Bangkok--17 May--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed KCE Electronics Public Company Limited's National Long-Term Rating at 'A-(tha)'. The Outlook is Stable.
KEY RATING DRIVERS
Leading Auto PCB Producer: KCE's rating reflects its leading position in the automotive print circuit board (PCB) business, which offers wider margins and has higher barriers to entry than PCBs for consumer electronics products. The company is one of the world's top-10 automotive PCB operators, with revenue market share of around 5%. Its profit margins are higher than the average of PCB producers, supported by a competitive cost structure due to an efficient manufacturing process and Thailand's low labour costs.
Copper Price Exposure: KCE is exposed to changes in raw material costs, particularly the commodity copper (including copper foil and copper anode), which accounted for around 18% of the cost of goods sold in 2017. We expect the copper price to continue to increase in 2018 and KCE's operating EBITDAR margin to weaken to around 20%-22% (2017: 23.7%) as a result.
Prices are agreed with customers annually, allowing KCE to propose price rises at the next round of negotiation if the medium-term outlook is for higher raw-material prices However, the extent to which the company can pass on higher costs will depend on the market-power dynamics between the company and its customers. In 2017, KCE's operating EBITDAR margin dropped to 23.7% from 29% in 2016, as copper price increases in 2017 were not fully passed on to customers through product prices.
Strong Financial Profile: Fitch expects KCE to continue to generate strong operating cash flow and maintain moderate financial leverage in the medium term in spite of weaker earnings and higher capex. We expect the company's current low financial leverage of 0.7x at end-2017 to provide flexibility to support an increase in investment. KCE's FFO-adjusted net leverage is likely to increase due to higher capex, but we expect it to remain below 1.0x over the next three years.
Growth Opportunities: KCE benefits from long-term growth prospects in the automotive PCB market. This is supported by global growth in vehicle production, particularly electric vehicles, and higher electronic content in automobiles. We expect its sales volume to increase by at least 5%-6% per annum over the medium term. In the past three years, KCE's revenue increased at a compound annual growth rate of 8%, to THB14.2 billion in 2017 from THB11.3 billion in 2014.
Customer Concentration; Foreign-Exchange Risks: KCE has a concentrated customer mix and faces ongoing price competition and technology risks associated with the electronics segment. In addition, the appreciation of the Thai baht against the US dollar during the manufacturing cycle could lower revenue in baht terms.
DERIVATION SUMMARY
The business profile of KCE is moderate relative to Thai nationally rated peers, but its financial profile is stronger. KCE's business and financial profiles are comparable to those of Polyplex (Thailand) Public Company Limited (PCL, A-(tha)/Stable), which is one of the top-10 polyester film producers in the world by revenue. PTL operates in a higher-risk industry, with the majority of its products standard films that are commodities and face high competition, while KCE focuses on the niche segment of automotive PCB, which has higher barriers to entry. However, PTL has more geographically diversified operations and a diversified customer base. KCE generates higher EBITDA margin, but both companies have low financial leverages with total adjusted net debt to EBITDAR of below 1.5x. The ratings are, therefore, the same.
Compared with Tipco Asphalt Public Company Limited (TASCO, A-(tha)/Stable), the largest asphalt producer in Thailand and the leading player in Asean, TASCO has more operating sites in seven countries in Asia and competition in the asphalt business is lower than that in the PCB business. However, KCE has stronger EBITDAR margin. Both have low financial leverage. So, KCE's rating is equal to TASCO's rating.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Flat revenue growth in 2018 and mid-single-digit revenue growth over 2019 and 2020
- Copper price to increase in 2018
- EBITDA margin to decrease to 20%-22% in 2018-2019 (2017: 23.7%)
- Higher capex for capacity expansion during 2019-2021
- 60% dividend payout ratio
- No major acquisitions.
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
- A substantial increase in size and a more diverse customer mix, and an increase in EBITDAR margin above 25%, while maintaining FFO-adjusted net leverage below 1.5x over a sustained period.
Developments that May, Individually or Collectively, Lead to Negative Rating Action
- Lower cash flows or higher investments than Fitch expects, or acquisitions leading to FFO-adjusted net leverage above 1.5x over a sustained period.
- Decline in operating EBITDAR margin below 20% over a sustained period if the competitive position or the ability to pass-on costs increases weaken
- A weakening in the company's market position or loss of key customers.
LIQUIDITY
Manageable Liquidity: KCE had THB1.7 billion of debt due within one year as of end-2017. Most short-term debt is packing credits (bank loans for financing export activities), while a THB588 million long-term loan is due in 2018. The company has a cash balance of THB1.1 billion, while its liquidity needs for working capital are supported by an uncommitted revolving facility of THB18.2 billion at end-2017.