Kunda - not immune to current global crisis

Tour at China Kunda's plant. We recently had the opportunity to visit China Kunda (Kunda)'s manufacturing plant in Shenzhen, PRC. This production facility, whose assets were acquired from Shenzhen Kunda Precision Mould (95% owned by CEO and Chairman Mr Cai Kaoqun) for a net cash consideration of RMB34,575 last month, has a whole range of specialized machines (such as EDM and CNC machines) involved in the manufacture of its moulds and in-mould decoration (IMD) products. Apart from the manufacturing equipment, we were also introduced to a number of the group's niche products, along with their production techniques used to achieve the desired results.

Prospects for its moulds. In the face of a worsening global economic outlook, we understand that Kunda has remained cautiously optimistic about its business prospects, saying that its two core segments are still likely to hold up fairly well in the downturn. Specifically, it is expecting to benefit from greater demand for its auto moulds, as its premium automotive customers turn to the company for quality yet affordable moulds to reduce costs. We also note that a considerable US$2.5b worth of precision plastic moulds still had to be imported into China in 2006, thus presenting the group with ample room for import substitution.

Prospects for IMD products. As for its IMD products, Kunda said that it is currently one of only three companies in China that is capable of producing the IMD products. While some companies had tried to enter this technically challenging niche market, management revealed that they have not been successful. Moreover, these products, which are significantly more durable, aesthetic and environmentally-friendly, have enabled the group to break away from intense competition in the consumer electronics space and move up the value ladder. Kunda has two IMD production lines currently, one for smaller products like handsets and another for bigger parts like laptop and air-con covers.

Not immune to current global crisis. Despite the optimism by the company, Kunda acknowledges that it is not immune to financial crisis and global slowdown. Lower consumer spending is likely to affect the demand for its products and in turn its profitability. With tight credit conditions and aggressive expansion, the company also said that its working capital, while still enough for now, is rather tight. However, the group has been actively looking for strategic partners, alliances and other sources of financing to resolve the issue. We do not have a rating on the stock.

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