This article comes from China International Capital Corporation's research report "Jiantao Laminates (01888): market share expansion and Product upgrade; reiterate recommended rating", written by China International Capital Corporation analyst Zong Jiaying.

Kingboard Laminates (01888) was listed on the main board of the Stock Exchange of Hong Kong in 2006, and the largest shareholder is Kingboard Chemical (00148). The company is the leading manufacturer of copper clad laminates, ranking first in the world for 11 consecutive years, with a market share of 14% in 2016. Jiantao laminate has two major business segments: copper clad laminate business and real estate business. CCL business includes epoxy fiberglass laminate, paper CCL and upstream materials; real estate business includes real estate investment and real estate sales.

The company has the advantage of vertical integration, focusing on copper clad laminate production, including epoxy fiberglass copper clad laminate, paper copper clad laminate, industrial chain upward layout of raw materials (copper foil, fiberglass cloth, resin), downstream facing 1200 + PCB manufacturers.

Zhitong Financial APP learned that CICC published a research report that copper clad laminate prices are expected to remain stable in 2018, mainly due to demand growth and limited release of new capacity. With the expansion of market share and product upgrading, the company is expected to maintain growth.

CICC expects its market share to reach about 16% in 2017. The company aims to achieve a 20% market share by 2019. The improvement of CCL market concentration and the company's vertical integration advantage will help the company to further increase its market share. CICC reiterated its "recommended" rating and raised its target price by 35% to HK $15.3, corresponding to 2.7 times 2018 price-to-book ratio.

Industry analysis: increased market concentration and demand growth

The layout of PCB industry chain and Kingboard laminate

Upstream raw materials (accounting for 10% of the company's revenue in the first half of 2017): copper foil, bleached wood pulp paper, glass cloth, glass fiber, epoxy resin and PVB. Raw materials are mainly used for internal production of copper clad laminate; copper foil sold externally accounts for only 10%.

Mid-stream copper clad laminate (64% of the company's revenue in the first half of 2017). The company mainly produces hard board, including: 1) paper copper clad laminate (accounting for 10% of the income in the first half of 2017), which is relatively low-end and is mainly used in the home appliance industry. The company's paper-clad laminate production capacity accounts for 70% of the world's total capacity. 2) Epoxy fiberglass copper clad laminate (accounting for 54% of the revenue in the first half of 2017), relatively high-end, mainly used in the electronic equipment industry. The company is constantly expanding the production capacity of epoxy glass fiber copper clad laminate.

Downstream PCB: the company faces 1200 + PCB manufacturers downstream. Revenue from the top five PCB customers accounted for about 30 per cent in 2015.

New Blue Ocean Market of PCB Industry: automotive Electronics and Communications

Downstream demand continues to expand, and new demand from the automotive electronics and communications industries is expected to lead to a new round of growth. Prismark expects the automotive electronics industry to have the highest growth in 2012-19 (5.9 per cent), followed by industrial / pharmaceutical (5.3 per cent) and communications (5.2 per cent).

Increase of market concentration of copper clad laminate

Taiwanese competitors are gradually leaving the copper clad laminate market, leaving more market space. The company's main Taiwanese competitor is gradually turning to semiconductor production, which also covers upstream materials, copper clad laminates and the entire PCB industry chain. The shift of competitors contributes to the business growth and market share expansion of Jiantao laminates.

Small manufacturers are gradually withdrawing, mainly because of stricter environmental protection qualifications, shortage of raw materials and tight supply, and small manufacturers are unable to guarantee their own copper clad laminate production.

2H17 prices keep growing, and prices are expected to remain stable in 2018

The comprehensive ASP of 1H17's copper clad laminate products is about HK $127, an increase of 32% year-on-year and 24% month-on-month. The increase in the price of copper clad laminate is mainly due to the shortage of upstream supply and the growth of downstream demand. The upstream material price rise began with the rise in copper foil prices at the beginning of 2Q16, and then 4Q16 glass fiber and glass cloth prices began to rise. Raw materials account for 600.65% of the cost of CCL. Copper foil, glass cloth and epoxy resin account for about 50%, 25% and 25%, respectively.

3Q17 has raised product prices three times, and CICC believes that there is room for further price increases. In the second half of 2017 and the first half of 2018, there is no clear sign that the new production capacity of copper foil, glass fiber and glass cloth will begin to expand, and supply shortages will continue. The copper clad laminate market has entered the peak season and the demand will increase steadily.

Upstream raw materials:

Copper foil:Capacity expansion is more focused on lithium copper foil and is slower than expected. The production expansion cycle of copper foil increased from 1-1.5 years to 18-24 months. The reason is that the Japanese manufacturers who master the key equipment of the expansion bottleneck, cathode rollers, will not expand their production of cathode rollers because of the increased demand for copper foil. Manufacturers that decide to expand production at the end of 2015 are more likely to clearly open new capacity this year (such as Nord, Chaohua and Changchun). As a result, the release of new capacity will not be as fast as expected.

Glass gauze and glass cloth:The attitude of production expansion is cautious, and there is little possibility of large-scale production expansion in the near future. The increase in the price of glass cloth is mainly due to the mismatch between supply and demand of electronic grade glass cloth (accounting for about 30% of the total demand) and industrial grade glass cloth. The shortage of supply is mainly due to the cold repairs of the major manufacturers. The production expansion period of glass fiber is 1-2 years, and once the kiln is in operation, the production can not be stopped for 3-5 years. As a result, manufacturers are cautious about expanding production. Except for the planned expansion of Jiantao laminate (+ 36%), the total production capacity of glass yarn will not change much.

Company analysis: rising prices and product upgrades drive copper clad laminates upward

The world's largest manufacturer of copper clad laminate, expanding its market share

CICC expects copper clad laminate prices and shipments to keep growing in the second half of 2017 and stable in 2018. The increase in the proportion of high-end copper clad laminates will also promote the growth of copper clad laminates business. Jiantao laminate is the global leader of copper clad laminates, ranking first in the world for 12 consecutive years, with a market share of 14% in 2016. CICC expects its market share to reach about 16% in 2017. The company aims to achieve a 20% market share by 2019. The improvement of CCL market concentration and the company's vertical integration advantage will help the company to further increase its market share.

The company's gross profit margin reached 31.7% in the first half of 2017, an increase of 12.6 percentage points over the same period last year and 6.4 percentage points higher than the previous year, breaking the record of 29.6% in the first half of 2006. CICC believes that the steady growth of its gross profit margin is mainly due to rising product prices and product upgrading. Regardless of the increase in product prices and assuming that the price of raw materials purchased by the company is in line with market expectations, CICC believes that the upgrading of the product structure will help the company's gross profit margin increase by 40.5% year-on-year.

With the upgrading of the product portfolio, the company can increase its sales revenue while expanding its market share. Thin plate, halogen-free copper clad laminate, high temperature resistance and other high value-added copper clad laminate will maintain the growth trend.

According to Prismark, the company's share of the global halogen-free copper clad laminate market reached 1.9% in 2016, a breakthrough.

In the first half of 2017, composite epoxy resin (CEM) copper clad laminate and epoxy glass copper clad laminate (FR4) accounted for 54 per cent of the company's total revenue, while paper copper clad laminate accounted for 10 per cent. High-end copper clad laminates accounted for 14% of total revenue in the first half of 2017 and 6% in 2016. The company plans to have high-end copper clad panels account for 30% of total revenue by 2019.

In the first half of 2017, tight supply of glass yarn and glass cloth led to a decline in the company's copper clad laminate production and shipments. Shipments of copper clad laminate decreased by 8% compared with the same period last year, and the average monthly shipment dropped to 9 million square meters. However, the tight supply of materials pushed up the price of copper clad laminate. Despite the decline in shipments, revenue from the company's copper clad laminate business increased by 24% to HK $7.364 billion.

In the second half of 2017, the company plans to expand the production capacity of copper clad laminate, glass yarn and glass cloth, and the new capacity will begin to be expanded before the end of the year. The increase in glass fiber and glass panel production capacity will help alleviate the company's shortage of raw materials, and help promote external sales growth and increase the company's overall revenue growth. In addition, the company is also working together to develop more cost-effective battery-grade copper foil. The company timely expands the production capacity of battery-grade copper foil product line.

Real estate business: abundant cash inflows and is expected to maintain a high dividend payout rate

Real estate sales accounted for 18% of revenue in the first half of 2017. CICC expects HK $6 billion in revenue from its property projects over the next three years. In the first half of 2017, the sales revenue of Phase 2 and 3 of Kunshan Development Zone, Phase 1 of Jiangyin Jian Yu Garden and Phase 4 of Huaqiao Jian Yu Park contributed HK $1.672 billion to revenue, with an EBITDA profit margin of 27%.

In the future, we will not increase the land reserve and focus on the development of copper clad laminate business. Professional institutional investors have doubts about the company's real estate business, but this doubt is expected to be gradually resolved after 2019, and the company's existing real estate sales projects will be completed by 2019. The company has no further land reserve plan and will focus on the main industry of copper clad laminate.

Financial analysis and valuation

The company's revenue in 2016 was HK $15.53 billion, corresponding to a compound growth rate of 13.6% in 2003-16, and net profit in 2016 was HK $4.35 billion, corresponding to a compound growth rate of 13.2% in 2003-16.

The company maintains a high dividend payout rate. Kingboard holds a 68.8% stake in Kingboard laminates. In the middle of this year, the company paid a dividend of HK $0.326 per share, with a dividend yield of 50 per cent. CICC expects the company's dividend payout ratio to remain at around 50%.

There is plenty of cash on hand. In the past five years, the company has kept its cash on hand at more than HK $2.4 billion, reaching HK $5.37 billion on July 30, 2017, mainly due to real estate sales. The company's net operating cash flow remained positive in 2016 and the first half of 2017, with a net debt ratio of 8.9% in 2015.

The company is expected to pay a special dividend. The settlement of income from Kunshan real estate project is expected to bring a lot of cash flow, and CICC expects the company to continue to pay special dividends.

CICC raised its 18-year earnings per share forecasts for FY17 and FY by 7 per cent and 22 per cent to HK $1.21 and HK $1.23 respectively, taking into account higher-than-expected profit margins. After the earnings forecast adjustment, CICC's forecast is 18% higher than Bloomberg's 2018 earnings per share forecast, and is more confident about the company's performance in 2018.

Maintain the "recommended" rating and raise the target price by 35% to HK $15.3, corresponding to 2.7 times 2018 price-to-book ratio. The company's valuation is lower than that of comparable Shengyi Technology (3.5 times 2018 price-to-book ratio), so CICC believes the company is attractive to domestic investors.

Risk:The price of copper clad laminate began to decline; the price of raw materials fluctuated. (editor: Hu Min)