|Shares Out. (in M):||1,038||P/E||12||-|
|Market Cap (in $M):||3,005||P/FCF||-||-|
|Net Debt (in $M):||1,726||EBIT||0||0|
|Borrow Cost:||Available 0-15% cost|
Kingboard Chemicals (SEHK:148, market cap: $3bn, EV: $5.5bn) stock faces the prospect of de-rating with a potential catalysts over the next 12-18 months. The company's stock has had a meteoric rise up over 100%+ year to date (see chart below), however this steep rise in our view has outpaced the fundamentals in its core PCB, laminates and chemicals business segments. The property segment has been levered to the red hot Chinese market, however there are several signs this is cooling off, due to government measures, due to potential bubble territory and hence, we would certainly not be chasing the stock at 5 year highs.
A catalyst that may weigh on the stock is the release of an Ernst & Young (E&Y) independent review report (which had been delayed for 5 years!): http://www.kbcopperfoil.com/upfile/2016101208255142195.pdf related to Kingboard Copper Foil, majority owned by the Kingboard Group. Refer to Appendix A of the E&Y report (dated 11 Oct 2016). The background for VIC readers is that Kingboard Copper Foil ("KBCF"), listed in Singapore (SGX:K14) had historically supplied raw material copper foil to its parent, Kingboard Group. However, since 2011, KBCF had essentially ceased its operating business altogether entering into a license agreement with a unknown entity called Harvest Resource (http://www.kbcopperfoil.com/upfile/2013090212115329235.pdf). This was done after minority investors voted against interested party transactions between the parent and KBCF. E&Y was appointed in Nov 2011 to carry out an independent review of the interested party transactions between KBCF and Kingboard Chemical and in respect to the licensing arrangement between KBCF and Harvest.
In addition, the Kingboard Group has been involved in a lengthy litigation by a US investor (http://www.kbcopperfoil.com/upfile/2011081012173264317.pdf) in the Bermuda courts which has dragged on for several years related to issues around transfer pricing, Harvest and corporate governance. The recent hearing summary is: http://www.kbcopperfoil.com/upfile/2016012508305778364.pdf. The next hearing is set for early 2017. Given the Oct 2016 release of the E&Y report, in conjunction with next year's hearing, this may weigh on the stock of the parentCo as Mr. Market and broader investors digest the information independently related to the findings by E&Y, in particular comments related to Harvest. The stock is not as well followed as several sell-side analysts have discontinued coverage on both the parent and the subsidiary. Although not by itself a concern, the balance sheet of Kingboard stands at over 3x debt/EBITDA. In addition, there has been reportedinsider selling at prices lower than current: http://www.scmp.com/business/markets/article/1958521/fresh-insider-buying-star-performers-offers-clues-potential-winning. In sum, the above may suggest the stock has more than priced in the bull case over the next 12-24 months and could de-rate 30% or so and has likely limited upside in the near-term.
Kingboard Copper Foil - background
Kingboard Copper Foil (KBCF), whose parent is Kingboard Chemical was engaged in the manufacture and trading of copper foil, a raw material for the laminates and PCB industries. As per the 1999 IPO prospectus "In FY1999, sales to the Kingboard Group accounted for almost 100% of the turnover and profit before taxation of the copper foil business of the KBCF Group". In fact, KBCF had not achieved relevant diversification beyond the parent. KBCF listed on the Singapore stock exchange at $0.53 in 1999, however, unfortunately for IPO investors, this proved to be the "all-time" high on the stock as since the SGX IPO, both margins and the stock declined. At the same time, the parent, Kingboard Chemicals witnessed rising stock price. In 2011, E&Y was appointed to carry out an independent review of the interested party transactions (IPT) between KBCF and Kingboard Chemical and in respect to Harvest (license agreement initiated by KBCF in 2011 after minority investors vetoed against IPTs)
E&Y independent review - why did this process taken as long as 5 years?
As mentioned above, E&Y was appointed in Nov 2011 to carry out an independent review of the interested party transactions between KBCF and Kingboard Chemical and in respect to the licensing arrangement between KBCF and Harvest. Link: http://www.kbcopperfoil.com/up/Independent%20review.pdf. What is surprising is that this process has taken as long as 5 years. The report has now been released: http://www.kbcopperfoil.com/upfile/2016101208255142195.pdf
Harvest - don't minority investors deserve greater transparency?
VIC readers should refer to the full report above in its entirety and Appendix A by E&Y dated Oct 11 2016. Of interest are comments related to the entity, Harvest of which as we mention little is known to investors. A few comments from the E&Y report, and VIC members should read the entire report :
Kingboard Chemical stock has had a meteroic rise which is unlikely sustainable over next 12-18 months
While Kingboard Chemicals stock has risen significantly (a 10-20x bagger) over the last 15 years, KBCF has consistently declined since IPO and lost value for minority shareholders. In the last 12 months, a 100% rise in the stock appears excessive, in light of the recent developments, which we expect may weigh on the stock price and investor sentiment until more clarity emerges on Harvest.
Given the above, we would expect that the stock could correct as much as ~30% and has likely limited upside in the next 12 months. The risks to the thesis could be significant demand for their core business -- PCB, laminates and a stronger than expected Chinese property market.
APPENDIX: SEGMENT BREAKDOWN
Source: Public filings, CapitalIQ, company website.
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E&Y report. Slowing Chinese property market.