Excerpts from CGS-CIMB report

Analyst: Colin Tan

Deep Value; Robust Growth; Solid Moat

■ Shutdown of several chemical factories in downstream industry in May has impacted demand for aniline, leading to 25% plunge in price to Rmb7,400/ton as at 28 Jun 18.

China Sunsine

Share price: 
$1.39

Target: 
$1.87

■ If ASPs for rubber accelerators remain unchanged, Sunsine could possibly see betterthan-expected gross margins in 3Q18F.

■ A rising US$ against renminbi would benefit Sunsine as the group has a net asset exposure of Rmb424m in US$ as at end-FY17.

■ Anticipate Sunsine to extend record profit streak to 2Q18F following its closest peer’s strong profit guidance amid favourable market conditions.

■ Maintain Add with unchanged EPS and TP of S$1.87.

visit10.17dScale model of China Sunsine's sprawling production facilities in Shanxian in the Shandong province. Photo by Saw Wei Jie


Aniline prices dive could be favourable to Sunsine
Prices of aniline plunged from c.Rmb10,260/ton as at 30 May 18 to Rmb7,400/ton as at 28 Jun 18 according to data from 100ppi.com. The price drop was attributed to weak demand resulting in an oversupply of aniline as several chemical factories in the downstream industry were shut down in May amid the tightening environmental policies. Aniline is a key raw material for Sunsine’s chemical products.

Lower raw material prices could boost 3Q18F gross margins
The price index for rubber accelerators in China have generally held steady in recent months at Rmb19,800-21,300 per ton over the Apr-Jun 18 period, based on Sublime China Information (SCI) data. If ASPs for accelerators continue to remain steady over the next 1-2 months, we could possibly see better-than-expected gross margins in Sunsine. Raw material accounted for c.80% of Sunsine’s total costs in FY17.

Expect Sunsine to extend record earnings streak to 2Q18F
Sunsine’s closest peer, Yanggu Huatai (300121 CH; Not Rated), released its 1H18F guidance on 29 Jun 18, forecasting a 155-185% yoy growth in net profit to Rmb206.2m-230.5m as new capacity kicked in. We think Sunsine could likewise chalk up another record set of earnings for 2Q18F and extend its record profit streak.
-- Colin Tan, 
Analyst, CGS-CIMB

If ASPs were to decline correspondingly instead…
We think this could still track our thesis on ASPs normalising in 2H18F and in line with our earnings forecasts.

Rubber accelerators producers could adjust ASPs accordingly with lower raw material costs in order to sustain cordial relations with international tyre makers and other key customers if tight supply of accelerator conditions are easing off.

Also, a beneficiary of rising US$ against renminbi
As at end-FY17, Sunsine had a net asset exposure of Rmb424m in US$, with about 70% held in cash. About one-third of its products are exported and international sales accounted for c.36% of its 1Q18 revenue at Rmb307m.

tbss9.14Rubber accelerators (TBBS) in China Sunsine warehouse. NextInsight file photo The recent strengthening of the US$ vs. Rmb could lead to substantial FX gains for Sunsine in the coming quarters.

Tyre production in China grew 7% yoy in 2017

Production volume for rubber tyres in China grew 7% yoy to 653m in 2017, according to data from China Rubber Industry Association as replacement tyres roughly account for c.70% of total tyres produced. Sunsine’s chemical products are mostly sold to tyre makers for the manufacturing of rubber tyres. Sunsine captured a c.25% market share of domestic production of rubber accelerators in 2016.

Maintain Add with unchanged TP of S$1.87
Sunsine is currently trading at 8.2x CY19F P/E, a 32% discount to peer average of 12.1x. Maintain Add with TP S$1.87, pegged to 9.8x CY19F at a c.19% discount to peer average. Key catalysts include stronger-than-expected earnings growth.

Downside risks include weaker gross margins and delays in capacity expansion.
 

Full report here. 


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