SINGAPORE (Jan 29): Phillip Capital is initiating coverage on China Sunsine, the largest producer of rubber accelerators in the world, with a “buy” call and target price of $1.60 or 10 times FY18 earnings.
In a Monday report, analyst Chen Guangzhi says he expects the group’s current attractive product spread to sustain growth for the next couple of years as supply continues its consolidation in China.
This is led by the nation’s supply-side reform initiatives and stringent environmental policies, which are phasing out smaller producers in favour of leading producers such as Sunsine. The move has in turn seen a surge in average domestic market prices over the recent two years due to supply shortage.
Chen sees China Sunsine experiencing 10-20% growth in both top and bottom line from the ramp-up of capacity and stable profitability. He expects its leading market position to further strengthen in the longer-term as the ongoing industry consolidation contracts the number of producers in the niche rubber market.
In addition, there is healthy demand from the tyre industry given how 90% of rubber chemical consumption is associated with the automobile market with a 6:100 consumption ratio of rubber chemicals to rubber.
“Global tyre production is expected to grow from 2.2 billion in 2017 to 2.7 billion in 2020 with CAGR of 3.4% during the period. Meanwhile, total global production of rubber chemical is expected to reach 1.8 million tonnes by 2020, delivering a CAGR of 3.5% from 2015 to 2020,” says the analyst.
Chen believes a more consolidated market in the foreseeable future will result from three main factors – the first being higher barriers to entry as a result of stringent environmental requirements, which will restrict new capacity and continue to phase out small mills in China.
As the cost of switching supply source is high for tyre producers, especially global brands, Chen also believes this will lead to suppliers stepping up due diligence for a high standard of environmental protection and product specification.
Lastly, the analyst thinks market leaders’ intrinsic qualities such as their superior production techniques, wider client base and better waste processing, will further drive the market consolidation.
“Sunsine has thrived during these rounds of market restructuring and transformation resulted from more stringent requirements of environmental protection domestically in recent years. Currently, the company is capable of taking advantage of market headwinds, as it constantly put efforts on environmental investments such as waste water treatment, solid waste treatment, and exhaust gas recycling facilities,” notes Chen.
“Moving forward, it is expected that Sunsine will maintain gross profit margin (GPM) of 27% and net profit margin (NPM) of 12% amid the consolidation of supply in China,” he concludes.
As at 10.22am, shares in China Sunsine are trading 2 cents higher at $1.13, or 1.32 times FY18 times book value.
