Polcolorit scheduled a grand opening of its new factory for the coming weekend. Construction of this factory was the main purpose of IPO made in 2004. The tiles capacity is being increased by 2.25m m2 to 6.75m m2. Additionally, the company will start to produce its own granulate for gres tiles with the capacity of 440t per day. Products coming out of the factory will be branded Ceramica Marconi (CM) and will have rather modern and sophisticated design directed to upmarket niche. The average price per 1m2 of new products is expected to reach PLN 32-39 versus some PLN 22 currently. In 2006, Polcolorit expects CM branded products volume to reach some 0.5m m2 and value PLN 15m. This implies the average price per 1m2 of PLN 30 and capacity utilization in the new factory of some 40-50%. Polcolorit expects CM brand to be sold domestically through specialized wholesalers and boutiques as well as through a Leroy Merlin DIY chain. On export, the company expects new products to be sold mainly on western markets, while Russia, Ukraine and other CIS markets should be further penetrated by mainstream products from the old products. The company expects to reach full capacity of the new factory within 2-3 years. In 2008-2009 Polcolorit plans to expand the facility by another production line to increase total capacity to 9m m2 of tiles.
We were slightly surprised that the new products will be so much focused on high end of the market to compete mainly with expensive tiles imported from Italy and Spain. This strategy will require the company to take substantial marketing outlays to conquer the niche on the domestic market and create new selling structures on western markets. We see risk of this approach as the premium niche is very competitive and rather narrow when looking at the example of Ceramika Nowa Gala, which faces problems after the capacity increase to sell the products at the average price per 1m2 exceeding PLN 30. We appreciate the start of own granulate production that is expected to bring significant cost efficiencies, however, we continue to think that the process of launching of new products combined with costs of idle capacities and marketing outlays are likely to weigh on margins in 2H06 and constitute a risk factor for the company. We reiterate our Hold rating for Polcolorit with a fair value estimate of PLN 2.93 per share.