KCE Electronics

KCE Electronics Plc (KCE) 
Investment thesis
Our meeting with executives yesterday confirmed our view over KCE’s strong profitability profile. We expect new records to be posted for 3Q13 for sales, GM and core earnings. 4Q13 sales will soften on seasonality, but will rise robustly YoY. Moreover, capacity expansion will enable further sales growth over the long-term—KCE currently runs at nearly full capacity. In order to reflect an upgraded margin assumption, we have revised up our core earnings forecasts by 3% for FY13 and by 1% for FY14. We have also increased our YE14 target price slightly to Bt21.40 (pegged to a core PER of 11.6x; PEG of 0.9x) from 21.10 previously. Our BUY rating stands.
Record core earnings ahead
We expect KCE (on Nov 7 or 8) to post record core earnings of Bt309m for 3Q13, up by 804% YoY and 30% QoQ. As the third-quarter is generally high season, the mean group capacity utilization rate was 95%. The reported top-line should be Bt2.4bn, up by 39% YoY and 8% QoQ. We assume GM of 27.1%, up from 24.9% in 2Q13 and 18% in 3Q12 on the twin effects of baht depreciation and a record GM at KCE Tech. There was an FX gain of about Bt10m to be booked, which should boost net profit to Bt319m, up 31% YoY (despite the high base set by 3Q12, when an insurance payout of about Bt116m was booked) and 62% QoQ.
QoQ drop in 4Q13 on seasonality, but robust YoY growth
Management guides for slippage in PCB sales (to about US$70m) in 4Q13 on seasonality. However, on a YoY basis, PCB sales will see growth of around 15% for the quarter. KCE is upbeat about the prospects for FY14, citing that the both new and existing clients are looking to expand orders, especially automotive customers. This is in line with research by Prismark (an electronics consultancy), which expects global automotive PCB sales to achieve the strongest growth of all PCB applications—a 2012-17 CAGR of 5.9% (Figure 3). Management expects all factories to hit full capacity runs during 1Q14-3Q14 before the new capacity starts operating in 4Q14.
New capacity—short-term GM squeeze for long-term gain
The capacity expansion will allow the group to expand sales over the long-term, but capacity expansion will come at the expense of slimmer GM for a short period. Management said that it is too early to accurately estimate the scale of profit squeeze during the first stage of COD in 4Q14, as neither orders tied to the new capacity nor the investment cost have yet been finalized. However, using KCE Tech as benchmark, the firm anticipates that the plant will break even in 1Q15 (six months after COD)—sooner than our assumption of 3Q15. We roughly estimate that the Lardkrabang plant will squeeze KCE group’s GM to about 21.5% from a normal range of 24-27% (still high compared with its historical average of only 18.2%).

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