11 | Feb | 2011

EXECUTIVE Q&A: KCE PROSPERS IN INCREASINGLY HIGH-TECH WORLD

SHAREINVESTOR

KCE Electronics Plc (KCE) was established on Nov 5,1982 with initial registered capital of 12 million baht. Its core business is printed circuit boards (PCBs)manufactured from an epoxy glass copper lead laminate under the KCE trademark.Deputy managing director Pitharn Ongkosit discusses the company's strategy and outlook.

BUSINESS:
What is KCE's business model?

We manufacture double-sided, multilayered and semiflex multi-layered PCBs and now we are focusing more on hightech multi-layered PCBs. We have four factories, including one that produces the laminate which is a key raw material for PCBs. The remaining three have a monthly capacity of 2.05 million square feet of PCBs and are operating close to a 80% utilisation rate.

Which industries does KCE manufacture the PCBs for?

We are the third-largest automotive PCB supplier in the world. The automotive industry represents 60% of our total revenue, contracted manufacturing 12% and the remainder includes industrial electronics, consumer,telecommunications and others. Close to 98% of our products are exported,60% to Europe,15-20% to the US and the rest in Asia.

Pitharn Ongkosit, the deputy managing director of KCE Electronics Plc,considers currency movements the biggest challenge for his company, but savvy use of financial products has created a natural hedge.

What is a multi-layered and flexible PCB, what type of products would require them, and why KCE is focusing more on these products?

A double-sided PCB is used in technology such as printers. A multilayered PCB for KCE ranges between four and 14 layers and can be used in high-technology such as the airbag monitor o rear-view camera of a car.Flexible PCBs are used in products such as slide or flip mobile phones, because this requires a flexible circuit to link the screen and the keypad. They are also used in the lights of a car, because cars are now using LED and the shape is no longer straight but curved, thus requiring flexible PCBs. We want to move to hightechnology PCBs because we want to continue to grow with our customers and solidify our status as their supplier.It's also beneficial financially because a square foot of double-sided PCB is worth US$7, while a square foot semiflex 10-layer board is worth $100. Five years ago 40% of our products were doublesided PCBs and now they are 20%. Sixlayer PCBs have risen from 15% to more than 30% and our target is 50%.

As the majority of your revenue is export-based, does the baht affect your business and how are fluctuations in commodity prices affecting KCE?

Copper, fibreglass and resin are dollarbased commodities and our customers understand that if there are sharp increases in commodity prices that we have to adjust our selling price as it is a global market. For the currency,40% of our cost is in baht, while the remaining is a natural hedge with US dollars. To adjust with the strengthening baht we have been using financial products such as options, swaps and forwards to stabilise our earnings.

INDUSTRY:
What differentiates KCE from its competitors?

Most of our customers use two to four suppliers and normally we are the second largest. Our quality, ability to delivery on time, price competitiveness and technological know-how differentiate us from our competitors.For example, we developed PCBs inhouse to match our clients' requirements so that we can continue to grow with them. Also, our automotive customers have very stringent requirements for the defect rate, between 4.5 and six pieces per million, and these targets are dropping every year. Thus for a new competitor to suddenly join this business and start making PCBs is very difficult as they would have a massive knowhow gap to overcome.

What is KCE's viewpoint on the automotive industry and its growth potential?

Our customers believe 2011 sales should grow at 10-15%, but what is more interesting is that as cars are becoming more technologically advanced, the number of electronic devices is growing faster than the number of cars that would be produced, and that is very beneficial to us.

FINANCIAL PERFORMANCE:
KCE's financial performance has improved tremendously what are the reasons for this?

In 2008 we began the implementation of KPIs, cost controls and efficiency measures and this has been very important to improve performance. If you look at our sales over the past 10 years they have always been consistent,but the problem was fluctuations in net profit and capex; one year KCE would make 200 million baht the next year we would make a loss. In 2007-08 we spent 800-900 million baht each year on capex,but now we spend 80-140 million,because our managers now know what their targets are and are benchmarked constantly to achieve or outperform them. We were quite happy with the outcome as we achieved a net profit margin of 7-8% in 2010 but there is room for further improvement. Our target is a consistent 10% net profit margin.

MISCELLANEOUS:
What are the biggest risk facing your business today?

The biggest issue that we are resolving are the movement in currencies. In the past two years currencies have been very volatile, and we spend a lot of time trying to figure out what is the best policy,this i why financial products help us to create a more natural hedge.

Where do you see KCE in five years?

We are in the process of building our customer base further that should help accelerate our expansion, as there are so many potential customers that we have not attempted to contact yet. This year we should receive orders from new customers and we will continue to enlarge our customer base further. KCE will continue to focus on improving its efficiency and migrating to manufacturing more high-technology PCBs, we aim to grow 20% per year and achieve annual sales of $500 million.

The Executive Q&A Series is presented by ShareInvestor, Asia's leading financial internet media & technology company, and the largest investor relations network in the region with more than 400 listed clients.The interview is conducted by Pon Van Compernolle, the vice-president of Merchant Partners. For more information, e-mail gancanapol@merchant.co.th or howard@shareinvestor.com or visit www.thailistedcompany.com

BANGKOK POST
11 February 2011