SINGAPORE (Apr 27): CIMB is maintaining China Sunsine Chemical Holdings at “add” after the manufacturer of rubber accelerators reported a record set of 1Q18 earnings.
To recap, earnings surged 161% y-o-y to RMB 150 million ($31.4 million) in 1Q18, accounting for 40% of CIMB’s estimates.
See: China Sunsine reports more than doubling of 1Q18 earnings to $31 mil on higher selling prices
This came on the back of a surge in revenue amid rising ASPs (average selling prices) and better-than-expected gross margin, which improved by 10.5 ppt to 34.9% in 1Q18.
The quarter also witnessed a significant increase of over 3,000 tons in rubber chemicals output to about 36,800 tons compared to 1Q17, mainly due to higher sales volume of anti-oxidants.
In a Thursday report, CIMB analyst Colin Tan anticipates a more gradual normalisation in ASPs in FY18.
“Our channel checks reveal that prices of most rubber accelerators, apart from its high-grade TBBS accelerator, have started to dip in Mar 18, albeit at a slow steady pace,” says Tan.
He expects a more gradual normalisation in rubber accelerator ASPs for Sunsine for the rest of FY18, forecasting a blended ASP of RMB 21,600/ton for rubber chemicals products.
As for prices of TBBS, ASP has stayed firm at 40,000/ton as only a handful are capable of producing it.
After main subsidiary Shandong Sunsine Chemical Co was granted “high-tech enterprise” status by the authorities, group effective tax rate in 1Q18 was lowered to 18% compared to 32% in 1Q17.
List of qualifying criteria includes having R&D expenditure of RMB 22 million in 1Q18 accounting for over 3% of revenue over the last three years. The status is valid for three years and renewable every three years.
“We now factor in recurring R&D costs in our forecast period,” says Tan.
At present, Sunsine is still awaiting approval from relevant authorities for the trial-run of the two new production lines – a 10,000-ton TBBS production line and 10,000-ton insoluble sulphur production line without much progress being made since the last quarter.
The expansion will add 20,000 tons to its 152,000-ton production capacity.
Management is hopeful of starting the trial-run by end-2Q18F and Tan now thinks the commercial production could start by end 3Q18.
CIMB is lifting its FY18-20 EPS by 7-45% to reflect a more gradual normalisation in ASPs and lower tax rate ahead.
“Our target price is revised to $1.87 accordingly, pegged to 9.8 times CY19 at 18% discount to peers’ average of 12.1 times,” says Tan.
As at 12.42pm, shares in China Sunsine are trading at $1.50 or 7.8 times CY19 forecast earnings.
