Bank of America Securities has released a research report initiating coverage on KB Laminates (01888) with a "Buy" rating and a target price of 53 Hong Kong dollars. This valuation is based on 12 times the projected price-to-earnings ratio for the second half of this year through the first half of next year, representing 0.5 standard deviations above the historical average trading multiple of 9 times.
The firm notes that the company is currently trading at approximately 7 times forward one-year earnings, below its historical average. The analysts believe KB Laminates will benefit from Copper Clad Laminate (CCL) price increases and spillover effects from a shortage of high-end fiberglass cloth, leading to significant earnings expansion. They project a compound annual growth rate of 44% for revenue and 62% for earnings between 2026 and 2028. Earnings per share estimates for 2026, 2027, and 2028 are set at 2.67 HKD, 6.16 HKD, and 7.01 HKD, respectively.
Understanding the Core Driver
Bank of America highlights that KB Laminates' vertical integration significantly enhances its earnings sensitivity to upstream material shortages and price increases. CCL price hikes in 2025 primarily reflected rising copper prices, while the more frequent increases since early 2026 have been driven mainly by a shortage of fiberglass cloth. The bank points to a structural imbalance in the fiberglass cloth industry due to rapidly rising AI demand and long lead times for equipment, leading them to expect this upcycle to persist until 2027.
The analysts anticipate that the average selling price (ASP) for CCL will expand by 130% this year and 40% in the first half of next year. Their analysis suggests that a 100% expansion in CCL ASP would boost the company's gross margin by 28 percentage points and deliver 200% growth in earnings per share this year.
Capitalizing on AI Opportunities
Bank of America notes that KB Laminates is also actively expanding its supply of specialty cloth products to external customers to capture the AI opportunity. The company has already been certified by major AI CCL suppliers, including EMC and Panasonic, and is targeting clients such as Shengyi Technology, Taiwan Union Technology, Iteq, and Doosan of South Korea. Furthermore, due to its own yarn production and greater access to Toyota Industries equipment compared to peers, KB Laminates is well-positioned to navigate ongoing supply constraints. The bank expects external cloth sales to contribute 4% and 7% of revenue in 2027 and 2028, respectively.
Market Sentiment and Risks
The bank notes that the stock has surged since April this year, driven by the market's pursuit of hardware sectors benefiting from price increases spurred by the AI demand boom, spanning from CCL to cloth, copper foil, and MLCCs. Investors have strong expectations for KB Laminates' earnings expansion due to frequent price hikes (1 to 2 times per month) and stronger-than-expected price adjustments (rising from 10% to 15%). However, the stock price has fallen nearly 70% from its late June high, following a broad tech sector correction and debates over potential specification changes for downstream PCB boards on the Nvidia Rubin Ultra platform.
Bank of America believes AI hardware demand will remain solid, supported by increased capital expenditure from US cloud service providers. However, they note that KB Laminates' exposure is still primarily in traditional sectors, and its pricing power will largely depend on AI demand and the overall supply-demand dynamics of the supply chain. Additionally, after more frequent and larger price increases in July, investors are beginning to consider a high base effect when evaluating price momentum for the fourth quarter of 2026 through the first half of 2027. Consequently, despite high confidence in its earnings outlook, investors are inclined to remain cautious on the company's valuation.
The bank mentions potential risks for the company, including slower-than-expected demand growth, a potential oversupply of CCL, failure to pass on price increases to end customers, and slower-than-expected progress in AI-related developments.