KCE - 3Q24: Results below all forecasts

Missing all estimates, KCE reported a 3Q24 net profit of Bt216mn, down 58% YoY and 66% QoQ on FX loss and lower high-margin PCB sales, which cut gross margin to 20.2% in 3Q24 (vs 22.0% in 3Q23 and 24.8% in 2Q24). We expect some improvement as the baht weakens and the new machinery is installed for high-margin special grade PCB (HDI) products. We cut our 2024F core profit forecast by 22% and 2025F by 19% to reflect the weakness. However, we stay Outperform as we believe 3Q24 was bottom. Our new TP is Bt40.00 based on 25X or -0.5 SD of its 5-year PE mean.

Strong baht leads to weak results. KCE reported a 3Q24 net profit of Bt216mn (-58% YoY and -66% QoQ), less than half estimates of ~Bt500mn, as the strengthening of the baht against the USD gave a Bt170mn FX loss. Excluding this, core profit was Bt386mn in 3Q24, down 18% YoY and 27.3% QoQ, with the strong baht reducing sales in baht terms by 12.1% YoY and 5.2% QoQ; also impacting was a 6.4% QoQ fall in PCB sales volume on a 15.8% QoQ drop in HDI PCB sales which arose out of replacement of old machinery with new, more efficient equipment, which is expected to be completed by the end of the year. Gross margin shrank to 20.2% in 3Q24 from 24.8% in 2Q24 and 22.0% in 3Q23 due to the stronger baht and higher costs from both high-cost inventory at the beginning of the quarter and a 1.9% QoQ increase in copper prices.

Sales by region. Sales to Europe fell 11.23% QoQ (volume down 15.8% QoQ) and to China decreased 17.6% QoQ (volume down 19.2% QoQ). Conversely, US sales increased 2.9% QoQ (volume up 1% QoQ) and domestic sales surged 38.2% QoQ (volume up 33.4% QoQ). We believe that some of KCE's Chinese customers (~200,000 square feet in 3Q24) have shifted production bases to Thailand in response to the increasing risk of US trade restrictions against China, allowing KCE to supply products domestically instead of exporting to China.

4Q24 outlook. We expect KCE’s core profit to improve QoQ in 4Q24 as the Thai baht has weakened by over 3.9% QTD to Bt34.9/USD, and the replacement of old machinery with new, more efficient equipment is expected to be completed by end-2024, allowing production to fill the order backlog of high-margin HDI products, for which demand is strong and up to now KCE has been unable to meet. We expect 3Q24 to be the year’s worst quarter

Cut 2024-2025 forecasts. We have cut 2024F by 22% and 2025F by 19% to reflect the lower revenue and production volume, and have adjusted our gross margin assumption down to 22.6% in 2024 from 24% and to 23.5% in 2025 from 24.5%.

Valuation and recommendation. We believe the significant decline in share price has already incorporated the negatives. Given the improvement in sentiment as the baht weakens and the expected recovery in performance, we maintain our Outperform with a new target price of Bt40, based on 25x PE or -1SD of the 5-year PE mean.

Key risks are changes in purchasing power, weaker-than-expected automotive industry, higher raw material costs (copper and epoxy resins) and exchange rate volatility. Key ESG focus areas are labor management and suppliers.