SINGAPORE (June 5): NRA Capital is “overweight” on China Sunsine Chemical with a fair value of $1.245 as it likes the stock’s attractive valuation and potential for higher dividends.
Demand for rubber chemicals from China Sunsine is also expected to increase in tandem with higher demand of vehicles in China.
“We estimate that Sunsine has to add 10,000 tonnes per annum (tpa) of capacity every two years to maintain its market share for accelerators, implying positive long term growth prospects,” says Liu Jin Shu of NRA Capital in a Monday report.
Meantime, China Sunsine has also paid out more cash in the form of dividends and share buybacks than funds raised at listing. The group is also expected to pay out higher dividends as the company sold some treasury shares this year to improve its liquidity.
Sunsine has also maintained a track record of success to low cost borrowings -- 4% pa in 2015 -- from domestic banks. This indicates the approval of the group.
Since 4Q16, the selling prices of China Sunsine products have lagged costs. However, with key competitors Yanggu Huatai and Kemai operating at close to 90% utilisation of their rubber accelerator capacities, China Sunsine will be able to pass on some of higher costs to customers.
There may also be potential margin gains as crude oil prices have softened in 2Q17.
China Sunsine will be adding 10,000 tpa of accelerators capacity in 2H17 as China is constantly tightening environmental controls. This will help mitigate against downtime in the event the company has to comply with future standards by refitting equipment, which may take time up to two quarters.
On June 1, China Sunsine reported it has installed online monitoring equipment at a certain chimney in its plant following inspection by environmental protection officials on May 20. The company has downplayed the incident, saying production remains unaffected by the checks.
China Sunsine is trading at 7.5 times FY16 earnings, while its competitors are trading at 11.5 times to 26.7 times trailing 12-month earnings.
NRA has a fair value of $1.245, while China Sunsine trades at 81 cents on Monday.
