November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer 1 Neutral‧Maintained Price as of 7 Nov 2018 31.00 12M target price (Bt/shr) 35.00 Unchanged/Revised up (down) (%) (12.5) Upside/downside (%) 12.9 Key messages KCE’s earnings outlook is obscured by the introduction of the Worldwide harmonized Light vehicles Test Procedure (WLTP) as it would impact European car makers, which are the company’s key clients. The uncertainty over how long it will take to recover causes the sales outlook to be vague. We cut our 2018-2020 earnings forecasts by 8%, 17%, and 16% as we assume lower sales and gross margin. We also de-rate PER by 0.5 S.D to reflect the negative issues. We maintain a rating of Neutral and roll our target price over to end-2019 at Bt35.00, based on PER of 16.5X (+0.5 S.D. sector average). Trading data Mkt cap (Btbn/US$mn) 36.4/909 Outstanding share (mn) 1,173 Foreign ownership (mn) 290 3M avg. daily trading (mn) 6 52-week trading range (Bt) 30.1 -47.5 Performance (%) 3M 6M 12M Absolute -30.7 -14.2 - 30.7 Relative -28.8 -9.6 - 29.1 Quarterly EPS EPS Q1 Q2 Q3 Q4 2015 0.45 0.43 0.50 0.58 2016 0.65 0.69 0.67 0.59 2017 0.56 0.57 0.52 0.51 2018 0.44 0.48 0.48 Share price chart (40) (25) (10) 5 20 25 30 35 40 45 50 55 Nov-17 Jan-18 Mar-18 Jun-18 Aug-18 Nov-18 Share Price Price performance relative to SET Source: SET Cloud cover Event Company update. Impact One-time impact from WLTP, but time to recover remains uncertain, leaving the sales outlook remain vague Though the introduction of the Worldwide harmonized Light vehicles Test Procedure (WLTP) would be a short-term hiccup dragging on car sales in Europe and decreasing PCB orders for KCE, there is uncertainty over how long the recovery will take. Europe is a dominant market for KCE accounting for ~47.3% of total 2017 sales. Coupled with entering the low season in 4Q18, we cut 2018-2020 sales in US dollar terms by 6-10%. Toned down gross margin by 1.5ppts-2.0ppts in 2018-2020 to reflect lower production efficiency on lower sales Based on our current copper assumption of ~US$6,200/ton (vs current market price of ~US$6,200/ton) and exchange rate of Bt32.5/US$ (vs current market price of Bt32.8/US$), we foresee less impact to gross margin from those two factors. Instead, production efficiency from lower sales could cause the gross margin to soften. Taking a conservative view, we toned down 2018-2020 gross margin by 1.5ppts-2.0ppts. Revised down 2018-2020 earnings by 8%, 17% and 16% Taking into account the sales cut and revised down gross margin assumption, we revised down 2018-2020 net profits by 8%, 17% and 16%. De-rate by 0.5 S.D. to 16.5x to reflect uncertainty on specific issue The impact from WLTP is likely to be a specific negative factor to KCE and there is uncertainty on how long it will take to recover, leaving an unclear earnings outlook. As a result, we de-rated multiple PER from 18.0x (+1.0 S.D. sector average) to 16.5x (+0.5 S.D. sector average). We agree that KCE deserves to trade at some premium level given its involvement in the automotive sector (~70% of total revenue). Valuation & Action We maintain a rating of Neutral and rolled our target price over to end-2019 at Bt35.00 based on PER 16.5x (+0.5 S.D. sector average). Risks Natural disasters, unplanned plant shutdowns, customers shifting suppliers, high raw material prices and Bt/US$ appreciation (our assumption is Bt32.5/US$ in 2018 and Bt32.6/US$ in 2019-2020). Key financials and valuations COMPANY UPDATE Thailand KCE Electronics (KCE.BK/KCE TB)* Chananthorn Pichayapanupat, CFA 66.2658.8888 Ext.8849 [email protected]
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November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
1
Neutral‧Maintained
Price as of 7 Nov 2018 31.00 12M target price (Bt/shr) 35.00 Unchanged/Revised up (down) (%)
(12.5)
Upside/downside (%) 12.9
Key messages
KCE’s earnings outlook is obscured by the introduction of the Worldwide harmonized Light vehicles Test Procedure (WLTP) as it would impact European car makers, which are the company’s key clients. The uncertainty over how long it will take to recover causes the sales outlook to be vague. We cut our 2018-2020 earnings forecasts by 8%, 17%, and 16% as we assume lower sales and gross margin. We also de-rate PER by 0.5 S.D to reflect the negative issues. We maintain a rating of Neutral and roll our target price over to end-2019 at Bt35.00, based on PER of 16.5X (+0.5 S.D. sector average). Trading data Mkt cap (Btbn/US$mn)
36.4/909
Outstanding share (mn)
1,173
Foreign ownership (mn)
290
3M avg. daily trading (mn)
6
52-week trading range (Bt)
30.1 -47.5
Performance (%) 3M 6M 12M
Absolute -30.7 -14.2 -
30.7
Relative -28.8 -9.6 -
29.1
Quarterly EPS EPS Q1 Q2 Q3 Q4
2015 0.45 0.43 0.50 0.58
2016 0.65 0.69 0.67 0.59
2017 0.56 0.57 0.52 0.51
2018 0.44 0.48 0.48 Share price chart
(40)
(25)
(10)
5
20
25
30
35
40
45
50
55
Nov-17 Jan-18 Mar-18 Jun-18 Aug-18 Nov-18
Share Price Price performance relative to SET Source: SET
Cloud cover Event Company update.
Impact One-time impact from WLTP, but time to recover remains uncertain, leaving the sales outlook remain vague Though the introduction of the Worldwide harmonized Light vehicles Test Procedure (WLTP) would be a short-term hiccup dragging on car sales in Europe and decreasing PCB orders for KCE, there is uncertainty over how long the recovery will take. Europe is a dominant market for KCE accounting for ~47.3% of total 2017 sales. Coupled with entering the low season in 4Q18, we cut 2018-2020 sales in US dollar terms by 6-10%.
Toned down gross margin by 1.5ppts-2.0ppts in 2018-2020 to reflect lower production efficiency on lower sales Based on our current copper assumption of ~US$6,200/ton (vs current market price of ~US$6,200/ton) and exchange rate of Bt32.5/US$ (vs current market price of Bt32.8/US$), we foresee less impact to gross margin from those two factors. Instead, production efficiency from lower sales could cause the gross margin to soften. Taking a conservative view, we toned down 2018-2020 gross margin by 1.5ppts-2.0ppts.
Revised down 2018-2020 earnings by 8%, 17% and 16% Taking into account the sales cut and revised down gross margin assumption, we revised down 2018-2020 net profits by 8%, 17% and 16%.
De-rate by 0.5 S.D. to 16.5x to reflect uncertainty on specific issue The impact from WLTP is likely to be a specific negative factor to KCE and there is uncertainty on how long it will take to recover, leaving an unclear earnings outlook. As a result, we de-rated multiple PER from 18.0x (+1.0 S.D. sector average) to 16.5x (+0.5 S.D. sector average). We agree that KCE deserves to trade at some premium level given its involvement in the automotive sector (~70% of total revenue).
Valuation & Action We maintain a rating of Neutral and rolled our target price over to end-2019 at Bt35.00 based on PER 16.5x (+0.5 S.D. sector average).
Risks Natural disasters, unplanned plant shutdowns, customers shifting suppliers, high raw material prices and Bt/US$ appreciation (our assumption is Bt32.5/US$ in 2018 and Bt32.6/US$ in 2019-2020). Key financials and valuations
COMPANY UPDATE Thailand
KCE Electronics (KCE.BK/KCE TB)*
Chananthorn Pichayapanupat, CFA 66.2658.8888 Ext.8849 [email protected]
December 28, 2016 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
3
Short term hiccup from WLTP, but recovery time remains uncertain, leaving vague sales outlook WLTP is used to measure fuel consumption and CO2 emissions from passenger cars, as well as their pollutant emissions. It was implemented on September 1, 2018, and caused European car makers to pause production to adjust their car models. According to a report by European Automobile Manufacturers Association, new passenger car registrations in the EU dropped 23.5% YoY due to the introduction of WLTP. This caused a surge in registrations in August of 31.2% YoY (Figure 2).
The plunge in registrations of new passengers cars in the EU could explain KCE’s weak top line in the third quarter as Europe is the company's main market. The European market accounted for 47.3% of the company’s total sales in 2017 but fell to 39.7% in 3Q18 (Figure 3 - Figure 4).
We believe WLTP would be a one-time negative impact, but the recovery time is an uncertainty. Under our best case scenario, we expect it to take at least 1-2 quarters before things return to normal, leaving a vague sales outlook for the company in 2019. Coupled with entering the low season in fourth quarter, 4Q18 sales in US dollar terms are expected to soften both QoQ and YoY.
Cut 2018-2020 top line estimates by 6%-10% In order to take into account the low season in the last quarter and uncertainty over the length of time for recovery from the introduction of WLTP, we cut our 2018-2020 sales forecasts by 6%-10% and expect sales to grow of 4% in 2018, 7% in 2019, and 8% in 2020.
Figure 1: WLTP Figure 2: New passenger car registrations in the EU fell 23.5% in
September 2018
Source: WLTPFact.eu, KGI Research Source: European automobile manufacturers association, KGI Research
Figure 3: Sales breakdown by location in 2017 Figure 4: Sales breakdown by location in 3Q18
Percent Percent
47.3
14.7
29.2
8.8
Europe
US
Thailand
Asia
39.7
15.5
35.4
9.4
Europe
US
Thailand
Asia
Source: Company data, KGI Research Source: Company data, KGI Research
November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
4
Less negative impact to gross margin from copper and exchange rate Copper price and the baht appreciation have been the main factors pressuring the company’s gross margin since 2017, as can be seen by the drop in KCE’s gross margin from 36% in 3Q16 to a low of 25.8% in 1Q18. The price of copper rose from about US$4,000/ton to about US$7,000/ton while the baht strengthened from ~Bt35/US$ to ~Bt32/US$. Recently, the price of copper and exchange rate have been less volatile than in the past and may have less of a negative impact on the company’s gross margin. However, the key concern would transfer to managing utilization rate due to lower sales.
Toned down 2018-2020 gross margin assumptions by 1.5ppts-2.0ppts We revised down our 2018-2020 gross margin assumptions by 1.5ppts-2.0ppts to reflect lower production efficiency on softer sales. Meanwhile, we believe our assumptions on copper price of ~US$6,200/ton and exchange rate of Bt32.5/US$ are still valid as the current market price of copper is ~US$6,200/ton and the exchange rate is Bt32.8/US$.
Figure 5: Exchange rate and gross margin Figure 6: Copper price and gross margin
Source: Biznews, Company data, KGI Research Source: Biznews, Company data, KGI Research
Revised down 2018-2020 earnings by 8%, 17% and 16% We revised down our 2018-2020 net profit forecasts by 8%, 17% and 16%, respectively, to take into account top line being revised down 6%-10% and gross margin being revised down 1.5ppts -2.0 ppts.
November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
5
Figure 8: Comparing assigned PER
PER, times
18.0
17.3
16.5 16.5
DELTA HANA KCE SVI
Source: Company data, KGI Research
De-rated multiple PER by 0.5 S.D. to 16.5x (+0.5 S.D. sector average) In our report Electronics Sector: The last man pays, published on September 11, 2018, we recommended investors to have exposure in the electronics sectors in the second half of this year in order to enjoy the rally leg then trim positions at the end of this year due to i) concern about prolonged upcycle, ii) concern about global trade, and iii) global semiconductor sales normally softening at the end of the year. The industry viewpoint seems to be in-line with our view. However, the impact from WLTP is likely to be a specific negative factor to KCE and there is uncertainty on how long it will take to return to a normal situation. As a result, we de-rated multiple PER from 18.0x (+1.0 S.D. sector average) to 16.5x (+0.5 S.D. sector average). We agree that KCE deserves to trade at some premium level given its involvement in the automotive sector (~70% of total revenue).
Maintain a Neutral rating with a 2019 target price of Bt35.00 We maintain a rating of Neutral and rolled our target price over to end-2019 at Bt35.0 based on PER 16.5x (+0.5 S.D. sector average).
November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
6
Figure 9: Company profile Figure 10: Earnings rebased in 2018
KCE Electronics PCL (KCE), originally known as Kuang Charoen Electronics Company Limited, was listed on November 5, 1985, with initial registered capital of Bt12mn. The company's core business is to produce and distribute custom printed circuit boards (PCBs), which are manufactured from copper clad laminate under the KCE trademark. KCE's PCB products are well-known and used in a variety of applications such as automotive, industrial, computer, and telecom system. Its customers include some of the world's biggest names.
November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
8
Balance Sheet Profit & Loss As of 31 Dec (Bt mn) 2016 2017 2018F 2019F 2020F
November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
9
KCE Electronics– Recommendation & target price history
November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
10
Corporate Governance Report of Thai Listed Companies
Source: www.thai-iod.com
Disclaimer: The disclosure of the survey result of the Thai Institute of Directors Association ("IOD") regarding corporate governance is made pursuant to the policy of the Office of the
Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the Stock Exchange of Thailand and the Market for Alternative Investment
disclosed to the public and able to be accessed by a general public investor. The result, therefore, is from the perspective of a third party. It is not an assessment of operation and is not
based on inside information. The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may be changed after
that date or when there is any change to the relevant information. Nevertheless, KGI Securities (Thailand) Public Company Limited (KGI) does not confirm, verify, or certify the accuracy and
completeness of such survey result.
Companies with Excellent CG ScoringStock Company name Stock Company name Stock Company name
EGCO ELECTRICITY GENERATING KTB KRUNG THAI BANK TISCO TISCO FINANCIAL GROUP
November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
11
Level 5: ExtendedStock Company name Stock Company name Stock Company name
CPN CENTRAL PATTANA SCC THE SIAM CEMENT
Level 4: CertifiedStock Company name Stock Company name Stock Company nameADVANC ADVANCED INFO SERVICE IFEC INTER FAR EAST ENGINEERING SVI SVI
BBL BANGKOK BANK KBANK KASIKORNBANK TCAP THANACHART CAPITAL
DCC DYNASTY CERAMIC KKP KIATNAKIN BANK TISCO TISCO FINANCIAL GROUP
DRT DIAMOND ROOFING TILES KTB KRUNG THAI BANK TMB TMB BANK
EGCO ELECTRICITY GENERATING MINT MINOR INTERNATIONAL
ERW THE ERAWAN GROUP SCB THE SIAM COMMERCIAL BANK
Level 3: EstablishedStock Company name Stock Company name Stock Company nameAAV ASIA AVIATION DTAC TOTAL ACCESS COMMUNICATION PACE PACE DEVELOPMENT CORPORATION
ANAN ANANDA DEVELOPMENT GFPT GFPT PS PRUKSA REAL ESTATE
AP ASIAN PROPERTY DEVELOPMENT GL GROUP LEASE RATCH RATCHABURI ELECTRICITY GENERATING HOLDING
BA BANGKOK AIRWAYS GLOW GLOW ENERGY ROBINS ROBINSON DEPARTMENT STORE
BDMS BANGKOK DUSIT MEDICAL SERVICES GPSC GLOBAL POWER SYNERGY SAMART SAMART CORPORATION
BIGC BIG C SUPERCENTER HMPRO HOME PRODUCT CENTER SPALI SUPALAI
BJCHI BJC HEAVY INDUSTRIES KTC KRUNGTHAI CARD STEC SINO-THAI ENGINEERING AND CONSTRUCTION
CENTEL CENTRAL PLAZA HOTEL LPN L.P.N. DEVELOPMENT TASCO TIPCO ASPHALT
CHG CHULARAT HOSPITAL MAKRO SIAM MAKRO TMT THAI METAL TRADE
CK CH. KARNCHANG MODERN MODERNFORM GROUP TPCH TPC POWER HOLDING
CKP CK POWER NOK NOK AIRLINES WHA NOK AIRLINES
Level 2: DeclaredStock Company name Stock Company name Stock Company nameAOT AIRPORTS OF THAILAND GUNKUL GUNKUL ENGINEERING QH QUALITY HOUSES
BH BUMRUNGRAD HOSPITAL ILINK INTERLINK COMMUNICATION TRT TIRATHAI
GLOBAL SIAM GLOBAL HOUSE MTLS MUANGTHAI LEASING TVO THAI VEGETABLE OILTRUE
Level 1: CommittedStock Company name Stock Company name Stock Company nameCBG CARABAO GROUP RS RS SAWAD SRISAWAD POWER 1979
MAJOR MAJOR CINEPLEX GROUP
No progressStock Company name Stock Company name Stock Company nameBCH BANGKOK CHAIN HOSPITAL CPALL CP ALL WORK WORKPOINT ENTERTAINMENT
BEM BANGKOK EXPRESSWAY AND METRO LPH LADPRAO GENERAL HOSPITAL
Anti-corruption Progress Indicator
Source: www.cgthailand.org
Disclaimer: The disclosure of the Anti-Corruption Progress Indicators of a listed company on the Stock Exchange of Thailand, which is assessed by the relevant institution as disclosed by
the Office of the Securities and Exchange Commission, is made in order to comply with the policy and sustainable development plan for the listed companies. The relevant institution made
this assessment based on the information received from the listed company, as stipulated in the form for the assessment of Anti-corruption which refers to the Annual Registration
Statement (Form 56-1), Annual Report (Form 56-2), or other relevant documents or reports of such listed company . The assessment result is therefore made from the perspective of a third
party. It is not an assessment of operation and is not based on any inside information. Since this assessment is only the assessment result as of the date appearing in the assessment
result, it may be changed after that date or when there is any change to the relevant information. Nevertheless, KGI Securities (Thailand) Public Company Limited (KGI) does not confirm,
verify, or certify the accuracy and completeness of the assessment result.
November 8, 2018 *The Company may be issuer of Derivative Warrants on these securities. http://research.kgi.com; Bloomberg: KGIT <GO> Please see back page for disclaimer
12
KGI Locations China Shanghai
Room 1507, Park Place, 1601 Nanjing West Road, Jingan District, Shanghai,
PRC 200040
Shenzhen
Room 24D1, 24/F, A Unit, Zhen Ye Building, 2014 Bao’annan Road,
41/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong
Telephone 852.2878.6888 Facsimile 852.2878.6800
Thailand Bangkok
8th - 11th floors, Asia Centre Building
173 South Sathorn Road, Bangkok 10120, Thailand
Telephone 66.2658.8888 Facsimile 66.2658.8014
Singapore 4 Shenton Way #13-01 SGX Centre 2
Singapore 068807
Telephone 65.6202.1188 Facsimile 65.6534.4826
KGI's Ratings Rating Definition
Outperform (OP) The stock's excess return over the next twelve months is ranked in the top 40% of KGI's coverage universe in the related market (e.g. Taiwan)..
Neutral (N) The stock's excess return over the next twelve months is ranked in the range between the top 40% and the bottom 40% of KGI's coverage universe in the related market (e.g. Taiwan)
Under perform (U) The stock's excess return over the next twelve months is ranked in the bottom 40% of KGI's coverage universe in the related market (e.g. Taiwan).
Not Rated (NR) The stock is not rated by KGI.
Restricted (R) KGI policy and/or applicable law regulations preclude certain types of communications, including an investment recommendation, during the course of KGI's engagement in an investment banking transaction and in certain other circumstances.
Excess return = 12M target price/current price-
Note When an analyst publishes a new report on a covered stock, we rank the stock's excess return with those of other stocks in KGI's coverage universe in the related market. We will assign a rating based on its ranking. If an analyst does not publish a new report on a covered stock, its rating will not be changed automatically.
Disclaimer KGI Securities (Thailand) Plc. ( “The Company” ) disclaims all warranties with regards to all information contained herein. In no event shall the Company be liable for any direct, indirect or any damages whatsoever resulting from loss of income or profits, arising by utilization and reliance on the information herein. All information hereunder does not constitute a solicitation to buy or sell any securities but constitutes our sole judgment as of this date and are subject to change without notice.