2007 Hong Kong Stock Recommendation - Kingboard Laminates Holdings Ltd (1888)

Kingboard Laminates Holdings Ltd (1888)

Background :
Kingboard Laminates Holdings Ltd is a subsidiary spinned off from Kingboard Chemical Group (148) which focuses in manufacture and sales of laminates and upstream component materials.

1. Is the industry has a growing demand? What is the relationship between demand and supply in the industry?
Ans : The demand for laminates is driven by the demand for PCB. The global laminates market was estimated to have a growth rate of 6~8% in the coming 2 years. The growth rate of China laminates market is around 20~30% in the past 3 years. This means the industry is still in a growing state. With the launch of Microsoft Vista and 3G in China, the demand for PCB is expected to increase in the coming years which in turn will increase the demand for laminates. Kingboard was rated no 1 in 2005 with 9.9% market share in global market and 31.7% in China market. With the large scale of economy, the company can achieve the cost competitive advantage stated by Michael Porter and gain greater market share in the future. In its growth to a larger capacity, it also creates greater barrier for new competitors to enter this industry.

2. Is the company profitable over a period of time and what are their average revenue and profit growth rates?
Ans : The company is profitable for the year 2003~2005 with a profit growth of 158%, 5.8% respectively. The half year result of 2006 has a growth of 58.4% over 2005. The revenue growth for the year 2003~2005 is 56.8% and 31.6% repectively. The company has experienced hard time in 2005 but the growth will continue in the coming future which is reflected in the half year result of it. The gross profit margins from 2003~2005 are maintained in a healthy state with figures of 23.9%, 33.1%, 28.3% respectively. The half year 2006 GP margin is 29.6%.

3. What is the company raising money for? Paying debts? Future development? etc
ANS: 60% of fund raised used for further development of factory production capacity in China. 30% of fund used for paying loans. 10% for working capital.

4. What are the major risk factors when investing in this company?
ANS:
a) The capacity of the company has reached nearly full operation. Its future growth relies on the increase of its capacity.
b) Rise in cost of raw material will damage its profit margin.
c) The tax examptions from Chinese government for some of its subsidiaries will expire in the coming years.
d) Management issues happen to Ocean Grands Chemicals Holdings Ltd may also happen to this company.

5. Are there any odd numbers in their financial statements?
ANS: Not yet find any odd numbers. But the debt rate is high in the past which can be improved after its IPO.

6. Is the IPO price reasonable when compared to its expected profits and dividends? Is it valuable when compared to those companies already get listed?
Ans : The IPO PE is a bit high when compared with other industrial company but it is quite difficult to compare with other companies in the same industry as many of the large competitors in the industry are subsidiaries of large electronics companies for which the results of individual subsidiary is not presented separately. For the dividend, Kingboard is expected to pay not less than 30% of its profits as dividend each year. With the forcast provided by the company for 2006 will not be less than 1623.8 million, the dividend yield will be around 1.95% at minimum. Not very attractive from dividend yield.

7. Find out some key ratios for study such as ROE, ROA, PE, PB, Debt to Equity ratio etc.

Ans:
ROE : 22.62% (2005)
ROA : 8.62% (2005)
PE : 15.4 (estimated 2006 PE based on HK$8.32 closing price on 29/12/2006)
(Assumption : Full 2006 profit : HK$0.54)
Debt to Equity Ratio : 162.3% (2005)
Gross Profit Margin : 29.6% (half year 2006)

As stated before, the debt ratio is quite high before IPO.

8. Any strategic investors? Which investment bank is the underwriter?
Ans : Two rich people in Hong Kong Mr. Cheng Yu Tung and Mr Lau Luen Hung have expressed intersts in buying the IPOs but no further information are disclosed that they have holdings in the company. Goldman Sachs is the underwriter and coordinator which has a good track record in the past.

9. Other Considered Factory

a) The company management have a good track record in managing the parent company of Kingboard Laminates. The chairman has stated the management target for Kingboard laminates is to double its revenues in the coming 5 years and seek proper acquisition opportunites to expand.
b) Kingboard Laminates is the most profitable part of Kingboard Chemical Group, its parent company. Its spin off for one reason is to lower the debt of Kingboard Chemical Group which provides a good opportunity for the market to have a more profitable investment. Spin off of subsidiary is one of the good factor as stated by Peter Lynch in investment.
c) The IPO price is set at HK$7.73 which is around US$1 for which it is clear to set the target for institutional investor holdings.
d) The Kingboard Chemical Group still holds 72.5% of Kingboard Laminates and the shares in the market after over-allocation is 825 million shares representing a market value of hong kong dollar 6.864 billion (calculated based on the closing price of HK$8.32 on 29/12/2006) which is not huge when institutional investors starting to buy its shares. However, the attitude of institutional investors to invest in such small medium enterprise may be affected by the issues happened to Ocean Grand Chemical Holdings Ltd. in 2006.

Conclusion :
After weighing the pros and cons of the company, I still believe that Kingboard Laminates Holdings Ltd (1888) is a company suitable for LONG TERM BUY and HOLD. See if it can be a "tenbagger" in the long run!