Steep gross margin decline in 2H12 mostly offset bydisposal gains with a little help from lower opex
Growth outlook stronger but margin unlikely to rebound
Remain N (remove V-flag); raise 2013e revenue 6% but cut2013e EPS 9%; TP now HKD4.1 (from HKD4.5), still based on10x 2013e EPS
Disposal gains protect bottom line from steep GM decline. Kingboard Laminates (KBL)
reported mostly in-line (though slightly ahead of consensus) 2012 results with revenue ofHKD12.5bn (-5.5% y-o-y) and EPS of HKD0.39 (HSBCe HKD0.40 and consensusHKD0.37). Gross margin for the full year fell sharply to 15.4% (down from 17.1% in 2011),with 2H12 declining 330bps h-o-h to 13.8%. This 2H12 decline came despite ASP beingslightly higher than 1H12 and raw copper prices mostly flattish. Management attributed higheroperating costs, including labour, electricity and water, for the poor profitability. Loweroperating expense helped to partially offset but the bottom line remained intact largely due tonearly HKD120m (c10% of net profit) of various disposal gains.
Growth outlook stronger but margin unlikely to rebound. Management sees animproving demand environment for 2013 which is reflected in the plans to increasecapacity by c11%. With overall utilization rate slightly below 80% in 2012, this wouldsuggest opportunity for 10-15% y-o-y unit volume growth. We remain on the conservativeside of this range and now model 10% y-o-y revenue growth to HKD13.8bn (6% higherthan our prior estimate). We believe that eroding profitability is of greater concern though.While we model a modest margin rebound off 2H12 levels, we lower 2013e EPS by 9% toHKD0.41 as we lower 2013e gross margin by 250bps to 15.1% (down 30bps y-o-y).
Remain Neutral. We cut our target price by 9% (in line with our 2013e EPS cut) to HKD4.1(from HKD4.5). We’re impressed by management’s efforts to grow revenue in what we viewas an extremely challenging global PCB environment. While an easing of cost pressure wouldbe a clear positive catalyst for shares, we unfortunately view that as unlikely and remainNeutral. As we have modelled growth conservatively, potential upside to revenue could beanother positive catalyst for shares. Copper prices have remained largely stable recently butshould prices begin to rise again, we would expect further downside risk to margin.