expect the SG so a higher gross margin can beexpected.It will start contributing revenue for KCE from September 2012,with additional revenue of around USD5-
33、10m/year.However,this clientmay choose do business with other suppliers,if they offer a lower pricethan KCE.Lower scrap rate than goalKCE production plants are KCE Electronics(PLC)in Lat KrabangIndustrial Estate,KCE International in Samut Prakarn,and KCETechnology at the Hitech Industrial Estate.KCE
34、 Technology thatcontributes the highest revenue of around 40-50%has the lowest grossmargin due to the many maintenance shutdowns and the flood impact(the only plant affected).However,the replacement of equipment hashelped to bring up production line efficiency,while lowering the reject ratefrom a hi
35、gh 8.35%in 2011 to only 5%in 2012.The reject rate is now only4.3%.However,we have kept our conservative with a forecast rate of 5%for 2013.,21 December 2012,Page 5 of 13,KCE Electronics(KCE),Table 1:Scrap rates&revenue portion,Table 2:Utilisation rates,Scrap rateKCE,20094.3%,20104.9%,20114.9%,KCE In
36、tlKCE Technology,0.0%7.3%,3.0%7.5%,2.6%8.3%,%of UtilisationKCE,200986.2%,201094.9%,201198.7%,KCE Intl,0.0%,72.2%,85.8%,Rev portionKCE,200942.4%,201034.3%,201136.2%,KCE TechnologyTotal utilisation,74.0%78.6%,76.4%80.8%,64.7%79.5%,KCE IntlKCE TechnologySource:Company report.,0.0%57.6%,21.8%44.0%,26.4%
37、37.4%,Source:Company report.,Full benefit seen in 2013Cut daily workforce by 30%KCE managed to turn the flood crisis into a good opportunity to upgrademachinery,which has also helped to reduce labour from 2,380employees per day to 1,650(-31%).The company aims to cut the labourforce to 1,700 for norm
38、al periods and 1,800 labourers during the highseason.The impact of the increased minimum wage to THB300/day innext year has been limited so far for KCE,as KCE already paid atTHB305/day.Cut operational costsWith new and more advanced tech machinery,KEC is able to reduce thereject rate by increasing t
39、he sizes of circuit wafers as each panel/wafer(1panel has many boards)from 2.1 sq ft per 1 panel to 4 sq ft,hencereducing the copper frame size.The larger panels boost gross margin byreducing raw materials by 7-10%.The new equipment can fit 6 PCB ononly 1 panel and lower overhead costs.Moreover,the
40、new machineryalso helps to the scrap rate to decline.Higher gross margin with record-high net profitWe project that 2013F net profit will recover and break the previous highof 7%due to the absence of any flood-related expenses.Moreover,theCT acquisition will generate around THB68m/year to KCE,which
41、will berecognised from 4Q12 onward.In 2013F,we project the norm profit toreach a record high of THB604m,up by 259%YoY for an implied EPS ofTHB1.29.We expect the 2013F dividend payout to be THB0.51/share,ora 5.0%yield.Chart 5:Recurring net profit vs.gross profit margin,700600500400300200,122,18.8%,45
42、3 19.6%,17.3%,262,19.1%,604,19.7%,660,20.4%,21.0%20.0%19.0%18.0%17.0%,100-,46,16.0%15.0%,2009,2010,2011,2012E,2013E,2014E,21 December 2012,Recuring net profitSource:KCE,KELIVE Research.,Gross profit margin,Page 6 of 13,(US$/Euro),4/9/09,5/7/09,6/4/09,7/2/09,7/30/09,8/27/09,9/24/09,10/22/09,11/19/09,
43、12/17/09,1/15/10,2/12/10,12/3/10,9/4/10,5/7/10,6/3/10,7/1/10,7/29/10,8/26/10,9/23/10,10/21/10,11/18/10,12/16/10,1/13/11,2/10/11,3/10/11,4/7/11,5/5/11,6/2/11,7/1/11,7/29/11,8/26/11,9/23/11,10/21/11,11/18/11,12/19/11,1/16/12,2/13/12,3/12/12,4/9/12,5/7/12,6/4/12,7/2/12,7/30/12,8/27/12,9/24/12,KCE Elect
44、ronics(KCE)RisksWeak European economy increasing European car demandAbout 65%of KCEs revenue comes from auto components for Europeancar makers,with BOSCH being the major customer.Despite Europesweak economy,BOSCHs earnings are still growing well,as its finalproducts are sold worldwide,not just in Eu
45、rope.BOSCHs sales inemerging markets are still high with double-digit growth.In 2011,sales in Europe grew by 9.6%YoY to EUR30.4b,increasing tothe pre-US crisis level once again after 1997.US sales grew by 6.9%YoY vs.Chinese sales(+13%YoY)and Indian sales(+14%).We expectBOSCHs sales to expand continu
46、ously,driven by higher consumerpurchasing power in emerging market countries and the weaker euro.Chart 6:EURO/US$1.551.50EURO Slide,1.45,Will KCE profit break,new high in 2013?1.401.351.301.25,1.20,EURO slide,KCE Profit break,record in 20101.15Source:BizNewsValuationWe have valued KCE by the Relativ
47、e Approach method,based on a PEratio,as we expect earnings to recover in 2H12 and go back on track in2013.We see the Relative Approach method as being the mostappropriate approach,as technology keeps changing.The share pricewill best describe performance within a 6-12 month period,not the longterm;t
48、hus,a DDM or DCF seems inappropriate.Table 3:Valuation tableEPS,2012,2013,2014,PE9101112,0.203.23.63.94.3,1.0411.612.914.215.4,1.0712.714.115.516.9,Source:KELIVE Research estimates.With the resumption of normal output,existing customers have returnedwith new orders.The new equipment has increased ef
49、ficiency and,21 December 2012,Page 7 of 13,KCE Electronics(KCE)reduced waste and rejects.The CT purchase will create a new profitstream and more revenue,which will benefit KCE from 2013 onwards.We thus believe that KCEs profit will reach a record-high once again in2013.Based on a forward PER of 10 x
50、,our target price is THB12.90,withan impressive upside of 26%.We are initiating coverage with a Buy call.Chart 7:KCE Forward PER band,16,Bt,14x,1412x1210 x10,8,8x,6x6420,2006,2007,2008,2009,2010,2011,2012F,2013F,Source:KELIVE Research estimates.,21 December 2012,Page 8 of 13,0,KCE Electronics(KCE)KC
