Fitch Ratings (Thailand) Limited has affirmed KCE Electronics Public Company Limited's National Long-Term Rating at 'A-(tha)'. The Outlook is Stable.
The affirmation reflects Fitch's expectation that KCE's operating performance will remain strong on robust global printed circuit board (PCB) demand, which, together with its currently low leverage, will sufficiently support its large committed capex plan for a new factory in the Rojana Industrial Estate in Thailand. KCE's leverage, measured by net debt/EBITDA, could increase to above 1.5x by end-2023, from 0.5x at end-2021, but Fitch expects it to fall to 1.2x by end-2024, factoring in its capex plan for the first phase of the Rojana project.
KEY RATING DRIVERS
Expansion Mode: KCE has invested in capacity expansion since 2021 to meet growing PCB demand. Capex increased to THB1.7 billion in 2021 (2020: THB332 million), most of which was used to expand capacity at its Lad Krabang and Ayutthaya plants by 600,000 sq ft per month. The Rojana project is a three-phase greenfield project with total capacity of up to 3 million sq ft per month, or 1 million sq ft per month in each phase.
The company has not finalised its budget, but Fitch has included in our estimates planned capex of around THB6.5 billion for factory construction and machinery for the first phase in 2022-2023. KCE said the capex for machinery in the second and third phases, estimated at around THB5.5 billion, is flexible and can be delayed if demand is weaker than the company expects. Fitch does not include this amount in the rating case, as the company has not committed to it.
Temporary Leverage Increase: Fitch expects net debt/EBITDA to rise to 1.1x by end-2022 and 1.6x by end-2023 before falling to 1.2x by end-2024, supported by healthy operating cash flow at its existing plants and a ramp-up at its new Rojana project. KCE has maintained a sound financial profile, with nearly net cash at end-2020, providing headroom for its large capex plan over 2021-2023. We believe KCE will generate sufficient operating cash flow to support the future phases of the Rojana project while maintaining leverage below 1.5x over the medium term.
Strong Demand Supports Earnings: Fitch expects KCE's revenue and EBITDA to continue to increase strongly by 20%-25% in 2022, led by robust demand and the capacity expansion in 2021. The Rojana project, which is likely to start operating in 3Q23, will support KCE's continued earnings growth over the medium term.
We expect KCE's EBITDA to reach THB5.5 billion by 2024, from THB3.4 billion in 2021, while maintaining a solid EBITDA margin of 21%-22%. The increasing penetration of electronic content in automobiles and the rising market share of electric vehicles will lead to sustained demand growth over the medium term.
Leading Auto PCB Producer: KCE's rating reflects its leading position in the automotive PCB business, which has longer product cycles and deeper customer engagement, providing higher barriers to entry and wider margins than those of consumer electronic PCB. The company is one of the world's top-10 automotive PCB makers, with market share of around 3%-5% by revenue.
Reduced Customer Concentration: KCE's expansion into the high-density interconnect (HDI) segment, including non-automotive products, is likely to reduce its customer concentration gradually over the medium term. The company's five largest customers contributed about 50% of its total PCB revenue in 2021, declining from about 65% in 2010.
Currency Volatility: KCE, as an exporter, is exposed to foreign-exchange fluctuations, leading to volatile EBITDA margins. Appreciation in the Thai baht would hurt its earnings, as around 80%-90% of its revenue is in US dollars and euros, while around 40%-60% of its costs are in baht, which are mostly unhedged.
DERIVATION SUMMARY
KCE's business profile is moderate relative to that of nationally rated Thai peers, but its financial profile is stronger. KCE's business and financial profiles are comparable with those of Polyplex (Thailand) Public Company Limited (PTL, 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, as most of its products are standard films that are considered a commodity and face intense competition. KCE focuses on automotive PCBs, a niche segment with higher barriers to entry. However, PTL has more geographically diversified operations and a broad customer base. Both companies have low financial leverage with net debt/EBITDA of below 1.5x. The ratings are therefore the same.
Eastern Polymer Group Public Company Limited (EPG, A-(tha)/Stable) and KCE have businesses that supply the automotive industry, but different product offerings. EPG is a manufacturer of polymer and plastic automotive parts and accessories for utility trucks, which accounted for about 50% of its total revenue.
EPG has a more diversified customer base across diverse end-user segments than KCE, given its diversified core businesses in thermal insulation and food and beverage plastic packaging. KCE and EPG have comparable operating scales, but KCE generally has better EBITDA and free cash flow margins. Their ratings are the same due to their comparable business profiles and similarly low financial leverage.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Revenue to continue to increase strongly by 20%-25% in 2022 (2021: 30%) due to strong PCB demand for all end-market sectors, including automotive, consumer and industrial, as well as increasing utilisation of the company's capacity addition. Revenue to expand by 15%-20% a year in 2023-2024, supported by healthy demand and the capacity expansion from its new factory in the Rojana project.
- EBITDA margin to stay at around 21%-22% in 2022-2024 (2021: 22.4%) amid high copper prices in light of the company's ability to increase selling prices, improve capacity utilisation, and a higher proportion of sales from high-margin special-grade PCB products.
- Large capex plan for the Rojana project and technological upgrade of around THB8 billion over 2022-2024 (2021: THB1.7 billion). This includes the capex plan for building the production facilities in the first phase of the Rojana project.
- Maintain high dividend payout ratio of 80% in 2022-2024 (2021: 78%).
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- KCE successfully expands its operating scale and diversifies its customer mix, while maintaining net debt/EBITDA below 2.0x over a sustained period.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Lower cash flow or higher investments than Fitch expects or acquisitions leading to net debt/EBITDA above 1.5x on a sustained basis;
- Decline in operating EBITDA margin below 13% over a sustained period;
- A weakening in the company's market position or loss of key customers.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: KCE had THB3.7 billion in debt at end-2021, of which THB2.5 billion is due in 2022. Most of the short-term debt is packing credits, which are bank loans for financing export activity. The liquidity is supported by a high cash balance of THB2.0 billion and uncommitted revolving facilities of THB17.1 billion and USD81 million at end-2021. Additional capex for capacity expansion is likely to be funded by internal cash flow generation and new long-term loans from banks.
ISSUER PROFILE
KCE is one of the 10-largest automotive PCB makers in the world by revenue. Automotive PCB accounted for around 80% of its PCB sales. KCE exports its PCB products globally. Europe contributed 44% of PCB revenue in 2021, the US 18% and Asia 37%.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Additional information is available on www.fitchratings.com