Elec & Eltek

Kim Eng on 19 Apr

Background: Elec & Eltek International Company is the largest manufacturer of printed circuit boards (PCBs) in China. Along with other PCB manufacturing sites under its parent company Kingboard Chemical Holdings, which is the world’s largest laminate manufacturer, Kingboard Group and Elec & Eltek (E&E) together rank seventh in the world in terms of sales revenue. E&E has an annual production capacity of 6m sq ft, with seven offices worldwide and 14 plants in Asia – one in Hong Kong, two in Thailand and 11 in China.

Why are we highlighting this stock? E&E’s share price has corrected significantly since our last update in April 2011, shortly after it successfully pulled off a dual listing on the Hong Kong Stock Exchange (HKSE). However, its generous final dividend of USD0.12 per share, representing 98% of its 2H11 profits, will go ex on 9 May 2012. We anticipate there will be a trading opportunity between now and 9 May.

Earnings went into a tailspin in 2H11… Following its HKSE dual listing in April last year, E&E was hit by the perfect storm of higher raw material costs, a hike in labour costs due to its exposure in China, as well as the flooding in Thailand that affected its extensive manufacturing operations in the country. Its 2Q11 results were also affected by dual-listing professional fees.

…but cash flow and dividends stayed healthy. Through it all however, cash flow stayed healthy. Even as E&E reported its worst quarterly profit in 4Q11 (net profit fell 59% YoY), operating cash flow recovered strongly to the highest level in the past two years on the back of good working capital management. As at end-2011, net gearing was just 0.2x. Although the company did cut its final dividend per share in 2011 from USD0.25 to USD0.12, it was able to declare healthy 2011 dividends of USD0.27 per share, maintaining its traditional payout ratio of 90-100%.

Earnings expected to recover in 2Q12. Demand remained soft at the beginning of the year, with the company expecting revenue and profits to decline sequentially. However, its medium-term orderbook is beginning to build up again, and E&E anticipates a recovery from 2Q12 onwards. Capacity-wise, the company continues to expand and rationalise its capacity, with a new plant in Yangzhou, China, expected to begin commercial production in 2Q12 with full ramp-up likely by year-end.