Lower copper prices to boost profitability, though expect larger impact in 2H13...
recent share sell off a good buying opportunity
Up to OW from N. Raise 2013e EPS 6% to HKD0.43 on higher GM. TP now HKD4.3 (HKD4.1) still based on 10x 2013e EPS
Lower copper prices a margin boon... copper prices have declined 11% year-to-date with the bulk of this decline coming since mid April (down 9% since 12 April). We see significant gross margin upside for Kingboard Laminates (KBL) as copper accounts for 40-50% of total cost of goods. The company will need to first work through current (higher cost) inventory so we expect greater margin upside to accrue in 2H13. Our 1H13e gross margin changes only slightly (up 20bps to 14.9%) but we increase our 2H13e gross margin by 190bps to 17.4%. We believe our new margin forecasts are conservative as we have factored in just a 6% decline in copper prices.
recent share sell off a buying opportunity. KBL shares have declined 7% since 12 April, in line with the copper decline of 9% but significantly worse than the HSI which has declined by only 1%. This share price reaction contradicts what we believe should be an inverse correlation between copper prices and company fundamentals (and thus share price). It's possible that the market has misread this correlation as this recent copper price decline has been part of broader commodities weakness, which does have potential to negatively impact KBL's parent company Kingboard Chemical (148 HK, N(V), HKD20.85, TP HKD26). While KBC generates 45% of total revenue from its chemicals business, commodity pricing is purely a cost driver for KBL and has relatively low impact on the revenue line.
Upgrade to OW from N. We raise our 2013e EPS by 6% to HKD0.43 while leaving our 2013e revenue unchanged at HKD13.8bn (+10% y-o-y). The increase to our earnings estimate is driven entirely by lower copper prices and higher gross margin and we now model full-year 2013e gross margin of 16.2%, up from 15.1%. Our new target price of HKD4.3 (up from HKD4.1) remains based on 10x 2013e EPS.