China Sunsine: (S$0.70) Solid track record with good earnings runway; add to Growth basket

China Sunsine is a major producer of rubber chemicals, primarily rubber accelerators, which are used in the curing of unprocessed rubber to make it more durable, mainly for the tyre industry.

With a FY07-16 sales volume CAGR of 17%, China Sunsine has risen to become the top rubber accelerator producer with global market share of 18% (FY08: 7%), and PRC market share of 31%, and serves more than 65% of the Global Top 75 tyre manufacturers, including Bridgestone and Michelin. It is also an excellent proxy to the fast growing tyre market in China. 

weifang line9.14A production line for accelerators at China Sunsine's factory. NextInsight file photo
Taking advantage of China's push towards greater environmental protection, the group's environmentally compliant facilities have benefitted from higher demand as the authorities move to shut down competitors’ factories that fail to meet regulatory standards. 

Near term catalysts for the stock include 1) its exposure to the huge tyre market in China, 2) capacity expansion and economies of scale, and 3) improved investor awareness.

Proxy to the Chinese tyre market growth
The China tyre market has expanded at 2006-2016 CAGR of 7.9%, which is expected to sustain given the healthy vehicle population growth (2016: +13.7%), further buoyed by tyre replacements. China Sunsine has constantly ploughed back profits to meet this demand as capacity soared 4.8x since IPO in 2007. 

Capacity expansion plans
With its FY16 utilization rate reaching 89%, the group will be expanding annual capacity by 13% to 172,000 tones over the next 18 months. This will comprise:
- 30,000 tons of TBBS accelerators: Phase 1 (10,000 tons) is currently undergoing trial run, and should begin commercial production in 2H17.
- 10,000 tons of insoluble sulphur. Trial run is expected to commence in late FY17, with commercial production in FY18.

Environmental edge
China Sunsine’s emphasis on environmental protection has paid off as the Chinese government tightens its grip on environmental standards. In several episodes since FY14, government crackdown on non-compliant producers has choked market supply of accelerators. Consequently, the group has been able to charge higher prices and capture market share. 

From this perspective, China Sunsine’s environmental practices give it a competitive edge as tyre-markers switch to more sustainable/ less risky suppliers. At the same time, competitors require time and capital to retrofit factories/overhaul processes to meet the required standards.

Respectable track record and returns

Has always been profitable

The group has been profitable throughout its listing history, achieving earnings CAGR of 12.6% over the past 10 years to reach Rmb245.3m in 2016. Average ROE over the decade was a respectable 16%. 

As rubber chemicals make up only 6% of the total cost to produce a tyre, the group has generally been able to pass on higher raw material costs to its customers. Over the past three years, it commanded gross margin of ~27%. 

products"Valuation: China Sunsine is currently trading at 6.6x trailing P/E. By applying a conservative 0.8x PEG ratio on its 10-year earnings CAGR of 12.6%, the stock could be worth $1.10, based on 10x trailing P/E.  In view of its good earnings prospects and attractive valuation, Market Insight is adding the stock to its Growth basket at an entry price of $0.70."

-- Maybank Kim Eng

Operating cashflow has been positive since IPO, except for FY12. At 31 Mar, the group was sitting on a cash hoard of Rmb337.9m (~$0.14/share).

Sale of treasury shares
The group recently placed out 27.7m of treasury shares (5.6% stake) at $0.646 each to a group of investors, including Asdew Acquisitions (owned by renowned investor Alan Wang). 

This aim was to improve the float and liquidity of the shares. Management has earmarked net proceeds of $17.5m for payment of future dividends. Sunsine has paid a total of $0.115/share in dividends over 10 consecutive years since IPO in 2007.

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