Bank of America Securities: Initiates Buy rating on KB LAMINATES (01888) with a target price of HKD 53.

Bank of America Securities has issued a research report covering KB LAMINATES (01888) with a "Buy" rating and a target price of HKD 53, which represents a projected price-to-earnings (P/E) ratio of 12 times for the second half of this year to the first half of next year, exceeding the historical trading average of 9 times by 0.5 standard deviations. The bank notes that the company is currently trading at an estimated P/E of around 7 times for the upcoming year, which is below the historical average. The bank believes that KB LAMINATES will benefit from the price increases in copper-clad laminate (CCL) and the spillover effects from the shortage of high-end fiberglass fabric, leading to significant profit expansion. It anticipates that between 2026 and 2028, the company's revenue and profit will grow at compound annual growth rates of 44% and 62%, respectively, predicting earnings per share of HKD 2.67, HKD 6.16, and HKD 7.01 for 2026 to 2028. Bank of America Securities states that KB LAMINATES' vertical integration significantly enhances its sensitivity to upstream material shortages and price increases. The price hikes for CCL in 2025 mainly reflect the rise in copper prices, while the more frequent price increases since early 2026 are primarily driven by the shortage of fiberglass fabric. The bank points out that structural imbalances in the fiberglass fabric industry have emerged due to the rapid rise in AI demand and longer lead times for equipment, leading them to expect this upward cycle to continue until 2027. The bank expects the average selling price of CCL for KB LAMINATES to expand by 130% this year and by 40% in the first half of next year. Their analysis indicates that if the average selling price of CCL were to increase by 100%, it would elevate the company's gross margin on CCL by 28 percentage points this year and contribute to a 200% increase in earnings per share. Bank of America Securities also mentions that KB LAMINATES is actively expanding its supply of specialty fabrics to external customers to seize opportunities related to artificial intelligence. The company has received certification from major AI CCL suppliers, including EMC and Panasonic, and aims to expand its reach to clients such as Shengyi Technology (600183.SH), Taiko Optical, Unimicron, and South Korea's Doosan. Additionally, with its own yarn production and access to more equipment supplies from Toyota machinery compared to its peers, KB LAMINATES is well-positioned to handle ongoing supply constraints. The bank expects external fabric sales to contribute 4% and 7% to revenue in 2027 and 2028, respectively. The bank adds that the stock has surged significantly since April this year as the market has chased hardware sectors benefiting from surging AI demand and price increases across various related areas, from CCL to fabrics, copper foil, and MLCCs. Investors hold strong expectations for KB LAMINATES' profit expansion due to frequent price increases (1 to 2 times a month) and stronger-than-expected price adjustments (rising from 10% to 15%). However, the stock price has fallen nearly 70% from its high at the end of June, following a broad adjustment in the technology sector due to concerns over capital expenditures, high valuations, and debates over potential specification changes for downstream PCBs on NVIDIA's Rubin Ultra platform. The bank believes that AI hardware demand will remain solid, benefiting from increased capital expenditures by US cloud service providers, but notes that KB LAMINATES' exposure is still primarily in traditional areas, and its pricing power will largely depend on AI demand and the supply-demand dynamics across the entire supply chain. Additionally, after the more frequent and larger-scale price increases in July, investors are beginning to consider high base effects when evaluating price momentum from the fourth quarter of 2026 to the first half of 2027. Therefore, despite having high confidence in its profit prospects, investors tend to maintain a cautious stance regarding KB LAMINATES' valuation. The bank mentions potential risks the company may face, including demand growth being slower than expected, potential oversupply of CCL, price increases not being passed on to end customers, and AI-related advancements being slower than anticipated.