Elec & Eltec (Electronic, PCB Industry)

The share price of E&E has been declining since hitting a peak of US$2.85 in Feb06 to a low of US$2.12 Jun06. At the close of 30 Jun 06, the share price was US$2.14, giving a historical PE of 7.7 and yield of 8.9%. I am expecting the business of the current FY06 to improve over FY05 and a slight increase in dividend. If we exclude the interim dividend that was already paid, and assuming the final dividend of S$0.07 and special dividend of S$0.13 can be maintained, the dividend yield is almost 5.9% based on current share price.

The company is originated from Hong Kong and has the primary production (14) bases in China, 2 plants in Thailand and 1 in HK. It is one of the largest (if not the largest) in the China, benefitting from the relocation of foreign electronic goods producers and growth of outsourcing in the recent decade. Kingboard HK became the new parent in the recent year after acquiring majority shares in its HK holding company. Apparently, one direct benefit from this new shareholder is its supply of copper related material for PSB production, which was cited as one of the factors contributing to better GP by E&E in its Q3FY06 announcement. The 9 months NPAT was already 28.8% above last year's although the revenue growth was a lower 11.9%, with a better GP and better cost controls. E&E has been on a expanding mode, and is currently constructing a new plant (total US$74M over FY06-07) in Kaiping, China. With the substantial investments, the bank loan has growth to US$120.5M in Mar06 (9 months) compared to US$89.9M in FY04 (FY05 - US$123.2).


Compared with FY01, FY05 profit trend was lower, suggesting a lower GP compared with 5 years ago.









Conclusion

From FY 2005 annual report and the outlook for FY 2006 is quite positive, also evident from the YTD 9 months' results. The Chairman has cited the following as the risks factors:

1. Increase in minimum wages costs in mainland China
2. Macro economic policies adopted by the Chinese Government in regulating its overheated economy
3. Rising raw material costs e.g. copper & oil prices
4. Increasing interest rates - due to high gearing
5. Appreciation of RMB, however, this also help to lower import costs of key raw materials

My thoughts....

On a valuation basis, the current share price presents an opportunity. The company has strong foundation in China and has expressed its "aim to maintain consistent dividend policy" (however, having learnt from IDT investment's lesson, the sustanability of dividend is more important). The investment merits of this company should be based on industry trend and economic cycle. On market capitalisation basis, it is more $500M based on current share price, hence a mid-cap, which I'm increasingly more incline to invest in, rather the small cap ones.

Apart the risks as above, my other concerns is the slow down in US economy, which is expected to high electronic industry.

At the current price, I find a comfortable margin of safety of >45%, and with only the final quarter results to be announced, the performance of the company is more or less on track to my projection. Hence, I'm looking at a entry price of US$2.15 or below, but for a short holding period, preferably to liquidate before end of this year (I'm concerned about slow down in world economy). I probably would like to invest 2 lots and a max of just 3 lots, as the per share cost is rather high.