UOB Kay Hian analyst Clement Ho has kept his “buy” call with a target price of 69.5 cents for China Sunsine Chemical after the company reported a "strong" set of 1HFY2021 ended June results.
In an August 23 research note, Ho highlights that China Sunsine’s 1HFY2021 of RMB265.2 million ($55.4 million), up 221.8% y-o-y, was driven by both increased sales volume and higher average selling prices (ASPs) of rubber accelerators.
“The better-than-expected ASP was due to: 1) the increase in price of aniline- the major feedstock for rubber accelerators; 2) higher production utilisation rates of Chinese tyre manufacturing companies; and 3) a shift in market dynamics to favour large rubber chemical players such as China Sunsine,” Ho says.
The higher ASPs also lifted the company’s operating leverage - gross margins for 1HFY2021 expanded 8.2 percentage points to 31.4%, while net margins expanded 7.2 percentage points to 15.1%.
See also: China Sunsine Chemical extends lead over rivals with eco-friendly focus
Ho notes that the good results follow management’s move to expand capacity over the past few years, despite rubber accelerator prices declining. “The move is now paying off, with market share for China Sunsine more entrenched, alongside the strong recovery in the China economy as negative impacts from the COVID-19 pandemic subsides,” he explains.
“Furthermore, higher crude oil prices have resulted in the similar rise of ASP for its derivatives, including rubber accelerators,” Ho adds.
Ho believes China Sunsine remains a good proxy to the recovering China auto sector, given that it derives more than 60% of its sales from the country. He highlights that China auto sales have been on an upward trend as the economy strengthened following the pandemic, also helped by subsidies from the government to stimulate the industry.
While he has tweaked his forecasts to include lower revenue estimates to account for the delay in commercial production for Phase 1 of China Sunsine’s anti-oxidant project, this is offset by higher gross margin assumptions following the 1H21 results.
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He has re-based his valuation year to FY2022, and values China Sunsine at 8.4 times PE, or one standard deviation above its historical three-year average. “At the current price, China Sunsine is attractively valued at 6.1 times FY2022 P/E relative to its closest peer Shandong Yanggu Huatai, which trades at 8.5times forward P/E,” he says.
As at 4.39pm, shares in China Sunsine are trading 0.5 cents or 0.98% lower at 50.5 cents.
