KGI Securities has maintained an “outperform” rating on China Sunsine, but with a lower target price of 47 cents from 60 cents previously due to weak 1H20 profits.
The company’s revenue dropped 26% from RMB1.41 billion ($277 million) in 1H19 to RMB1.04 billion in 1H20, and profit after tax plunged 69% to RMB82 million from RMB266 million in the same period.
However, KGI analyst Chen Guangzhi said this was due mainly to the unfavourable macro environment resulting in a contraction in both average selling price (ASP) and profit margins. However, normalisation of profit margin and correction of ASP were expected by the management back in 2018 and 2019.
Chen said the bull-bear cycle lasted exactly a decade from the 2008 Global Financial Crisis, and the beginning of the down cycle started in 4Q18. However, the Covid-19 pandemic disrupted the cycle, and he warns of the risk that the downturn might become “prolonged”.
He explained that China Sunsine as the market leader in the rubber chemicals industry in China, has been occupying the majority of the market share in both domestic and overseas markets. However, investors should know that the company lacks catalysts apart from the ramp-up of production which depends on market conditions.
“The difference from the 2017-2018 period when it was tagged as a growth stock, enjoying both substantial volume and ASP growth, is that Sunsine is now regarded as a value stock.” Chen said.
Therefore, the likely driver of higher price-performance lies on the turnaround of macro conditions such as the bottoming- out of ASP and the exit of more peers from the market. He added the recovery of the economy should lead to improvement in profitability, but not to what it was during the heydays.
Chen said he is “cautiously optimistic” on the company’s 2H20 outlook, as crude oil prices bottomed out in April. Ongoing output cuts and the slow pick-up of oil demand could support oil prices, which will subsequently provide a price floor for chemical products.
Secondly, raw material prices like aniline reached a decade low of RMB4,500 per tonne recently, and further decline in prices will drive out more small and medium players in the market. In other words, long-lasting ASP below breakeven costs will accelerate the balance of supply and demand dynamics.
Chen also noted that China Sunsine has zero-debt and abundant cash in hand. He added that the company’s positive cash flows are enough to cover its capital expenditure (capex) and thus, able to tide it through the down cycle.
As at 12.54 pm, shares of China Sunsine were trading at 35 cents, with an FY20 price to book ratio of 0.6 and dividend yield of 2.3%
