Sunday, January 23rd, 2022

The Growth Thesis of Kingboard Laminates (1888 HK) Remains Intact

The Growth Thesis of Kingboard Laminates (1888 HK) Remains Intact,
ASP Hikes On the bright side, Due to market concerns over ASP and demand during a bad season, KBL’s share price has fallen since its peak of HK$19.70. However, based on our channel checks, demand for CCL goods has remained high in 2Q21, with KBL running at full capacity. Meanwhile, ASP increases have been unexpectedly positive.

We remain optimistic about KBL’s prospects, and we expect demand to build up in the second half of the year.

What’s New
• Dealing with non-material unfavorable news from the previous month. The share price of Kingboard Laminates (KBL) has fallen from a high of HK$19.70 to current levels due to the following concerns: a) China’s government is attempting to rein in commodity price increases; and b) the vehicle industry’s sluggish shipment volume in the face of a semiconductor scarcity. Historically, the auto industry has contributed roughly 30% of KBL’s cargo.

• Concerns about commodity price controls are unfounded. The market is wary of the Chinese government’s attempt to control commodity prices, which is one of the drivers of copper clad laminates (CCL) ASP increases. However, we feel that this anxiety is unfounded, given neither our nor the consensus forecasts have factored in further price increases. Despite market worries, KBL increased the FR-4 ASP in May in order to pass on raw material price increases; the ASP is now Rmb240 per piece, up from Rmb200 in 1Q21 and Rmb220 at the end of April. We also note that the greatest driver of price increases is a supply shortfall in glass yarn, glass fabric, and copper foil, which is experiencing a capacity bottleneck; as a result, we expect KBL’s margins will be preserved through 2021.

• Strong overall demand is more than enough to compensate for the auto industry’s downturn. The customary slow season, 2Q, is exacerbated by the vehicle sector’s underperformance as a result of the chip shortage. Capacity utilization, on the other hand, maintained at 100% through 2Q21, owing to overall strong demand for PCB (therefore CCL) from other areas, notably servers, consumer electronics, and home appliances. During the sluggish season, the orders lead time has decreased from three months to a more healthy one month, but this should not be a huge problem because demand should come up in the CCL high season in 2H.

• Expansion into the ultra-thin CCL sector, which has a significant profit margin. KBL is also increasing the capacity of its ultrathin CCL from 0.8 million pieces per month in May 21 to 2 million by the end of the year. By end-22, the longer-term goal will be 4 million pieces per month, or 30 percent of overall capacity. The applications of ultra-thin CCL materials are predominantly in compact electronic devices such as smartphones and cameras, which should benefit from the ongoing recovery in smartphone shipments as well as the rising use of autonomous driving in vehicles in the mid-term. CCL’s ultra-thin goods currently have a similar margin to conventional FR4 goods, but as capacity increases and operating scale improves, CCL’s typical margins should be 3-5 percent higher than FR-4 goods. Beijing Oriental Hotel is located in Beijing, China.

Waterproof Technology by Yuhong (002271 CH) Due to policy tailwinds and aggressive capacity expansion, growth is expected to strengthen. We believe Chengdu’s recent policy on waterproofing materials is a hint of upcoming national regulatory changes in the industry, which are expected to take effect in 2H21 and hasten market consolidation. Despite the recent increase in raw material costs, we believe Yuhong can achieve strong mid- to long-term growth with its aggressive statewide expansion plan, while maintaining a high gross margin. Reiterate BUY with a new Rmb66.00 target price.

What’s New

• Chengdu’s most recent policy directive on the use of waterproofing products in the region… On May 27, the Chengdu Municipal Housing and Urban-Rural Development Bureau issued the most recent regulation policy for the use of waterproofing materials in construction operations in the region, which will take effect on June 1st. A minimum warranty of ten years (rather than the traditional five years); a prohibition of hot-melt Styrene-Butadiene-Styrene (SBS) waterproofing membrane (due to high pollution and safety issues in the construction process); and c) the use of polymer waterproof materials in local government-led projects are among the key measures.

•…will be advantageous to industry leaders. Although the policy is divisive in the industry, and the prohibition of certain types of commonly used waterproofing materials is still up for debate, we believe it will benefit industry leaders who have advanced technology and the flexibility to adjust their production lines to meet regulatory requirements and differentiated market demands. Beijing Oriental Yuhong Waterproof Technology (Yuhong) already has flexible production lines across the country, according to management. Due to the delays in implementing the new price strategy, gross margin will be under pressure in 2Q21. However, we believe that the company’s increased purchasing power and inventory storage capacity will assist it to keep its margins more consistent than its peers in the face of volatile raw material markets.

• Year-to-date product sales are robust; the full-year target is intact. Despite a very high base last year, management stated that product shipment increased by 35-40% yoy in May; nevertheless, the full-year 2021 sales forecast remains unchanged at Rmb30 billion, up 40% yoy. Meanwhile, the company expects overall demand from the real estate and infrastructure industries to remain stable.

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