Hong Kong & China Research Initiating coverage 21 August ... · huge domestic market, Kingboard Laminates is set to further its growth. Vertically integrated model = Higher value

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IMPORTANT DISCLOSURES ARE INCLUDED IN THE APPENDIX AT THE END OF THIS REPORT

Hong Kong & China

Research

Initiating coverage 21 August 2007

Kingboard Laminates STOCK RECOMMENDATION PRICE

OUTPERFORM HK$6.20 SECTOR REUTERS CODE BLOOMBERG CODE

Electronic & Electrical Equipment 1888.HK 1888 HK

12 MONTH RANGE MARKET CAPITALISATION PRINCIPAL LISTING

HK$9.93 – 5.69 HK$18.6bn (US$2.4bn) HKG

NEXT RESULTS DUE LAST RESULTS CHANGE IN STOCK RECOMMENDATION

27 Aug 2007 (H1) 28 March 2007 (FY) n/a

CHANGE IN EPS ESTIMATES

n/a

ANALYST

[email protected]

Tel +852 2123 0397

Share price performance

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Kingboard Laminates Kingboard Laminates relative to HSI (rebased)Source: Bloomberg

Note: listed on 7 Dec 06 @IPO price HK$7.73

Share price (%) �1 mth �3 mth �6 Dec 07

Ordinary shares �23 �19 �20Relative to Hang Seng Index �13 �17 �25Average daily volume shares 12.7mHang Seng Index 20387.13

Year end: December 2005 2006 2007E 2008E

Sales (HK$m) 6,131 8,472 10,814 12,472EBITDA (HK$m) 1,714 2,417 2,803 3,680Pre�tax profit (HK$m) 1,233 1,887 2,139 2,826Tax (%) 7.4 7.7 8.0 10.0PATMI (HK$m) 1,078 1,638 1,839 2,374EPS (HK$) 0.39 0.57 0.61 0.79% Growth +4.0 +51.9 +12.3 +29.1DPS (HK$) 0.10 0.80 0.25 0.40% Growth +80 +680 �69 +61Div cover (x) 3.9 0.7 2.5 2.0PER (x) 15.7 10.8 10.1 7.8

Yield (%) 1.6 12.8 4.0 6.4

PBR (x) 3.4 3.1 2.7 2.3EV/EBITDA (x) 10.3 7.9 7.2 5.3EV/sales (x) 2.8 2.1 1.6 1.4Market cap/sales (x) 2.8 2.1 1.7 1.5NAV per share (HK$) 1.8 2.0 2.3 2.7Interest cover (x) 13.3 26.8 18.9 24.0Gearing (%) 10.3 30.0 25.2 22.3ROE (%) 21.4 29.0 26.8 28.9No of shares in issue (m) 3,000Major shareholder Kingboard Chemicals � 72.5%

Event

Kingboard Laminates is an attractive proxy, in our view, to PCB growth in China, which is growing faster than the industry and the global electronics market. This global market leader trades at 10.1x and 7.8x FY2007E and FY2008E PER and offers dividend yields of 4.0% and 6.4% respectively. We initiate coverage with an OUTPERFORM recommendation.

Key points

Kingboard Laminates is the world’s biggest copper clad laminate maker and also holds the largest market share in China by production volume. Its vertically integrated model allows it to extract more value from each production step, which is reflected in its profit margins.

Supported by parent company Kingboard Chemical and sister companies Elec & Eltek and Techwise, Kingboard Laminates also enjoys greater economies of scale and better production capacity management. As PCB manufacturing activities in China increase due to both rising demand and relocation of production bases from higher cost areas, Kingboard Laminates is well ahead of its competitors.

Finally, with new production coming online and an expected product mix shift, we expect earnings growth, margin recovery and expansion from FY2008 onwards.

Valuation and share price catalyst

The stock currently trades at 10.1x and 7.8x FY2007E and FY08E PER respectively, with a dividend yield at about 4.0% and 6.4% for the same period. We also see a favourable outlook guidance and further evidence of strong monthly PCB sales as positive catalysts for the share price.

Recommendation and conclusion

We initiate coverage with an OUTPERFORM and a fair value of HK$10.70 based on 13.5x FY2008E PER, which is the same forward PER multiple of its IPO price of HK$7.73.

Note: Prices as at 17 August 2007

Source: Company, Cazenove

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1.0 Key points 3

2.0 Valuation 6

3.0 Background 8

4.0 Laminate manufacturing trends 13

5.0 Competitor analysis 16

6.0 Market dynamics 19

7.0 Financial analysis 21

7.1 Segmental analysis 21

7.2 P&L 21

7.3 Balance sheet 22

7.4 Cash flow 22

8.0 Forecasts 23

9.0 Company financial statements 25

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1.0 Key points

Kingboard Laminates is the world’s largest PCB laminates maker according to research from Japan Marketing Survey (JMS) for 2005. It should have reinforced its position in 2006 since it achieved a 38% sales growth during the year. This vertically integrated laminates manufacturer differentiates itself from its competitors by making some of the upstream materials required in the laminates production process. It makes phenolic resins, epoxy resins, glass yarn, glass fibre and copper foil, much of which is consumed internally. Its parent company is Kingboard Chemicals, a reputed and well established company in Hong Kong, which has recently ventured into production of chemicals and commodities.

We believe that given its dominant market position, sustained growth of global electronics and the continual expansion of China’s electronic manufacturing activities, due to its lower cost appeal and huge domestic market, Kingboard Laminates is set to further its growth.

Vertically integrated model = Higher value add and stronger bargaining power Kingboard Laminates makes many of the upstream components needed to produce both the glass epoxy or paper laminates. These include copper foil, glass yarn, glass fabric and resins. Compared with its competitors, Kingboard Laminates can capture greater value add, achieve higher margins and have stronger bargaining power when it comes to negotiating prices to reflect higher raw material prices. It can also offer a shorter lead time to its customers, given the more vertically integrated operations and better service during periods of material shortages.

The group has a diversified base of customers, over 1,000 of them in 2005, and is not reliant on any one of them. In H1 2006, sales to the Kingboard Group accounted for 20.7% of overall sales but sales to the top five customers accounted for 26.5%. This means the next four customers only accounted for 5.8% of its overall sales. We believe sales to its affiliated companies would help to manage its production capacity and ensure the facilities continue to operate at a high utilisation level.

Fig 1.1 An integrated production model


largest PCB laminates maker in the world

Kingboard Chemicals is the parent company

large downstream product sales support upstream production

large diversified customer base while affiliated PCB companies provide demand to manage capacity utilisation

differentiates itself from peers

Wood Pulp

Tung Oil

Formalin

Phenol

TBBA

Acetone

ECH

Bisphenol-A

Pyrophyllite

Colemanite

Methanol

Copper Material

Raw Materials Upsteram Component Materials

Phenolic Resin

Wood Pulp

Prepreg

Copper Foil

Epoxy Resin

Glass Yarn Glass Fabric

Prepreg

Laminates

Paper Laminate

Glass Epoxy Laminate

Kingboard Laminates’ involvement

Where most competitors’ production is confined to

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Fig 1.2 Margin comparison Fig 1.3 Copper prices vs KBL’s margin trends

Source: Company, Cazenove, LME

Kingboard Laminates is still pursuing growth opportunities and intends to gain more global market share. With its facilities operating at high utilisation, Kingboard Laminates is expanding capacity and in FY2007 it expects to add capacity by 35% for glass epoxy laminate production, 18% for copper foil, 46% for glass yarn, 30% for glass fibre and 23% for glass epoxy resins.

We expect glass epoxy laminates to account for roughly 50% of group sales in 2007, similar to the level in 2006, but expect sales of paper laminates to account for 21% of sales compared to 27% of sales last year. We believe sales of upstream components and provision of drilling services will account for 29% of sales in FY2007, up from 23% of sales in FY2006.

Although there is no breakdown in margin for any one of the three segments, we believe margins for glass epoxy laminates and other products and services can generate higher profit margins. As we have mentioned, Kingboard Laminates’s margins have increased despite higher copper prices, and we believe that the expected change in product mix should mitigate the impact of higher copper prices and result in higher margins in FY2008. In addition, Kingboard Laminates has reduced its dependency on upstream components from external sources to just 20% currently and we expect the group to reduce this even further going forward. This would again support our expectations for margin improvements in FY2008.

Fig 1.4 Planned capacity expansion in 2007

Source: Company

Seasonal strength is evident

Over the past three years, we have observed a seasonal sales split between H1 and H2 of about 45% and 55% respectively. This year should be similar although we believe with new capacity coming online rapidly in H2 2007; the split may be just marginally different from trend.

We can see from the combined sales in figures 1.5 and 1.6 that demand for laminates and PCB has started to pick from the slower season in H1 2007. Combined sales from five Taiwanese laminates makers show that sales have grown for four consecutive months more recently, which is also mirrored in the combined sales of selected Taiwanese PCB makers. We expect to see the

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Elite Material Taiwan Union TechnologyUniplus Elec. ITEQHwa Woei Guangdong ShengyiKingboard Laminate

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rising copper prices do not appear to have had a significant negative effect on Kingboard’s margins

product mix shift and increased in�house production of upstream materials help to improve margins

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usual seasonal effect on sales momentum in H2 2007 and Kingboard Laminates should therefore show improved sales and earnings performance in H2 2007.

Fig 1.5 Combined laminates sales (Taiwan) Fig 1.6 Combined PCB sales (Taiwan)

Source: Respective companies, Cazenove

Valuation is attractive for a global market leader

Kingboard Laminates is world leader in laminate production and the dominant laminate maker in China. We believe that a company with such a market position does not deserve to trade at 10.1x FY2007E and 7.8x FY2008E PER, which puts it just in line with smaller Taiwanese peers. Furthermore, two Japanese makers Matsushita Electric Works and Sumitomo Bakelite and a Chinese laminate maker, Guangdong Shengyi trade at a sharp premium to Kingboard Laminates. With earnings expected to expand 12% and 32% in FY2007 and FY2008, we believe it should trade at least on 13.5x FY2007E PER, which is also the valuation multiple offered at the time of the initial public offering. This is also the multiple that our fair value is premised on. In addition, we modelled a 40% earnings payout from the group in FY2007, which is higher than the 30% the group is committed to paying. We modelled a 50% earnings payout in FY2008. This would translate into fairly attractive yield of about 4.0% and 6.4% respectively for FY2007 and FY2008.

Investment risks

Kingboard Laminate is exposed to similar generic risks and headwinds faced by many global manufacturing and electronic companies, which include a protracted global economic downturn � resulting in slower demand � currency risks, raw material price increases and competition.

More specific to the company, earnings growth could be affected and is susceptible to order pull backs from major customers, slower than expected order wins, unforeseeable issues with product quality, pricing pressure from customers, unforeseeable wage increases, key material shortages and capacity constraints or delays in putting out sufficient capacities to meet order demand.

Fluctuations in copper prices may seem to have an impact Kingboard Laminates’s share price and cost of production as currently copper purchases account for 34% of group expenses. However, in reality the group can pass on to its customers some of this impact through raising prices. Nevertheless, sentiment on the stock could continue to be affected by headline changes to copper prices.

Lastly, there are the obvious environmental concerns and the resulting regulatory and legal issues that could follow should the PRC government decide to impose stricter controls or if Kingboard Laminates runs into issues with respect to waste discharge or allowing pollutions issues to escalate. Any one of these issues could result in increased expenses and affecting Group’s profitability.

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2.0 Valuation

Kingboard Laminates was listed on HKEX in December 2006 at an offer price of HK$7.73 per share. The offer price translated into then forward FY2006 PER of 13.5x. Our fair value multiple for the company is premised on the same PER. This would translate into a fair value of HK$10.70 based on 13.5x FY2008E PER. In addition, the group is committed to pay out at least 30% of its earnings to shareholders, although we believe it could pay up to 40% this year (dividend yield of 4.0% at current levels for current year) and even more further out as Kingboard Chemicals (KBC) subsidiaries have a track record of paying out large dividends. For example, Elec & Eltek recently declared it would pay more than 100% of its earnings to shareholders following its recent H1 2007 results announcement. During the same period in 2006, Elec & Eltek paid 89% of its earnings to shareholders. While a 30% earnings payout is the group’s implied dividend policy, we believe there is scope to pay more.

The group is trading on 10.1x FY2007 and 7.8x FY2008 our estimated PER and 11.6x and 9.9x consensus PER. Its Japanese peers Matsushita and Sumitomo are currently trading on consensus PERs of 31.5x and 23.7x FY2008 (FYE March), while Taiwanese laminate makers, TUC and ITEQ trade on consensus multiples of 11.5x and 11.3x for FY2007E. Its closest competitor in China – Guangdong Shenyi, which is listed on the Shanghai Exchange, trades on consensus PERs of 30.9x and 28.6x for FY2007E and FY2008E. Given Kingboard Laminates’s market leadership position and the dominant market share in China, which is well ahead of its closest rival Guangdong Shengyi and Grace Electron, we believe it should at least trade ahead of its Taiwanese peers. The current valuation accorded to the Japanese and Chinese makers would at least support our belief and conviction that Kingboard Laminates should trade at a slight premium. We believe the market should at least value the group at 13.5x FY2007E PER – the same valuation multiple at the time of its listing in 2006.

Although Kingboard Laminates has traded above 15x forward PER for brief moments after its listing in December 2006, the stock has trended lower since then. This could be attributed in part to concerns over rising copper prices and seasonal slowdown in demand. However, as we show later, the group can partly offset the impact of increases in copper prices by passing them on to customers through higher prices. As new capacity and seasonal demand returns in H2 2007, we expect stronger earnings growth later this year and this should drive valuations higher.

Fig 2.1 Peer valuation table

Ticker Name Price

EV/ EBITDA

(x)

EV/Next Yr Est

EBITDA

EPS Growth

Curr Year

EPS Growth

Next Year

P/E (x) Curr Year

P/E (x) Next

Year ROE (%)

P/BV (x)

1888 Kingboard Laminates Holding HKD 7.25 9.9 8.6 9.6% 17.0% 11.6 9.9 34.9 4.4

6991 Matsushita Electric Works JPY 1382.00 6.3 6.1 0.9% N.A 31.5 N.A 5.3 1.7

4203 Sumitomo Bakelite Co Ltd JPY 762.00 7.6 7.0 23.1% N.A 23.7 N.A 5.3 1.5

2383 Elite Material Co Ltd TWD 19.10 N.A N.A N.A N.A N.A N.A 15.4 0.2

6274 Taiwan Union Technology Corp TWD 20.70 5.5 4.4 �15.7% N.A 11.5 8.1 13.8 1.2

5381 Uniplus Electronics Co Ltd TWD 10.35 N.A N.A N.A N.A N.A N.A 0.5 1.0

6213 Iteq Corp TWD 43.55 4.6 3.7 26.1% 14.3% 11.3 9.9 22.8 3.0

600183 Guangdong Shengyi Science RMB 16.15 12.0 9.9 16.0% 31.2% 30.9 23.6 28.6 9.4

Average 5.0 4.0 17.9 9.3 14.0 1.8

Source: Bloomberg 14/8/2007

fair value is pegged to 13.5x FY07E PER

represents more than 20% upside to FV

only trades in line with Taiwanese peers, which are smaller in size

Japanese peers and closest Chinese competitors trade at a sharp premium

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Kingboard Laminates’s share price has declined since its IPO in December 2006 despite the group reporting a 52% Y�o�Y improvement in earnings. We believe this decline is due to rising copper prices, rising competition (competitors announcing increases in production capacity) and expectations of slower earnings growth reflecting higher raw material prices and seasonal effects. In contrast, we are upbeat about the group’s prospects and with an undemanding valuation we believe this should be an attractive proposition to investors.

Fig 2.2 Forward PER band, Kingboard Laminates Fig 2.3 Forward PBV band, Kingboard Laminates

Source: Bloomberg, Cazenove

Fig 2.4 Historical 12 mth PER band, TUC Fig 2.5 Historical 12 mth PER band, ITEQ Corp


Fig 2.6 Historical 12 mth PER band, S.Bakelite Fig 2.7 Historical 12 mth PER band, G. Shengyi


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3.0 Background

Kingboard Laminates is a vertically integrated maker of copper clad laminates, which are used to make printed circuit board (PCB). The production extends up to the production of upstream components, which includes copper foil, glass yarn, epoxy, glass fabric and bleached kraft.

According to JMS, in 2005 the group was the global leader in laminates production by value, with an approximate market share of 9.9%, and in China it has an estimated market share of 31.7%.

The group aims to boost revenue growth by expanding its global market share in laminate production through expanding its existing capacity in China. It also plans to improve its profitability by making more input materials in house, instead of relying on external sources.

What is laminate? Laminate is one of the basic materials used in the production of PCB, which in turn is a primary component in electronic appliances and devices. The laminate is made using a mixture of resins and reinforcing materials and then made to harden. This would be sandwiched between two sheets of copper in the simplest example of a double�sided laminate.

Different laminates can be made by altering the resin mix and the type of reinforcing materials used. This would result in laminates with different mechanical, thermal and electrical properties. The more common materials used in the production of laminates include epoxy reinforced with glass fabric, bleached kraft paper, or a combination of glass fabric and bleached kraft paper or composite epoxy material.

Fig 3.1 Applications of different laminates

Type of laminate Reinforcing material Resin Type of PCB Examples of Applications of PCBs

Glass epoxy laminate

Glass fabric Epoxy resin Single to Multi�layered PCBs Mobile phones, PDAs, computers and networking telecommunication devices

Paper laminate Bleached kraft paper Phenolic resin Single and double sided PCBs Clocks, toys, calculators, CRT televisions, audio and visual proof

CEM laminate Bleached kraft paper and glass fabric

Epoxy resin Single and double sided PCBs Transformers for televisions and other electronics products, plasma and LCD televisions

Source: Company

Glass epoxy laminates: offer better heat tolerance and are better insulators than paper laminates. They have a higher dimensional stability and mechanical strength but are not machined as easily as paper laminates. These are used in multi�layer PCBs, which can tolerate higher levels of heat and stronger electrical charges.

CEM laminates: are made up of a combination of bleached kraft paper and glass fabric. The mechanical properties are similar to paper laminate but the thermal properties are closer to glass epoxy laminate. They have a higher selling price compared with paper laminates but lower than glass epoxy laminates.

Paper laminates: have a lower mechanical strength and have less tolerance to heat and mechanical stress than glass epoxy laminates. They are mainly used in the production of toys, clocks and CRT televisions.

Copper foil: makes both coated and uncoated copper foil of different thickness from copper cathode or copper scrap. The group’s primary suppliers are in Chile. Coated copper foil is used in the production of paper laminates and uncoated copper foil is used in glass epoxy laminates.

Glass yarn/ glass fabric: glass fabric is woven from pliable glass yarn and used as the reinforcing and insulating materials used in the production glass epoxy laminates.

world’s largest PCB laminates maker

what is a laminate?

product introduction

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Bleached kraft paper: is produced from eucalyptus wood pulp and is used as the reinforcing and insulating materials for the production of paper laminates.

Epoxy resin: is the fundamental material used in the pre�pregnation (see below) process for the purpose of strengthening glass fabric and making glass epoxy and composite epoxy laminates.

Fig 3.2 In�house components manufacturing Upstream component Nature of production % of external sales in 2005

Copper foil In�house, through Kingboard Copper Foil All laminates 27%

Glass yarn In�house Glass epoxy laminates Only non electronic grade

Glass fabric In�house Glass epoxy laminates 11%

Bleached kraft paper In�house Paper laminates 7%

Epoxy resin In�house All laminates 22%

Source: Company

Fig 3.3 Production requirements

Wood Pulp

Tung Oil

Formalin

Phenol

TBBA

Acetone

ECH

Bisphenol�A

Pyrophyllite

Colemanite

Methanol

Copper Material

Raw Materials Upsteram Component Materials

Phenolic Resin

Wood Pulp

Prepreg

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Epoxy Resin

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Prepreg

Laminates

Paper Laminate

Glass Epoxy Laminate

Purchased from external suppliers

Purchased from Retained Group and external suppliers

Consumed internally only

Consumed internally and sold externally

Sold externally only (including to the Retained Group)

Source: Company

Laminates are produced by bonding prepreg to copper foil. Prepreg consists of either bleached kraft paper in phenolic resin or glass fabric in epoxy resin. Laminates can be single sided or double sided. The prepreg is sandwiched between two copper foil layers in the case of double sided laminates. In the schematic diagram above, we can see that the key upstream component materials are produced in�house while they sourced most of the raw materials from suppliers outside the Kingboard Group. However, the group buys formalin and methanol from parent company Kingboard Chemicals to make the phenolic resin.

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Fig 3.4 Laminates production process

Raw Materials Resin MixingPrepregnation

Treatment

SheetingPlying�up

Trimming Packaging

Heat and Pressure Treatment

Source: Company

In the laminate production process, raw materials are mixed to produce phenolic or epoxy resins. Reinforcing materials such as glass fabric or bleached kraft paper are then introduced into these resins via polymerization, which involves heating the mixture. This material becomes known as the prepreg. Prepregs are then cut, piled and stacked together. A layer of copper foil is then placed onto the stack of prepreg to form copper�clad laminates, whether single sided or double sided. The stack is then bonded under heat and pressure in a vacuum environment and the resultant product is a sheet of laminate.

The group aims to expand its presence in the PRC, particularly in eastern China and expand its global and PRC market share. To support its goals, Kingboard Laminates will continue to expand production capacity of laminates and upstream components. In 2007, the group is planning to expand its production capacity of glass epoxy laminates, copper foil, glass fabric, glass yarn and epoxy resin. In particular, epoxy laminates production is set to expand by 35% in 2007 and should become an important revenue growth driver for Kingboard Laminates.

Fig 3.5 Kingboard Laminates’s current and planned production capacity Monthly Capacity 2006 1H2007E 2007E Y�o�Y growth

Paper laminates (shts) 4.2m 4.2m 4.2m 0.0%

Glass epoxy laminates (shts) 2.8m 3.0m 3.8m 35.0%

Copper foil (tonnes) 4000 4600 4600 15.0%

Bleached kraft paper (tonnes) 5400 5400 5400 0.0%

Glass fabric (meters) 20.2m 20.2m 26.2m 30.0%

Glass yarn (tonnes) 3700 3700 5400 45.9%

Epoxy resin (tonnes) 7500 9200 9200 22.7%

Source: Company

Kingboard Laminates’s sales and marketing activities are led by its executive directors. The team focuses on deepening and broadening its relationships with the customers. The team is made up of four different groups, covering Guangdong Province, eastern China, Hong Kong and international areas. The sales teams visit three/four customers on average in a day with the aim of establishing current and future demand trends for their products. In 2005, over 92% of its products were shipped to customers within the PRC.

As at end 2005, the group had more than 1,000 customers, while their five largest customers accounted for 26.5% of sales in H1 2006. Sales to its parent company and affiliates accounted for 20.7% of sales during the same period, making it the single biggest customer.

production process

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sales and marketing

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JMS estimated that the total global laminate market was about HK$51.2bn in 2005 with production value in China at about HK$16.0bn in the same year. The laminate market is dominated by the top ten manufacturers (see figure 3.7), who account for about 61% of the total global market share. Kingboard Laminates’s key competitors in the PRC are shown in figure 3.6 below.

Fig 3.6 PRC market share 2005

%

Kingboard Laminates 31.7

Guangdong Shengyi Scitech 13.6

Grace Electronics 8.1

ITEQ 7.4

Nanya Plastics 6.6

Matsushita E.W. 4.2

Zhaoyuan Jinbao Electronics 4.1

Uniplus 4.0

PIC (Elec & Eltek) 3.7

Elite Material 3.0

Others 13.6

Total 100.0

Source: JMS

Fig 3.7 Global market share 2005

%

Kingboard Laminates 9.9

Matsushita E.W 9.8

Nan Ya Plastics 8.1

Doosan 6.3

Isola 6.1

Hitachi Chemical 5.5

Guangdong Shengyi Scitech 4.3

Mitsubishi Gas Chemical 3.9

ITEQ 3.4

Sumitomo Bakelite 3.3

Others 39.4

Source: JMS

Fig 3.8 Laminates sales and selling prices 2003 2004 2005 H1 2006

Laminates 2,566.8 4,000.0 4,997.3 3,173.4

No. of epoxy sheets (m) 16.3 21 26.5 15.5

ASP 86.9 121.5 118.8 137.2

Glass epoxy laminates 1,416.9 2,552.0 3,148.3 2,126.2

No. of paper sheets (m) 26.0 29.2 31.8 16.3

ASP 44.2 49.6 58.1 64.2

Paper laminates 1,149.9 1,448.0 1,849.0 1,047.2

Upstream chemicals 244.0 401.5 842.1 511.2

Source: JMS

market and competitors

sales and selling prices

Kingboard Laminates

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Brief company history and management profiles

Cheung Kwok Wing, Chairman and executive director of Kingboard, first engaged in the distribution and trading company in the 1970s. The Kingboard Group was subsequently established in 1988 and was listed in 1993 on the Hong Kong Stock Exchange.

Kingboard Laminates was established in 2006, for the purpose of the listing exercise although the Kingboard Group started to produce laminate in 1988 when it established its first laminate manufacturing facility. The group quickly extended its operations both vertically and horizontally covering upstream components and broadening its laminate product range. It also spun off its copper foil operation, which was listed on the SGX in 1999 under Kingboard Copper Foil. Kingboard Laminate was listed in December 2006.

Fig 3.9 Management profiles Name & position Comments

Cheung Kwok Wa

Chairman and Executive Director Cheung Kwok Wa is Chairman and executive Director of the company. He joined Kingboard Chemical Holdings in 1988 and has more than 18 years’ experience in the marketing of a wide range of industrial products. He is responsible for overall strategic planning for the group.

Cheung Kwok Keung

Managing Director and Executive Director Cheung Kwok Keung is Managing Director and executive Director of the company. He joined Kingboard Chemicals in 1991 and has more than 15 years’ experience in the laminate industry. He is responsible for the overall implementation of the strategic plans and goals of the group and supervises the day to day operations.

Cheung Kwok Ping

Executive Director Cheung Kwok Ping is an executive Director. He joined Kingboard Chemicals in 1988 and has over 18 years’ experience in marketing. He is responsible for the group’s marketing operations and is also the general manager of the paper laminate factories in Fogang and Shaoguan.

Lam Ka Po

Executive Director Lam Ka Po is an executive Director and also a co�founder of Kingboard Chemicals and has over 18 years’ experience in the sale and distribution of laminates. He is also an executive director of Kingboard Copper Foil.

Cheung Ka Ho

Executive Director Cheung Ka Ho is an executive Director. He is responsible for the laminate marketing operations for the Southern China region.

Chan Sau Chi

Executive Director Chan Sau Chi is an executive Director and she joined Kingboard Chemical in 1999. She is responsible for the group’s purchase of laminate�related raw materials.

Liu Min

Executive Director Liu Min is an executive Director and he joined Kingboard Chemicals in 1998. He is the general manager of the copper foil factories in Fogang and Lianzhou.

Zhou Pei Feng

Vice President, Finance Zhou Pei Feng is an executive Director and is the general manager of three glass epoxy laminate facilities in Shenzhen, Fogang and Jiangmen. He joined Kingboard Chemicals in 1999.

Source: Company

Kingboard Laminates

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4.0 Laminate manufacturing trends

The cross sectional diagram in figure 4.1 below shows a laminate with the prepreg or resin sandwiched between two copper foil sheets. One of the most common glass�based materials used to make the resin is FR�4. Many different reinforcement materials and resin systems can be used to make different laminate products, each with its own characteristics. Figure 4.2 below lists several different resin systems.

Fig 4.1 Cross sectional diagram of a laminate

Copper foil

One or more piles or resin Impregnated glass cloth

Copper foil

Copper foil

One or more piles or resin Impregnated glass cloth

Copper foil

Source: Multek

Fig 4.2 Various epoxy resin systems

Difunctional Epoxy Polyphenylene Oxide/ Epoxy Blends

Tetrafunctional Epoxy Polyimide and Blends

Multifunctional Epoxy Cyanate Ester and Blends

High Performance Multifunctional Epoxy CHO/ Glass

Bismaleimide Triazine (BT) PTFE

Source: Multek

Innovation and miniaturization, which have driven most of the developments in technologies and electronics devices, have also driven changes and development in laminates technology and manufacturing. Meanwhile, new environment protection requirements have also been implemented and now disallow the use of certain harmful materials in devices bound for certain countries. In figure 4.3, we highlight new technological trends and the corresponding material requirements for laminates production. The common tenets driving new PCB materials technologies are usually borne out of requirements to meet demand for higher transmitting speed, environment protection regulation and miniaturization.

The expansion of data flow has raised the need for quicker transmission, and to cope with the speed and volume while reducing interferences and noises new materials are often needed. At the same time, the use of lead free and other non�environmental threatening materials, higher oven temperatures are needed for reflow and soldering processes. As a result, new materials are needed to cope with physical requirement changes, otherwise quality issues such as de�lamination loom large.

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Fig 4.3 PCB material trends Trend of PCB Material requirements

High speed low loss transmission Low dielectric constant, materials that offer better signal integrity and cut noises

Thermal management Low CTE (coefficient of thermal expansion), suitable thermal resistance and conductivity, high Tg

Bare die assembly or Chip on Board Low CTE

Impedance control Thickness control

Lead free assembly High heat resistance, higher Tg materials to withstand hotter environment needed

High productivity High cycle process

Green material Halogen free

Source: Nelco, Multek

Fig 4.4 2005 CCL market value analysis Fig 4.5 2009E CCL market value analysis

Source: Prismark

Legend: segments listed clockwise from top

Glass epoxy GP 39.0%

Middle range TG 14.0%

High TG 11.0%

CEM�1 3.0%

CEM�3 6.0%

Papers 15.0%

High�freq low dK 7.0%

Build up materials 5.0%


Glass epoxy GP 22.0%

Middle range TG 28.0%

High TG 13.0%

CEM�1 3.0%

CEM�3 5.0%

Papers 14.0%

High�freq low dK 8.0%

Build up materials 7.0%

Kingboard Laminates

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Fig 4.6 Applications of various types of laminates

High layer PCBpower supply, i�pod server, based station automotive,X�box IC test, substrate

Mobile phonetelecom. equipment

Sony PSP, PS3 notebook, Green mobile phone

4C electronics

Low DK, low DF Tg 200High Tg lead free laminate

Tg180 lead free high Tg green laminate

Tg180 Low CTE lead free laminate

Tg180 Lead free high Tg laminate

Tg160 Low DF & lead free

green laminate

Tg150 thermal reliability green laminate

Tg150 high thermal resistance

Tg140 FR�4 multifunctional

Tg140, Tg 150 FR�4 multifunctional

Tg140, High CTI laminate

Tg120�130 CEM1, CEM3 composite CCL

Base station telecomeq, high freq. appl.

for halogen free higher layer count

for lead free productvery high layer count (>20)

for lead free productMed�high layer count (>10)

for Halogen�free & Low DF product

for Halogen�free & Lead�free product

for lead free 4�12L

Low CTE laminate

for lead free 2�8 layer

& modulus PWB

for 2�8 layer rigid board

for high CTI material medium

layer count

For single, double�side rigid board

Application

Perform

ance

Server, notebook, LCD module,GPS, mobile phone

Lead�free rigid Mother�board

Washing machine Plasma TV

Source: ITEQ

Fig 4.7 Abbreviations Abbreviations Terms

dK Dielectric constant

Tg Glass transition temperature

DF Dissipation factor

CTE Coefficient of thermal expansion

Source: Wikipedia

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5.0 Competitor analysis

Kingboard Laminates operates in a competitive industry that is dominated by several major producers. Nevertheless, it has emerged as the leader globally and in the PRC. In the PRC, especially, the group has a dominant market share of 31.7%. In this segment, we review the industry competition and its competitors.

Kingboard Laminates is the global market leader with an estimated 9.9% market share in terms of production value in 2005, according to researcher Japan Marketing Survey. In the PRC, the world’s fastest growing region for PCB production, it is the runaway leader with a dominant 31.7% market share. Although it is the largest company in the world, we believe it still trails behind some of its competitors, especially the European and Japanese competitors in certain technology areas, and product portfolio. There is room for Kingboard Laminates to improve and along with it comes more growth opportunities. In figures 5.1 and 5.2 below, we show the group’s market position against its competitors

Fig 5.1 Global market share breakdown Fig 5.2 PRC market share breakdown

Source: Companies, JMS

Matsushita E.W.: Matsushita Electric Works (MEW) is part of the Japanese Matsushita Group and it has six key business areas covering lighting products, information equipment and wiring, home appliances, building products, electronic and plastic materials and automation controls. The Electronic and Plastic Materials Business Unit is relevant to our analysis. In the last fiscal year, FY 2007 (March year end), this business unit registered a 10.6% sales increase YoY to US$986m (HK$7.7bn) and accounted for about 7% of the group’s business last year. It turned from a loss making to profit of about US$42m ((HK$328m) and spent US$42m (HK$328m) on capital expenditure. The group registered double�digit sales increase (YoY) in the last fiscal year. Key product areas in the segment cover IC substrates, multi�layer PCB materials and flexible PCB materials. The group’s key products in multi�layer PCB materials will mainly focus on environmentally friendly, halogen free glass epoxy multi�layer materials and higher end, high reliability glass epoxy multi�layer materials. The group is setting up a new multi�layer PCB materials factory in Suzhou and plans to expand its output of multi�layer materials at one of its plants in Guangzhou.

Nan Ya Plastics: Nan Ya Plastics Corp (NPC) is the world’s largest downstream plastics manufacturer. Its businesses cover four major segments: Electronics materials, Plastics, Engineering & Switchgear and Polyester fibre divisions. Under electronic materials, the group makes copper clad laminates, copper foil, prepreg, epoxy resin, glass fabric and glass yarn. In 2006, the group has an estimated annual production capacity of 31.2m sheets of copper clad laminates, 220,000 tonnes of epoxy resin, and 284.4km of glass fibre. Of the copper clad laminates it sold in 2005, about 60% was bound for its domestic market in Taiwan. The group had further expanded its upstream materials production capacity in Kunshan, China, which is aligned to its PCB production expansion. Sales of copper clad laminates, prepreg, epoxy resin and glass fibre cloth accounted for about 16.3% of group sales in 2005.


Kingbo ard 9.9%

M atsushita E.W 9.8%

Nan Ya P lastics 8.1%

Do o san 6.3%

Iso la 6.1%

Hitachi Chemical 5.5%

Guangdo ng Shengyi Scitech 4.3%

M itsubishi Gas Chemical 3.9%

ITEQ 3.4%

Others 42.7%


Kingbo ard 31.7%

Guangdo ng Shengyi Scitech 13.6%

Grace Electro n 8.1%

ITEQ 7.4%

Nan Ya P lastics 6.6%

M atsushita E.W 4.2%

Zhao yuan Jinbao Electro nics 4.1%

Uniplus 4.0%

Elite M aterials 3.0%

Others 17.2%

Matsushita E.W will focus on halogen free and higher end glass epoxy materials and expand production capacity in Suzhou and Guangzhou

capex increased 53% YoY in FY07 but sales increase only 11%

over 60% of Nan Ya Plastics’ copper clad laminates sales were made to Taiwanese customers in 2005

Nan Ya’s key production facilities are in the eastern Jiangsu Province, PRC

Kingboard Laminates

C 17

Doosan: Doosan is a Korean conglomerate that has many different business interests. The group owns Doosan Electro�Materials BG, established in 1974, and is also one of two copper clad laminates production companies in Korea � with the other being LG Chemicals. This business division makes and sells copper clad laminate, flexible copper clad laminate, prism sheet, OLED materials and chemicals such as optical monomer for plastic lens and adhesive for copper foil. It also makes both paper and epoxy based laminates and counts Sony, Samsung, LG, IBM, Toshiba and Phillips among its customers. All of its six production plants are in South Korea. The group has an annual production capacity of about 13.4m sheets of epoxy based copper clad laminates and 7.1m sheets of phenol or paper based copper clad laminates. In 2006, production of epoxy based copper clad laminates increased 13% YoY, while production of paper laminates increased 8% YoY. In 2006, sales of paper laminates declined about 22%, while sales of epoxy laminates increased 22%.

Isola Group: Isola is an Arizona, US�based PCB materials maker. It is a developer and manufacturer of high performance base materials that are used in the manufacture of advanced multi�layer printed circuit boards. It is majority owned by Texas Pacific Group and Redfern Partners. Its products are used in applications for aerospace, automotive, broadband telecommunications, military, chip packaging and testing, high end computing and other specialty markets. The group’s key focus is on product areas that have more stringent requirements so that the appliances can extract the high performance that is required. So far, it had developed products with high thermal management qualities and those that satisfy green issues which call for the elimination of halogen and lead compounds. Its production plants in Asia are in Suzhou, Huizhou and Dalian.

Hitachi Chemicals: Hitachi Chemicals is a Japanese�based chemical and materials company, whose electronics�related business segment accounted for 46.7% of group sales in 2007 or about US$2.6bn. Within the segment, the group supplies semiconductor and display related materials, PCB and related products and other electronic materials such as carbon anode for lithium materials. Within the PCB unit, the group supplies copper clad laminates for IC substrates, multi�layer PCBs and various types of copper clad laminates. In FY2007 (March year end), the group achieved a 7.6% increase in segment sales. The group highlighted that during the fiscal year, sales of multi�layer PCBs declined as some of its domestic customers relocated their production facilities but it noted that sales of copper clad laminates used to make IC substrates have increased in response to stronger demand.

Mitsubishi Gas Chemical: Mitsubishi Gas Chemical Company is a multi�faceted chemicals and materials company, based and originated in Japan. Of its four key business segments, sales from the Information and Advanced Materials business segment accounted for about 14.7% of group sales in FY2007 (March year end). Within this segment, the group produces and sells materials used in making PCBs, produces and sells PCBs and IC substrates and oxygen absorbers. In the previous fiscal year, the group stated its sales of materials for PCBs were affected by increases in copper and other raw materials, while IC substrates sales were lower due to inventory adjustments. It also mitigated a slowdown in demand for epoxy resins by selling higher performance materials. The group aims to specialise in high performance epoxy materials, expand sales to infrastructure and semiconductor tester segment, and develop applications for in�vehicle products.

Guangdong Shengyi Sci. Tech: Shengyu Sci. Tech is probably the closest competitor to Kingboard Laminates. Established in 1985, the company makes FR4, CEM�1, CEM�3 and prepreg products. Its products have been qualified by Siemens, Motorola, Sony, Nokia, Samsung and Huawei. Besides copper clad laminates, the company also makes and sells silica powder. In 2006, the group registered 41% (YoY) sales increase in copper clad laminate products and 50% (YoY) sales increase in silica powder. About 30% of sales were for customers in China while the remaining 70% of sales were exported to overseas customers. Shengyi Sci Tech. is upbeat about its prospects in 2007 and sees stronger sales from Japanese customers due to higher outsourcing activities and lower output among Japanese producers. The group is planning a capex of about RMB 700.6m or about US$140m, which represents an increase of nearly 32%. The group has an estimated annual production capacity of about 25m sq metres currently and before the inclusion of new production capacity from Song Shan Lake Northern Science Tech. Industrial district.

all six production plants that Doosan owns are in South Korea and we believe a large portion of its sales are to Samsung and LG

privately held, this US�based maker seems to be focused on higher end specialty products only

group cited that CCL used in household appliances are usually imported due to cost issues

no actual breakout of sales contribution from PCB materials

evidence of customers moving demand requirements offshore

group’s intention to shift towards higher performance epoxy materials hint at sales challenges in the commodity segment

closest rival but still trails far behind with a wide market share gap

registered very healthy growth rates in 2006, sees strong sustained demand in China and plans new capacity. Capex will be about 32% YoY higher in 2007

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Grace Electron Corp: Grace Electron is a Chinese PCB laminate maker based in Southern China. Established in 1996, the group supplies copper clad laminate, flexible copper clad laminate and prepreg. Currently, it has a monthly capacity of 1m sheets of copper clad laminates, 150K sq metres of flexible copper clad laminate, and multiple flexible and rigid copper clad laminate capacity of about 120K sq metres. Grace Electron is the third largest PCB laminate maker in China, with an estimated market share of approximately 8.1%. The group has subsidiaries that are focused in the production of glass fabric and glass yarn. It remains a private company and in the last financial year, the group reported a turnover of over RMB5bn. It currently has 4,600 workers at its various factories in the PRC.

ITEQ Corporation: ITEQ, founded in early 1997, is a Taiwanese laminate maker that specialises in producing high performance advanced laminate, prepreg and mass lam products (inner layers used for multi�layer PCBs). In 2006, mass lam products accounted for 18% of group sales, epoxy resin FR�4 accounted for about 30.3% of group sales, high TG products accounted for 25.6% and lead free products accounted for 21.8% of group sales. ITEQ also claims that it is the largest lead free copper clad laminates supplier in 2006, while Matsushita is the largest halogen free copper clad laminates supplier in the world. The group has a projected year end copper clad production capacity of 2.1m sheets per month and the CCL production is done in Kuangchow, Humen and Xishan all within the PRC. The group is also expanding into flexible copper clad laminates, heat sink sheets and optical film production.

Fig 5.3 Overview of key competitors Name Country Specialty Current capacity Expansion strategy

Kingboard Lamminates

HK Glass epoxy, paper laminates. Vertically integrated, makes upstream products

50.4m shts of paper laminates and about 36m shts of glass epoxy laminates

Plans HK$700m�800m capex in FY2007. Glass epoxy laminates capacity to expand to 3.8m pcs per month

Matsushita E.W. JP Halogen free, higher end PCB products

Actual figures are not available

Capex increased 53% YoY in FY2007 and plans new multi�layer PCB materials plant in Suzhou

Nan Ya Plastics TW Vertically integrated producer of copper clad laminates.

31.2m copper clad laminates at end 2005

Said in a media interview in 2006 to focus its expansion of PCB materials in China

Doosan KR Glass epoxy and paper laminates maker with all six production facilities based in Korea

13.4m shts epoxy and 7.1m shts paper laminates. One of two laminate makers in Korea

Not available

Isola Group US High end specialty products that are halogen and lead free. Products used in complex equipment and appliances


Plans product innovation to carve niche. Factories are in Huizhou, Dalian and Suzhou

Hitachi Chemical JP IC substrates and full range of copper clad laminates


Multi�layer product orders have declined while more IC substrates are sold

Mitsubishi Gas Chemical

JP High performance epoxy based laminates.


Expand sales to infrastructure and semiconductor test segment.

Guangdong Shengyi Sci. Tech

CN Similar product offerings to Kingboard Laminates


Plans to increase its capacity by investing RMB 3.2bn over a 8 to 10 years period from 2005

Grace Electron Corp

CN China based, vertically integrated maker of laminates

12m shts of copper clad laminates

Plans further capacity expansion and market share gains. No specific details

ITEQ Corp TW High performance advanced laminates, prepreg and mass lam products

25.2m shts of copper clad laminates

To expand and start 3 layers halogen free and high Tg FCCL poducts and 2 layer FCCL lead free products

Source: Companies, Cazenove

third largest PCB laminate producer in China with capabilities in FCCL production

annual turnover exceeds RMB 5bn

specialises in advanced laminates product

expects strong demand due to environmental requirements for lead free, halogen free products

Kingboard Laminates

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6.0 Market dynamics

In this section, we analyse the growth prospects in the laminate market and then the global and PRC PCB markets. Historical numbers and estimates are taken from JMS and Prismark.

According to an estimate by Japan Market Survey, the total global laminate market, in terms of production value, reached approximately HK$37.2bn in 2003, HK$41.6bn in 2004 and HK$51.2bn in 2005. The growth rates in 2003, 2004 and 2005 were about 2.6%, 11.8% and 23.1% respectively. Among the three key types of laminates, glass epoxy laminate has consistently accounted for the lion share of this market growth. Its market share has fluctuated between 68% and 74% over the past four years. For Kingboard Laminates, its shipment of glass epoxy laminates in 2006 translated into an approximate global market share of about 9.7% and it had an estimated 30% of the global market share for paper laminates in the same year.

Fig 6.1 Global laminate growth Fig 6.2 Segmental growth rates

Source: JMS

Although global sales of glass epoxy laminates declined by 0.4% in 2003, there was a sharp rebound in demand in 2004 and 2005. In each of these two years, sales of glass epoxy laminates expanded 11.0% and 29.1% respectively. Composite epoxy materials (CEM) laminates, which usually falls under the glass epoxy category, had sales growth of about 2.7% in 2003, 4.1% in 2004 and 8.5% in 2005. In 2005, sales of CEM laminates were estimated at about HK$3.4bn.

If we look at the sales breakdown, according to JMS sales of glass epoxy laminates, paper laminates, CEM laminates and others accounted for 71%, 14%, 7% and 8% of sales respectively in 2005. Glass epoxy laminates sales are expected to grow further and could account for about 75% of overall sales in 2008.

Going forward, global laminate sales are expected to register 5.9% and 8.7% sales growth in FY2007 and FY2008 respectively. Prismark breaks down the growth of various types of laminates further. Middle range Tg laminates, which are those with Tg160 and below, are expected to show the fastest CAGR of 28.1% over a four year period.

In the PRC, demand for laminates has increased steadily due to increased PCB production in the country, which has been mostly driven up by the relocation of PCB manufacturing activities into China and increased domestic demand for electronics goods. Production by value of laminates has expanded 23.6%, 32.0% and 23.4% in 2003, 2004 and 2005 respectively. In contrast, globally laminates production by value has only expanded 2.6%, 11.8% and 23.1% respectively. The lower global growth rates in 2003 and 2004 also hinted at a contraction in production activities in countries outside of the PRC, as growth in China increased at a faster pace.

Global PCB production by value was estimated at somewhere between US$38m and US$39.5m according to data from Prismark and BPA consulting, both well known industry researchers. Prismark is projecting global PCB production value to expand 6.1% CAGR between 2003 and 2010, while PRC PCB production by value is expected to expand 11.5% CAGR during the same

global laminate production in value terms is expected to continue to grow

25.5 25.4 28.236.4

44.3 46.9 52.1

69.463.9

60.3

51.2

41.637.236.2

0

10

20

30

40

50

60

70

80

2002 2003 2004 2005 2006 2007E 2008E

HK$bn

Glass Epoxy Paper CEM Others

25.5 25.4 28.236.4

44.3 46.9 52.1

69.463.9

60.3

51.2

41.637.236.2

0

10

20

30

40

50

60

70

80

2002 2003 2004 2005 2006 2007E 2008E

HK$bn

Glass Epoxy Paper CEM Others

�5

0

5

10

15

20

25

30

35

2003 2004 2005 2006 2007E 2008E

%

Glass Epoxy Paper CEM Other

�5

0

5

10

15

20

25

30

35

2003 2004 2005 2006 2007E 2008E

%


�5

0

5

10

15

20

25

30

35

2003 2004 2005 2006 2007E 2008E

%


glass epoxy laminates drive growth

China PCB laminates growth expands at a faster rate

Kingboard Laminates

20 C

period. BPA consulting expects PCB production by value to expand 8.1% CAGR between 2004 and 2010, while PRC production by value is expected to expand 16.8% during the same period. We concur with this assessment and believe the PRC market is a chief beneficiary of the healthy global PCB growth. This, we reiterate, comes on the back of electronics growth and increased relocation of production activities into China.

Fig 6.3 2005�2009 CCL growth forecast Fig 6.4 Global & PRC laminates production growth

Source: Prismark

With both global and PRC PCB production growth looking encouraging, we believe Kingboard Laminates, which is the largest laminates maker in the PRC with the largest market share of more than 30%, should be a key beneficiary of this macro trend.

Fig 6.5 China PCB production growth Fig 6.6 Global PCB production dollar growth

Source: Prismark

Fig 6.7 PRC and global production value growth Fig 6.8 PRC and global production value dollars

Source: BPA consulting

Glass

epoxy

GP

Middle

range

TG

High

TG

CEM�1 CEM�3 Papers High�

freq

low dK

6.6

28.1

12.3

7.7

2.95.9

11.4

0

5

10

15

20

25

30

%

2005�2009

Glass

epoxy

GP

Middle

range

TG

High

TG

CEM�1 CEM�3 Papers High�

freq

low dK

6.6

28.1

12.3

7.7

2.95.9

11.4

0

5

10

15

20

25

30

%

2005�2009

0

5

10

15

20

25

30

35

40

2002 2003 2004 2005

US$bn

0

5

10

15

20

25

30

35

40

45

50

%

0

5

10

15

20

25

30

35

40

2002 2003 2004 2005

US$bn

0

5

10

15

20

25

30

35

40

45

50

%

PRC Rest of worldPRC Rest of world

Growth Market shareGrowth Market share

LHS:

RHS:

0

5

10

15

20

25

30

35

40

2002 2003 2004 2005

US$bn

0

5

10

15

20

25

30

35

40

45

50

%

0

5

10

15

20

25

30

35

40

2002 2003 2004 2005

US$bn

0

5

10

15

20

25

30

35

40

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50

%

PRC Rest of worldPRC Rest of worldPRC Rest of worldPRC Rest of world

Growth Market shareGrowth Market shareGrowth Market shareGrowth Market share

LHS:

RHS:

0

2

4

6

8

10

12

14

16

18

20

2004 2005 2006 2007 2008 2009 2010

US$bn

0

5

10

15

20

25

30

35

%

0

2

4

6

8

10

12

14

16

18

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2004 2005 2006 2007 2008 2009 2010

US$bn

0

5

10

15

20

25

30

35

%

Production valueProduction value

Growth Market shareGrowth Market share

LHS:

RHS:

0

2

4

6

8

10

12

14

16

18

20

2004 2005 2006 2007 2008 2009 2010

US$bn

0

5

10

15

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35

%

0

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10

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14

16

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2004 2005 2006 2007 2008 2009 2010

US$bn

0

5

10

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Production valueProduction valueProduction valueProduction value

Growth Market shareGrowth Market shareGrowth Market shareGrowth Market share

LHS:

RHS:

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010

US$bn

0

1

2

3

4

5

6

7

8

%Production value Growth

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010

US$bn

0

1

2

3

4

5

6

7

8

%Production value (LHS) Growth (RHS)

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010

US$bn

0

1

2

3

4

5

6

7

8

%Production value Growth

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009 2010

US$bn

0

1

2

3

4

5

6

7

8

%Production value (LHS) Growth (RHS)

�30.0%

�20.0%

�10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

1995 1996 1997 1998 1999 2000 2002 2003 2004

Hong Kong/ China growth

Annual growth

2001

�30.0%

�20.0%

�10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

1995 1996 1997 1998 1999 2000 2002 2003 2004

Hong Kong/ China growth

Annual growth

2001

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004 0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Total world (RHS).Hong Kong/China (LHS)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

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2004 0

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Kingboard Laminates

C 21

7.0 Financial analysis

Kingboard Laminates’s sales growth in the past four years has been driven by strong demand for its laminates products, which was equally matched by an expansion in production capacity. Glass epoxy laminates saw the fastest growth in 2006, achieving an annual growth rate of 36%. This was followed by demand for paper laminates, which grew 24% over 2005. Sales of other products and services expanded 68% due to its much smaller base. Overall, the group achieved sales CAGR of 30% in the past four years. Apart from strong sales volume (62% volume growth in a four�year period) ASP has also increased sharply, especially for glass epoxy laminates, which grew from about HK$95 per sheet in 2003 to over HK$130 per sheet in 2006.

Fig 7.1 Segmental sales analysis, 2003�2006

Source: Company

In terms of overall group sales, we have seen a CAGR of 30% in the past four years. In 2006, the group reversed a declining growth trend to register a 38% YoY sales growth. Net profit growth was less even. The group registered 166% YoY jump in PATMI growth in 2004 but only a 4% YoY growth in PATMI in the following year. Then in 2006, it registered another healthy 52% PATMI growth.

In figure 7.3, we show the various margin trends. The group saw a peak in margin trends in 2004. Then, the group registered gross margin of about 33% and PATMI margin of about 22%. This was primarily due to higher selling prices and a larger portion of glass epoxy laminates sales. Margins then started to trend down in 2005 and 2006 due to lower selling prices and higher raw material prices. Kingboard Laminates has been targeting an EBIT margin of at least 20% annually and the group’s EBIT margin in 2004 through 2006 was 26.6%, 21.8% and 23.1% respectively.

Fig 7.2 Sales and profit trend, 2003�2006 Fig 7.3 Margin trends, 2003�2006

Source: Company

sales CAGR >+30%

7.1 Segmental analysis

0

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Paper laminates Others

reversal of a declining growth trend

management aims to achieve EBIT margin of 20%

7.2 P&L

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Kingboard Laminates

22 C

Prior to 2006, the group has been able to manage both its gross gearing and debt to equity ratio of between 10% and 12% and 15% and 25% respectively. The group, however, continued to remain in a net debt position. In 2006, the group had total borrowings of about HK$3.1bn from HK$1.4bn in 2005. This mostly reflects the financing of the HK$2bn special dividend paid to Jamplan (BVI) � the sole Shareholder of Kingboard Laminates prior to its listing � and also the term loan and revolving credit of up to HK$1.7b and HK$1.1b respectively secured with a financial institution, to ensure the group retains sufficient cash for working capital requirements.

Separately, the group has continued to register success in managing its trade receivables. We have seen trade receivable days fall from a peak of 163 days in 2003 to 115 days in 2006. Similarly, the trade payable days has also fallen from 63 days in 2003 to 44 days in 2006. Inventory days have remained stable. Regardless, we have been able to see an improvement in cash conversion cycle days, given the tighter working capital control and management.

Fig 7.4 Cash and borrowings positions Fig 7.5 Cash conversion cycle

Source: Company

The group has generated positive cash flow from its operations despite the demanding receivable terms. Although it has only generated positive free cash flow in 2006, the capex has been used specifically to expand its capacity. The capex used on capacity expansion has, in turn, translated into substantially higher sales for the group. The jump in cash flow from operations to HK$2.2bn from HK$894m in 2006 was in part due to the tightening of credit terms, which lowered working capital requirements despite the sales growth in the year.

Fig 7.6 Cash flow changes

Source: Company

a dividend of HK$2bn was paid to sole shareholder Jamplan (BVI) in 2006 prior to listing

improved working capital

7.3 Balance sheet

�2,000

�1,000

0

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HK$m

Cash & Bank Balances Net Fixed Assets OD & ST DebtLT DebtNet Cash (Debt)

�2,000

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days

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free cash flow positive in 2006

�2,500

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500

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2003 2004 2005 2006

HK$m

Cash From Operations

Net Change in Capex

Dividends Paid

Kingboard Laminates

C 23

8.0 Forecasts

A key production material in laminate production is copper and therefore any changes in copper prices would ultimately have an impact on operating costs. Copper as a percentage of Kingboard Laminates’s cost of production jumped from 14% in 2003 to 24.1% in 2004, with a temporary fall to 21.8% in 2005 before rising to 33.9% in 2006. Going forward, we expect copper to account for a larger percentage of the group’s cost of sales. We currently assume a copper price of US$8000/ ton in our cost model.

Although copper expenses as a percentage of total cost have increased, this has not had a substantial impact on the group’s gross margin. Copper prices have been rising since 2003 but Kingboard Laminates’s gross margin has proved very resilient on two occasions – first in 2004 and then in 2006.

In our view, the key reasons behind the increase in margins in both 2004 and 2006 can be attributed to change in product mix and increased in�sourcing. In 2004 and 2006, sales of glass epoxy laminates increased 80% and 48% respectively while group sales increased only 57% and 38%. In addition, production of copper foil and glass fabric increased 42% and 59% in 2004 and a further 26% and 23% in 2006. In addition, the vertically integrated model has worked in the group’s favour while its position as the world’s largest laminate maker has boosted its bargaining power. This ultimately should allow Kingboard Laminates to increase its pricing, which should help to partially offset the effect of higher copper prices.

Fig 8.1 Copper costs assumption Fig 8.2 Copper prices vs KBL’s margin trends

Source: Company, Cazenove, LME

We believe capacity growth is a key driver behind the group’s sales growth, given that it is already operating at a high level of utilisation. Although Kingboard Laminates is expanding both glass epoxy and paper laminates production capacity, we can see from figures 8.3 and 8.4 that the focus is likely to be on expanding the capacity of the more popular glass epoxy laminates. Production capacity of glass epoxy laminates has only expanded 2%, while paper laminates capacity expanded 11% in 2006. In the current year, the capacity for glass epoxy laminates is expected to increase 36%, while no capacity expansion is planned for paper laminates. Much of this capacity is, however, expected in H2 2007. Over 2008 and 2009, we expect glass epoxy laminates to expand 18% and 14% respectively, while paper laminates capacity should remain stable at current levels with no major expansion initiatives planned. As a result, we expect to see sales of glass epoxy laminates account for an increasing share of group sales. By 2009, glass epoxy laminates should account for 53% of sales, while paper laminates should only account for about 16% of sales based on our current estimates.

As for earnings, we expect gross margin to decline to 26% in the current year, given the high copper prices, but we have assumed margins to expand given changing product mix, greater in�sourcing and also increased economies of scale. We have assumed copper prices will remain stable at S$8,000/ ton in the next three years.

21.833.9 40.5 42.0 43.3

0%

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100%

2005 2006 2007E 2008E 2009E

Copper Wood Pulp Depreciation Others

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Kingboard Laminates

24 C

Fig 8.3 Segmental forecast Fig 8.4 Segmental forecasts


Fig 8.5 Semi�annual P&L forecast (HK$m) Year end: December H1 2007E H1 2007E H1 2008E H2 2008E H1 2009E H2 2009E

Sales 4,649.9 6,163.8 5,612.2 6,859.4 6,259.9 7,651.0

Cost of goods sold (3,430.8) (4,547.7) (3,990.3) (4,877.1) (4,315.4) (5,274.3)

Gross profit 1,219.1 1,616.1 1,621.9 1,982.3 1,944.5 2,376.6

Other operating income 38.8 38.8 38.8 38.8 38.8 38.8

Distribution costs (83.7) (104.8) (97.8) (119.6) (100.2) (122.4)

Administration expenses (209.2) (258.9) (243.0) (274.4) (250.4) (306.0)

Operating expenses (292.9) (363.7) (340.8) (393.9) (350.6) (428.5)

EBIT 965.0 1,291.2 1,319.9 1,627.1 1,632.7 1,986.9

Net interest expense (59.8) (59.8) (59.0) (59.0) (48.1) (48.1)

Share of Associates' or JV income 1.0 1.0 1.0 1.0 1.0 1.0

Pretax profit 906.2 1,232.4 1,261.8 1,569.1 1,585.6 1,939.8

Tax (72.5) (98.6) (126.2) (156.9) (190.3) (232.8)

Minority interests (54.4) (73.9) (75.7) (94.1) (95.1) (116.4)

PATMI 779.3 1,059.9 1,059.9 1,318.0 1,300.2 1,590.7

Sales mix 43% 57% 45% 55% 45% 55%

Earnings mix 42% 58% 45% 55% 45% 55%

Cash dividends for the year 311.7 423.9 530.0 659.0 650.1 795.3

Reinvested earnings 467.6 635.9 530.0 659.0 650.1 795.3

Div payout ratio 40% 40% 50% 50% 50% 50%

Growth rates (%)

Sales +21 +33 +21 +11 +12 +12

SGA expenses +30 +18 +16 +8 +3 +9

EBIT +2 +28 +37 +26 +24 +22

Net profit �3 +27 +36 +24 +23 +21

Margins (%)

Gross margin 26.2 26.2 28.9 28.9 31.1 31.1

EBIT margin 20.8 20.9 23.5 23.7 26.1 26.0

Pre�tax margin 19.5 20.0 22.5 22.9 25.3 25.4

Net margin 16.8 17.2 18.9 19.2 20.8 20.8

Effective tax rate % 8.0 8.0 10.0 10.0 12.0 12.0


0

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2003 2005 2007E 2009E

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0 s

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Glass epoxy laminates Paper laminates

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Kingboard Laminates

C 25

9.0 Company financial statements

Profit and loss account (HK$m unless stated) Year end: December 2005 2006 2007E 2008E 2009ESales 6,131.2 8,472.4 10,813.7 12,471.6 13,910.8Gross profit 1,733.7 2,414.0 2,835.2 3,604.2 4,321.1EBIT 1,334.2 1,958.8 2,256.1 2,947.0 3,619.6Net interest (100.3) (73.1) (119.5) (123.0) (110.2)Pretax profit 1,233.1 1,887.3 2,138.6 2,826.0 3,511.4Tax (91.0) (145.8) (171.1) (282.6) (421.4)Minority interests (63.8) (103.3) (128.3) (169.6) (210.7)PATMI 1,078.2 1,638.1 1,839.2 2,373.8 2,879.4EPS (HK$) 0.39 0.57 0.61 0.79 0.96DPS (HK$) 0.10 0.80 0.25 0.40 0.48Sales growth (%) +38.2 +27.6 +15.3 +11.5Op. profit growth (%) +46.8 +15.2 +30.6 +22.8PATMI growth (%) 0.0 +51.9 +12.3 +29.1 +21.3Gross margin (%) +28.3 +28.5 +26.2 +28.9 +31.1EBIT margin (%) +21.8 +23.1 +20.9 +23.6 +26.0PATMI margin (%) +17.6 +19.3 +17.0 +19.0 +20.7Earnings payout (%) +25.9 +139.0 +40.0 +50.0 +50.0Source: Company, Cazenove

Balance sheet (HK$m unless stated) Year end: December 2005 2006 2007E 2008E 2009ECash and bank deposits 685.0 1,713.3 1,438.1 2,075.9 3,374.4Inventories 889.8 1,339.5 2,449.6 2,825.2 3,151.2Receivables 2,372.5 2,710.3 3,459.2 3,989.6 4,450.0Other current assets 4,964.1 181.2 181.2 181.2 181.2Property, plant & equipment 3,962.1 4,065.3 4,275.4 4,290.9 4,032.0Other fixed assets 368.4 236.3 238.3 240.3 242.3Total assets 13,242.0 10,245.9 12,042.0 13,603.1 15,431.1Accounts and bills payable 647.5 729.9 1,334.8 1,539.5 1,717.1Short term bank loans 1,008.8 540.7 500.0 500.0 500.0Other current liabilities 6,163.9 800.7 800.7 800.7 800.7Long term debt 360.9 2,535.0 2,535.0 2,535.0 2,535.0Other long term liabilities 12.7 0.5 0.5 0.5 0.5Preferred shares 0.0 0.0 0.0 0.0 0.0Minority interests 600.3 700.9 829.3 998.8 1,209.5Owners' equity 4,447.9 4,938.2 6,041.7 7,228.6 8,668.3Total liabilities and SE 13,242.0 10,245.9 12,042.0 13,603.1 15,431.1 Source: Company, Cazenove

Cash flow statement (HK$m unless stated) Year end: December 2005 2006 2007E 2008E 2009EPretax profit 1,233.1 1,887.3 2,138.6 2,826.0 3,511.4Depreciation & amortization 379.4 458.5 546.8 732.8 954.5Tax paid (91.0) (145.8) (171.1) (282.6) (421.4)Other non cash adjustments (109.5) 1,450.4 0.0 0.0 0.0Changes in non cash workg (519.3) (1,411.1) (1,254.2) (701.3) (608.8)Cash from operations 893.4 2,237.7 1,258.1 2,572.9 3,433.7Capex (948.1) (729.7) (757.0) (748.3) (695.5)Investment changes 10.9 55.2 0.0 0.0 0.0Free cash flow (54.7) 1,507.9 501.2 1,824.6 2,738.2Other investing activities (678.7) 4,435.7 0.0 0.0 0.0Cash from investing (1,615.8) 3,758.2 (757.0) (748.3) (695.5)Dividends paid (278.8) (2,277.1) (735.7) (1,186.9) (1,439.7)Share issue 0.0 1,159.5 0.0 0.0 0.0Net change in gross debt (13.3) 1,697.4 (40.7) 0.0 0.0Other financing activities 1,187.5 (5,575.8) 0.0 0.0 0.0Cash from financing 895.4 (4,995.6) (776.4) (1,186.9) (1,439.7)Currency adjustments 12.2 28.1 0.0 0.0 0.0Net debt - beginning 499.8 685.0 1,713.3 1,438.1 2,075.9Net debt - ending 685.0 1,713.3 1,438.1 2,075.9 3,374.4 Source: Company, Cazenove

Key ratios Year end: December 2005 2006 2007E 2008E 2009E Solvency ratios Net debt/ equity (%) 13.6 24.2 23.2 11.7 -3.4Net cash/ (debt) HK$m (684.7) (1,362.4) (1,596.9) (959.1) 339.4Current ratio (x) 1.1 2.9 2.9 3.2 3.7Interest cover (x) 13.3 26.8 18.9 24.0 32.8Efficiency ratios Creditor days 139.3 115.2 115.2 115.2 115.2Inventory days 72.8 81.6 81.6 81.6 81.6Debtor days 53.0 44.4 44.4 44.4 44.4ROE (%) 21.4 29.0 26.8 28.9 29.1ROA (%) 8.1 16.0 15.3 17.5 18.7Capex to sales (%) 15.5 8.6 7.0 6.0 5.0Price ratios PER (x) 15.7 10.8 10.1 7.8 6.5EV/EBITDA (x) 10.3 7.9 7.2 5.3 4.0PBV (x) 3.4 3.1 2.7 2.3 1.9P-CFPS (x) 9.2 6.0 9.2 5.6 4.5 Source: Company, Cazenove

Management (age) Capital history – ordinary shares Chairman Cheung Kwok Wa (43) Number of shares (m) 3,000 Executive Director Cheung Kwok Keung (54) Last issue/buyback n/a Executive Director Cheung Kwok Ping (46) Executive Director Lam Ka Po (50) Staff strength 7,200 Executive Director Cheung Ka Ho (23) Executive Director Chan Sau Chi (32) Seasonality (%) Sales Op. ProfitExecutive Director Liu Min (38) H1 45 48Executive Director Zhou Pei Feng (32) H2 55 52 Shareholder Information (Aug 2007) Kingboard Chemicals: 72.5% Business profile (%) HK$m %Market information Glass epoxy laminates 4,277 50Estimated free float % 27.5% Paper laminates 2,292 27Main listing(s) Hong Kong CEM laminates nm nmAverage daily volume (3 months) 5.3m Others 1,903.7 23 Financial calendar Geographical split (%) SalesFinancial year end December PRC 90.3Half year end June Other parts of Asia 6.9 America & Europe 2.8Source: Company

Kingboard Laminates

26 C

Kingboard Laminates

C 27

APPENDIX

IMPORTANT DISCLOSURES

This research is issued by JPMorgan Cazenove Limited. It is distributed in the United States by Cazenove Inc. a third party not

affiliated with J.P. Morgan Chase & Co. and Cazenove Inc. accepts responsibility for its contents. It is issued in Hong Kong and

Australia by Cazenove Asia Limited, in Singapore by Cazenove & Co. (Singapore) Pte. Limited and elsewhere in the world by

JPMorgan Cazenove Limited or a suitably authorised connected company of JPMorgan Cazenove Limited (together Cazenove).

Where "disclosure date" appears below, this means the day prior to the report date for securities listed on the Hong Kong Stock

Exchange. For all other securities it means the end of the month preceding the date of this report, unless that month end is within 10

calendar days of the report date in which case the disclosure date is the end of the preceding month. All share prices quoted are the

closing price for the business day prior to the date of the report, unless otherwise stated.

DISCLOSURES INCLUDING THOSE REQUIRED BY THE UNITED STATES As at the disclosure date, the following applied:

• JPMorgan Cazenove Limited and/or an affiliate acted as a market�maker or liquidity provider in the securities of Kingboard

Laminates Holdings Ltd.

This research may have been disclosed to the issuer prior to dissemination to verify its factual accuracy. Internal procedures ensure

that objectivity is not compromised. Our conflicts management policy is available at:

www.jpmorgancazenove.com/code/equities/research/research.shtml

Cazenove research analysts, including those responsible for preparation of this report, receive compensation based on a number of

factors including quality of research, client feedback, firm profitability (including equity trading and capital markets profitability) and

competitive factors.

The analyst(s) named below certifies, in accordance with Regulation Analyst Certification adopted by the US Securities and Exchange

Commission, that:

• The views expressed in this research accurately reflect my personal views about the security or securities and the issuer(s) which

are the subject of my research.

• No part of my compensation was, is, or will be, directly or indirectly, related to the expression of specific recommendations or

views contained in this research.

Don See.

RESEARCH RECOMMENDATIONS STOCK RECOMMENDATION DEFINITIONS

OUTPERFORM � the total return on the security is expected to outperform the relevant market index by 5% or more over the next six

months.

IN�LINE � the total return on the security is not expected to outperform or underperform the relevant market index by 5% or more

over the next six months.

UNDERPERFORM � the total return on the security is expected to underperform the relevant market index by 5% or more over the

next six months.

RECOMMENDATION DISTRIBUTION Cazenove research has 720 companies (excluding investment trust and private equity companies) under coverage. 53% have been

assigned an OUTPERFORM rating. 34% of companies with this rating are investment banking clients of the firm. 35% have been

assigned an IN�LINE rating. 27% of companies with this rating are investment banking clients of the firm. 13% have been assigned

an UNDERPERFORM rating. 8% of companies with this rating are investment banking clients of the firm.

For investment trust and private equity companies, Cazenove research has 284 companies under coverage. 29% have been

assigned an OUTPERFORM rating. 30% of companies within this rating are investment banking clients of the firm. 66% have been

assigned an IN�LINE rating. 17% of companies within this rating are investment banking clients of the firm. 5% have been assigned

an UNDERPERFORM rating. 27% of companies within this rating are investment banking clients of the firm.

Our ratings are under constant review.

RECOMMENDATION HISTORY 12 months recommendation changes for Kingboard Laminates Holdings Ltd;

No changes in recommendation over the last 12 months.

The registered address of JPMorgan Cazenove Limited is 20 Moorgate, London EC2R 6DA

Telephone +44 (0)20 7155 5000 Facsimile +44 (0)20 7155 9800

Research e�mail: [email protected] Research web site: www.caznet.com

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Exchange.

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Telephone +852 2526 4211 Facsimile +852 2868 1411

Cazenove Asia Limited is regulated by the Securities and Futures Commission and is a participant of The Stock Exchange of Hong

Kong Limited.

DISCLAIMER

Kingboard Laminates

28 C

This report has been prepared for information purposes only and is not a solicitation, or an offer, to buy or sell any security or to

participate in any trading strategy. It does not purport to be a complete description of the securities, markets or developments

referred to in the material. The information on which the report is based has been obtained from sources which we believe to be

reliable, but we have not independently verified such information and we do not warrant that it is accurate or complete. All

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THE UNITED STATES OR BY CAZENOVE INC. Proposed transactions by U.S. persons in the securities described in this report

should be discussed with Cazenove Inc.

©2007 JPMorgan Cazenove Limited.

Ref: 261

Documents

Hong Kong & China Research Initiating coverage 21 August ... · huge domestic market, Kingboard Laminates is set to further its growth. Vertically integrated model = Higher value