Eucon

EUCON'S Shanghai plants are operating at full capacity. With strong orders from customers, management plans to expand its capacity. New machines are scheduled to be added over the next few months, and new factories are under construction close to its Shanghai plants. This would allow the group to meet the demand for drilling services as well as finished PCB and/or mass laminates. The group's expansion in its other markets is on track. As it moves into the seasonally stronger H2 of the year, momentum remains healthy and Q306 is expected to be better than Q206.

Expanding capacity: The demand for PCB manufacturing remains robust. Eucon's Shanghai plants (Zhuo Kai, Eu Ya, Zeng Kang and Yaolong) are operating at full utilisation. Plans are underway to expand its production capacity.

Eucon's current total monthly production capacity is up to 400,000 sq ft of PCB. Management intends to add another 300,000 sq ft of PCB production capacity a month at the new plant behind Zhuo Kai (or Zhuo Kai 2). Production is expected to commence in November 2006.
The construction of its new plant (Zeng Kang 2) is on track. Management expects production to begin in early October. This plant can house up to 66 mechanical drilling machines. Eucon intends to start with 40 drilling machines and progressively increase the number of machines. Management is targeting to increase the number of drilling machines to 120 by next year.
Eucon reported a net profit of $4 million in Q206 and $6 million in Q106. We expect H206 performance to be better.

Outlook remains healthy: Eucon has moved into the Korean market with the setting up of a Korean-based subsidiary to leverage on the growing Korean mobile communications and electronics industry and extend its services to Korean PCB manufacturers. This subsidiary is expected to start contributing in 2007, with significant contribution from 2008. The performance of its laser drilling operations is expected to improve in Q406. This would contribute to improved earnings in H206.

Valuation and recommendation: We estimate earnings of $26.3 million for FY06 (EPS: 4.6 cents) and $36.6 (EPS: 6.4 cents) for FY07. Eucon's PE valuation, based on our forecast, is 5.3x 2006F, 3.8x 2007F and 3.1x 2008F earnings. PE-G valuation of 0.1x remains attractive. Maintain 'buy' with a 12-month target price of 48 cents.