Business should improve from the low in 1Q09. We believe business for KCF has improved from a very weak 1Q09, when sales were hit by a sharp drop in volume that resulted in under-utilised capacity. Coupled with the need to deplete inventories acquired at higher costs, KCF incurred a net loss of HK$80.3m during the quarter. Our recent discussions with Elec & Eltek (ELEC SP, US$1.22, Outperform), KCF’s sister company and one of its customers, indicate that business had bottomed in mid-1Q09 and volume has recovered by more than 20% qoq in 2Q09. We believe KCF should be experiencing the same, given that 77% of its revenue was derived from the Kingboard group of companies in 1Q09.

Copper prices have recovered; some Taiwanese peers starting to raise prices. Copper prices reached a bottom at end-Dec 08 and have been recovering since, climbing mom from March. This should translate into higher selling prices as KCF passes on rising material costs to its customers. We have seen several of its Taiwanese peers raising copper foil prices by a few percentage points in 2Q09.

Forecasts and target price unchanged; but downgrade to Underperform from Neutral. We have left our FY09-11 profit forecasts intact, but have downgraded the stock from Neutral to Underperform as it is now trading above our target price of S$0.195 and the privatisation offer price of S$0.21 from its Hong Kong-listed parent company. Shareholders can either opt for 21 Sct cash, 0.374 new Kingboard Laminates share (1888 HK, HK$3.99, NR) or a combination of cash and shares of Kingboard Laminates.

We would advise short-term investors to sell in the open market as we believe its share price may pull back if the exercise falls through. However, for long-term investors, we deem the offer price unattractive, valuing the company at a huge discount to its last announced book value of HK$3.12 or 0.4x P/BV vs. Kingboard Laminates’ 1.6x P/BV. We would advise them to hold on to their investments.

In the meantime, investors looking for PCB exposure can buy Elec & Eltek (ELEC SP, US$1.22, Outperform) and Jadason (JAD SP, S$0.07, Buy).