KCE Electronics

KCE Electronics Plc (KCE)

All set for greater efficiency at KCE-Tech. Based on a recent conference call with
KCE management, the big changes at KCE-Tech are – as planned – generating higher
efficiency in 4Q12 with defect rate cut to below 5% from 8-9% before the flooding.
Changes behind this include a new panel to reduce waste, new handling processes to
reduce defects and facility improvement to reduce utility expenses. As KCE-Tech is the
biggest plant, contributing about half of total capacity, the 3-4% reduction in its defect
rate alone adds a high 24-32% to the company’s earnings (assuming full utilization rate
and the company’s net margin of 6.2% in 2010).

Earnings to outshine peers in 4Q12F. Most electronics companies under our
coverage are likely to post a less exuberant performance from both seasonality and
customer lack of confidence in the macro outlook for the US and Europe. KCE,
however, is positioned to outdo peers with strong earnings recovery to ~Bt120mn core
profit (a ten-quarter high), thanks to: 1) greater production efficiency and defect
reduction at KCE-Tech, 2) orders from new clients and 3) ~Bt15mn earnings
contribution from Chemtronics Technology (Thailand) Ltd., a chemical and copper
recycling business bought on Oct 2.

Expect new earnings record of Bt600mn in 2013F. KCE’s management said that
orders on hand indicate that sales will continue to grow in 1Q13F. With new
customers, the post-flood return of orders from existing customers plus the big
improvement in efficiency at KCE-Tech, we expect KCE to post a new high for earnings
of Bt600mn or Bt1.27/share in 2013F. We do not feel our forecast is aggressive when
compared with its Bt181mn earnings in 1Q10 (annualized to Bt724mn) when KCE-Tech
did not have its big defect problem.

Reaffirm Buy and Bt11.5 TP. As an earnings turnaround play, we maintain Buy and a
2013 TP of Bt11.5 based on 9x PE, which is the sector’s -0.5SD ten-year average.