Equity Research Information Technology Kingboard Laminates (1888 HK) Accumulate (initiation) Target price: HK$3.44 Value and dividend yield play; initiate at Accumulate Initiation at Accumulate rating We initiate coverage of Kingboard Laminates (KBL) with an Accumulate rating given 1) stable business performance in 2H14 and positive 2015 business outlook 2) over 15% share price correction since its peak in early Sep due to broad market movements rather than companyspecific issues and 3) its attractive valuation (single digit 2015 P/E) and decent dividend yield (over 6% dividend yield for 2015). The stock is also under the ShanghaiHong Kong Stock Connect Scheme. We set a twelvemonth target price of HK$3.44, based on 8x 2015E P/E, compared to an eightyear average P/E of 10x. Joseph Ho, CFA SFC CE No. AFP308 josephho@gfgroup.com.hk +852 3719 1030 Ryan Zhu SFC CE No. BDK820 zhuran@gfgroup.com.hk +86 755 88263160 GF Securities (Hong Kong) Brokerage Limited 2930/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Stock performance (HK$) 3.5 3.0 2.5 Dec13 Mar14 Jun14 Sep14 Dec14 Source: Bloomberg Key data Dec 16 close (HK$) 2.98 Share in issue (m) 3,000 Major shareholder Kingboard Chemical (74.6%) Market cap (HK$bn) 8.9 3M avg. vol. (m) 2.5 52W high/low (HK$) 3.63 /2.61 Source: Bloomberg Global leader in laminates for PCB industry Headquartered in Hong Kong, KBL is the world s leading manufacturer of copperclad laminates (CCL) for use in the printed circuit board (PCB) industry, and has a 14% global market share. KBL s CCLs are used in a wide range of endproduct applications such as PCs, smartphones, base stations and consumer electronic products. KBL s key customers include Unimicron, Tripod, Chin Poon as well as Kingboard Group sister PCB companies (Techwise, Elec & Eltek). KBL has a highly diversified customer mix its top five customers accounted for almost 30% of sales in 2013. Key competitors including Shengyi (600183 CH) in China, Nan Ya Plastics (1303 TT) and ITEQ (6213 TT) in Taiwan and Panasonic in Japan. Vertical integration KBL differentiates itself from other CCL makers with its highly vertically integrated manufacturing facilities. Most upstream materials used to manufacture CCL including copper foils, epoxy resin, glass fibers and glass yarn are produced inhouse. Around 80% of its production facilities are in Guangdong province and the remaining 20% is in Jiangyin, Jiangsu province. Steady 2H14 performance and positive industry outlook for 2015 In 1H14, KBL shipped 45m CCL sheets (+8% YoY). Demand has remained favorable in 2H14; we expect the company to ship 49m sheets during the period, taking fullyear shipments to 94m sheets (+3% YoY). The outlook for the industry in 2015 remains positive, driven by strong demand for smartphones, the buildout of the 4G network in China, and a moderate recovery in the PC market. We forecast output of m CCL sheets for KBL in 2015, up 6% YoY. Blended ASP, however, is likely to trend down on a reduction of input costs, largely due to the fall in copper prices. A value and dividend yield play The stock is trading at 6.9x 2015E P/E and 0.6x P/B. The company is a cash cow for its parent company, Kingboard Chemical (148 HK), which has a 74.6% stake in KBL. KBL maintains a stable dividend stream for shareholders, underpinned by its strong operating cash flow, healthy balance sheet (2014 endjune net gearing of 22%), and stable dividend payout ratio of around 40%. We forecast a 2015 dividend yield of 6.0%. Key risks Slowdown in underlying demand for consumer electronics. Rapid fluctuations in copper prices. Valuation Turnover (HK$ m) YoY chg Net profit (HK$m) EPS (HK$) YoY chg P/E (x) P/B (x) DPS (HK$) Dividend Yield ROE Net gearing 2012 12,483 (5) 1,164 0.39 (12) 7.7 0.8 0.17 5.7 10.3 15.7 2013 12,798 3 1,207 0.40 4 7.4 0.7 0.17 5.7 9.8 21.1 2014E 13,051 2 1,197 0.40 (1) 7.5 0.7 0.18 6.0 9.0 13.8 2015E 13,476 3 1,287 0.43 8 6.9 0.6 0.19 6.5 9.2 7.4 2016E 14,098 5 1,368 0.46 6 6.5 0.6 0.21 6.9 9.3 1.8 (HK) Research Note: Calculated based on diluted shares.
Value and dividend yield play Upstream critical electronic component manufacturer Headquartered in Hong Kong, KBL is the world s leading manufacturer of copperclad laminates for use in the printed circuit board (PCB) industry, and has a 14% global market share. KBL s CCLs are a critical upstream component and are used in a wide range of endproduct applications such as PCs, smartphones, base stations for telecom networks, and consumer electronic products. KBL s key customers include Taiwanese printed circuit board makers Unimicron, Tripod, and Chin Poon as well as sister Kingboard Group PCB companies (Techwise, Elec & Eltek). KBL s has a highly diversified customer mix its largest single customer accounted for 12% of sales in 2013, while the top five customers accounted for almost 30% of sales in 2013. 80% of revenue from CCL Glass epoxy and paperbased copper clad laminates accounted for 80% of group sales in 1H14 (see figure 1). Upstream materials including copper foils, glass yarn, glass fabric and epoxy resin (see figure 3) accounted for 12% of revenue for the period. Figure 1: Sales mix by product (1H14) Figure 2: CCL volume output and ASP Upstream materials 12% Other 7% Property 1% 200 150 111 120 111 111 109 107 140 120 87 79 81 91 94 106 80 60 50 40 Paper laminates 19% Glass epoxy laminates 61% 0 2010 2011 2012 2013 2014E 2015E 2016E 20 Laminate output (no. of sheets m, LHS) Blended ASP (HK$ per sheet, RHS) Figure 3: Key products Copper foils + Glass Yarn Glass fabric + Epoxy resin = Copper clad laminates Sources: Isola, Kingboard, Shengyi Global no. 1 in the laminates industry According to Prismark Partners LLC, KBL has been ranked no.1 in the global laminates world for the ninth consecutive year with a global market share of 14% in 2013 (see figure 4). Key competitors including Ashare listed Guangdongbased Shengyi (600183 CH), the laminates division of chemical group Nan Ya Plastics (1303 TT) and CCL specialist ITEQ (6213 TT) in Taiwan as well as Panasonic Corp in Japan. KBL differentiates itself from small CCL makers with its highly vertically integrated manufacturing facilities. Most upstream materials used to manufacture CCL including copper foils, epoxy resin, glass fibers and glass yarn are produced inhouse. Around 80% of its production facilities are in Guangdong province and the remaining 20% is in Jiangyin, Jiangsu province. Page 2
Figure 4: Global Market share of laminates market (2013) Figure 5: Peer comparison: revenue (HK$bn) Others 51% Kingboard Laminates (China) 14% Shengyi (China) 11% Nan Ya Plastics (Taiwan) 10% 1 13.1 13.2 12.5 12.8 8.3 7.0 7.4 7.7 ITEQ (Taiwan) 6% Panasonic (Japan) 8% 2010 2011 2012 2013 KBL Shengyi Source: Prismark Partners LLC (April 2014) Sources: Company data Steady 2H14 performance and positive outlook in 2015. In 1H14, KBL shipped 45m CCL sheets (+8% YoY). Demand has remained favorable in 2H14; we expect the company to ship 49m sheets during the period, taking fullyear shipments to 94m sheets (+3% YoY). The outlook for the industry in 2015 remains positive, driven by strong demand for smartphones, the buildout of the 4G network in China, and a moderate recovery in the PC market. We forecast output of m CCL sheets for KBL in 2015, up 6% YoY. Blended ASP, however, is likely to trend down in 2015 on a reduction in input costs, largely due to the fall in copper prices. We expect 2H14 gross profit margin to trend down slightly (see figure 9) compared to 1H14 on yearend discounts aimed at boosting shipments. However, we expect moderate gross profit margin improvement in 2015, underpinned by capacity expansion of glass yarn and glass fabric production, which will further raise the inhouse production ratio for these upstream materials. 1% of revenue from investment properties KBL has rental income from some investment properties in China. Property income in 1H14 amounted to HK$67m, or about 1% of total revenue. In addition, KBL owns a land bank with gross floor area of approximately 1.3m sqm in Kunshan and Jiangyin in Jiangsu province. Property development will be funded from presale proceeds. Figure 8: Yearly sales and margins forecasts Figure 9: Halfyearly sales and margins forecasts 20.0 1 17.1 13.2 15.4 15.6 16.0 16.3 16.4 14.1 12.5 12.8 13.1 13.5 9.3 9.4 9.2 9.5 9.7 18.0 16.0 1 12.0 8.0 6.0 17.3 5.9 9.6 16.0 15.1 16.1 15.9 13.6 6.6 6.3 6.5 6.4 6.6 9.0 9.0 9.8 9.2 9.1 18.0 16.0 1 12.0 8.0 6.0 2011 2012 2013 2014E 2015E 2016E 2.0 1H12 2H12 1H13 2H13 1H14 2H14E 2.0 Sales (HK$ bn) (LHS) GPM (RHS) NPM (%, RHS) Sales (HK$ bn) (LHS) GPM (RHS) NPM (%, RHS) Page 3
Valuation A value and dividend yield play Copper clad laminates makers are trading at an average 2015 P/E of 11.6x (see figure 10). However, KBL is trading at a discount to the industry average. The stock is currently trading at 6.9x 2015E P/E and 0.6x P/B. The company is 74.6% owned by its parent company Kingboard Chemical (148 HK) and is a cash cow for the Kingboard group. KBL maintains a stable dividend stream for shareholders, underpinned by its strong operating cash flow, healthy balance sheet (2014 endjune net gearing of 22%), and stable dividend payout ratio of over 40%. We forecast a 2015 dividend yield of 6.0%. We set a twelvemonth target price of HK$3.44, based on 8x 2015E P/E, compared to an eightyear average P/E of 10x. Figure 10: Valuation peer comparison for global semiconductor equipment makers Market Share price cap P/E (x) P/B (x) Div yield ROE Share price chg Company Stock code (US$m) local CCY 14E 15E 14E 15E 14E 15E 2014E 2015E 1M 3M 6M YTD Copper clad laminates NAN YA PLASTICS 1303 TT 15,383 60.70 14.6 15.6 1.6 1.6 4.3 4.3 11 10 (2) (10) (11) (12) SHENGYI TECH CA 600183 CH 1,800 7.83 17.6 15.3 2.5 2.3 3.3 3.6 13 14 16 13 40 59 KINGBOARD LAMINATES 1888 HK 1,153 2.98 7.5 6.9 0.7 0.6 6.0 6.5 9 9 (7) (11) 3 (9) ITEQ CORP 6213 TT 243 23.25 9.5 8.5 NA NA NA NA NA NA (0) (14) (27) (25) Average 12.3 11.6 1.6 1.5 4.5 4.8 11.0 11.1 Printed circuit board makers IBIDEN CO LTD 4062 JP 2,247 1,730 14.1 18.9 0.8 0.7 1.8 1.7 6 4 (1) (19) (11) (12) UNIMICRON TECHNO 3037 TT 1,141 23.20 30.8 22.3 0.8 0.8 2.2 2.7 2 3 2 (5) (16) 3 TRIPOD TECH CORP 3044 TT 1,048 62.40 12.4 11.1 1.2 1.2 4.5 10 11 5 3 7 17 COMPEQ MFG CO 2313 TT 676 17.75 11.3 9.5 1.2 1.0 3.0 4.5 10 13 3 (5) (14) 2 TTM TECHNOLOGIES TTMI US 585 7.02 15.3 9.0 0.8 0.8 NA NA 5 10 3 (4) (11) (18) Average 16.8 14.2 1.0 0.9 2.7 3.4 6.7 8.1 Sources: Bloomberg, GF Securities, share price as of Dec 16, 2014 Figure 11: Earning per share (HK$) 0.80 0.76 0.70 0.60 0.57 0.60 0.55 0.50 0.44 0.43 0.46 0.40 0.39 0.38 0.40 0.40 0.30 0.20 0.10 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E EPS (HKD) Figure 12: Rolling forward P/E 20.0 18.5 1 2.9 2007 2008 2009 2010 2011 2012 2013 2014 Forward PE (x) +1SD 1SD Figure 13: Book value per share (HK$) 4.8 4.5 4.5 4.3 3.9 3.6 3.5 3.3 3.0 2.8 2.4 2.5 2.3 2.0 1.7 1.5 1.0 0.5 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E BPS (HK$) Figure 14: Rolling forward P/B 4.5 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2007 2008 2009 2010 2011 2012 2013 2014 Forward PB (x) Average 1.5x +1SD 1SD Page 4
Key risks Key risks to our positive outlook include 1) slowdown in underlying demand for consumer electronics and 2) rapid fluctuation in copper prices (copper accounts for about 30% of cost of goods sold). Figure 15: Financial statements Income Statement Balance Sheet Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E Glass/Paper laminates 9,674 10,053 10,470 10,876 11,298 Cash/ST Investments 2,328 2,427 3,362 4,236 5,086 Upstream materials 1,816 1,683 1,482 1,600 1,700 Account receivables 4,638 4,296 4,291 4,430 4,635 Others 993 1,062 991 1,000 1, Inventory 1,259 1,289 1,351 1,391 1,453 Turnover 12,483 12,798 13,051 13,476 14,098 Other Current Assets 2,995 4,015 4,015 4,015 4,015 Gross profit 1,918 1,991 2,089 2,197 2,312 Total current assets 11,220 12,027 13,019 14,072 15,189 Other income 125 172 162 170 170 Property, plant & equip. 6,406 6,629 6,329 6,039 5,759 Selling & distribution exp. (276) (279) (288) (296) (310) Intangible assets 0 0 0 0 0 Admin exp. (420) (437) (452) (458) (465) Other LT Assets 1,648 3,302 3,302 3,302 3,302 Other expenses/gains 89 70 (12) (10) (10) Total Assets 19,274 21,958 22,650 23,413 24,250 Operating profit 1,437 1,518 1,499 1,602 1,697 Finance costs (94) (125) (101) () () ST Debt 1,311 1,593 1,593 1,593 1,593 Share of profits 2 Trade payables 1,488 1,625 1,652 1,700 1,776 Pretax income 1,345 1,393 1,398 1,502 1,597 Other Current Liabilities 444 825 825 825 825 Taxation (180) (183) (193) (207) (220) Total current liabilities 3,243 4,043 4,070 4,118 4,194 Minority interests (2) (3) (8) (8) (8) LT Debt 3,042 3,790 3,790 3,790 3,790 Net profit 1,164 1,207 1,197 1,287 1,368 Other LT Liab 98 101 101 101 101 Minority Interests 1,083 1,106 1,114 1,122 1,130 Shareholders' Equity 11,808 12,918 13,575 14,282 15,035 Total Equity & liabilities 19,274 21,958 22,650 23,413 24,250 Cash Flow Statement Financial Ratio Year end Dec (HK$ m) 2012 2013 2014E 2015E 2016E 2012 2013 2014E 2015E 2016E Pretax profit 1,345 1,393 1,398 1,502 1,597 Margins Tax Paid (180) (183) (193) (207) (220) Gross margin 15.4 15.6 16.0 16.3 16.4 Depr/Amort 709 717 700 690 680 EBITDA margin 17.2 17.5 16.8 17.0 16.9 Change in working capital (776) 449 (30) (131) (191) Operating profit margin 11.5 11.9 11.5 11.9 12.0 Others (354) (1,339) Net margin 9.3 9.4 9.2 9.5 9.7 Operational cash flow 745 1,037 1,875 1,854 1,866 Return/Profitability Capex (367) (346) (400) (400) (400) ROA 6.2 5.9 5.4 5.6 5.7 Assoc, MI, Invsmt (306) (1,019) ROE 10.3 9.8 9.0 9.2 9.3 Investment cash flow (673) (1,365) (400) (400) (400) Balance sheet Net Change in Debt 209 1,030 Net gearing 15.7 21.1 13.8 7.4 1.8 New Capital Current ratio (x) 3.5 3.0 3.2 3.4 3.6 Dividend (85) (102) (540) (579) (616) Working capital Others (474) (536) Days receivable (days) 136 123 120 120 120 Financing cash flow (350) 392 (540) (579) (616) Days inventory (days) 43 44 45 45 45 FX and others 3 35 Days payable (days) 51 55 55 55 55 Chg in Cash (275) 99 935 875 850 Others Beginning cash 2,603 2,328 2,427 3,362 4,236 Effective tax 13.3 13.2 13.8 13.8 13.8 Ending cash 2,328 2,427 3,362 4,236 5,086 Dividend payout ratio 43.8 42.3 45.1 4 4 Page 5
Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between 5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 10% Neutral Expected sector relative performance ranges between 10% and 10% Cautious Sector expected to underperform benchmark by more than 10% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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