KCE Electronics:1QFY16net profit seen further growth

　　1QFY16 net profit to grow 44% y-y, 10% q-q to Bt735mn.

　　According to our inquiries, 1QFY16 earnings are likely to beat our forecast. Sales areexpected to grow 22% y-y and 9% q-q to Bt3,123mn on continued orders. Gross marginwould narrow down due to a 3.5% cut in selling price in 2016 as KCE has policy to reduceproduction cost for its clients on annual basis, but it is likely to hit a record high at 34% asutilization rate at its new facility appears to climb further given production effectiveness.

　　SG&A to sales would decline on cost saving of the new facility compared to that of oldfactory. Additionally, we expect KCE to record FX gains on the back of a stronger baht. Assuch, we expect net profit to grow 44% y-y and 10% q-q to Bt735mn in 1QFY16.

　　FY16 earnings projection raised by 8% on potentially stronger-than-expected results.

　　In view of potentially stronger than expected earnings in 1QFY16, we raise our FY16earnings projection by 8%. Our forecast is based on: 1) a rise of 19% y-y in total sales toBt14,849mn on higher utilization rate at Ladkrabang factory with its two phases runningat 95% on average, 2) a gradual improvement in gross margin over course of the year; and3) a decrease of SG&A to sales given cost saving at the new facility. As such, net profitwould grow 43% y-y to Bt3,194mn.

　　Rating upgraded to ‘TRADING BUY’ with target price raised to Bt78.75.

　　KCE remains our top pick in the electronic component sectors in view of strong growthpotential. The company’s major clients are in the auto sector, which has witnessed decentgrowth compared with other sectors. More important is its capacity expansion to supportgrowing demand helped boost earnings over the past and the company’s bottom line isexpected to continue to grow in the foreseeable future. We thus upgrade our rating to‘TRADING BUY’ with an upwardly revised target price of Bt78.75.