Kingboard Chemical – Time To Buy Again?

Kingboard Chemical 1-Year Chart 2018Kingboard Chemical Holdings Ltd (0148.HK) is the world’s largest laminates producer, the largest PCB manufacturer in China, and a leading supplier of chemicals in Asia. With more than 60 manufacturing facilities in China and Thailand, the company operates a diversified business.[mepr-active membership=”1734″ ifallowed=”show” unauth=”message” unauth_message=”Please login or purchase a membership to view full text.”] In recent years the company has also successfully built up a property development and investment segment to further enhance the business portfolio. Kingboard Chemical made headlines last November with the sale of its ten percent stake in Cathay Pacific Airways for a gain of 800m HKD after a holding period of just six months.

Kingboard Chemical laminates business accounts for a third of the total sales and contributes more than half to the profits. The property segment accounts for only 15 percent of the sales, but for 26 percent of the profits. Chemicals make up another third of the sales and 13 percent of the profits. The highly competitive PCB business accounts for 19 percent of the sales, but only 9 percent of the profits. A fifth segment, which includes hotel businesses as well as LCDs and magnetic product manufacturing, accounts currently to one percent of the total sales only. Kingboard Chemical serves customers around the world with China as its biggest market, accounting for over 90 percent of the revenues.

Kingboard Chemical was founded in 1988 and is headquartered in Hong Kong. The shares are listed on the main board of Hong Kong’s stock exchange since 1993. The shares can also be traded in Germany and the US. Major shareholder is Hallgain Management Ltd, the private investment vehicle of Kingboard Chemical’s founder and chairman Kwok Wing Cheung, with an ownership of around 38 percent. 61 percent of the shares are in public hand.

With a workforce of 42,800 employees, Kingboard Chemical reported revenues of 43bn HKD (5.5bn USD) and profits before tax of 8.3bn HKD (1.1bn USD) in 2017. This is an increase of 20 and 71 percent respectively compared to the same period a year ago. In 2016, revenues and profits were up 9 and 87 percent respectively. The operating margin of 20 percent is around industry average. Kingboard Chemical’s cash reserves rose 25 percent to 8.1bn HKD (1bn USD) during 2017. The company shows a robust balance sheet with good profitability and financial strength. The equity ratio is at high 61 percent and the gearing, defined here as total liabilities to total equity, at 64 percent. Next earning results will be announced at the end of August.

We have recommended Kingboard Chemical already a year ago and included the company in our model portfolio (see: Kingboard Chemical – A Well Diversified Investment). The shares came under pressure after the 2.5-year long lasting uptrend peaked at 48.40 HKD in November 2017. Since then, the shares lost around 30 percent, 20 percent alone this year. This could be partly due to the sale of 20m shares or 1.9 percent by the chairman in early November. The company is priced at six times earnings. The shares trade below book value and at three times operating cash flow only. The latest dividend yielded almost four percent. The two covering analysts rate the company as outperformer and buy.

Kingboard Chemical shows robust financial position with good profitability and financial strength. The valuation is low compared to its industry peers. The industry outlook remains positive. Kingboard Chemical expects further growth in all business segments this year. A continues tight supply of laminates and upstream materials will be an opportunity to raise product prices. Kingboard Chemical’s laminates division is also expanding capacity to support its long-term sustainable growth. The company enjoys unrivaled economies of scale through a sophisticated and comprehensive vertically integrated business model that enables it to expand its competitive advantage continuously. The PCB division is expected to benefit from a continued strong demand for electronic products, especially from the telecommunication, automobile, and from the home appliance sector. Last but not least, the charismatic chairman is known to be a very acquisitive businessman who says about himself to never have made a loss in any investments during the past 20 years, even not during the financial crisis in 2008.

Kingboard Chemical is well diversified and positioned in an intensely competitive business environment. Revenues and profits grew by 6 and 18 percent annually over the last three years. Assuming a stable global economy, we expect the share price to increase at least 15 to 20 percent until the end of this year.

AIS Rating: ★★★★☆

 

2012 2013 2014 2015 2016 2017
 EPS (HKD) 2.05 2.89 2.47 1.61 4.88 5.31
 Change -19% 41% -14% -35% 203% 9%
 P/E  P/E
SECTOR
 P/B  P/CF  Equity
Ratio*
 ROE  LIAB./
Equity**
 Div
YLD
6 13 0.9 3 61% 15% 64% 3.8%

* Equity / Total Assets, ** Total Liabilities / Equity
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