Monday (July 2): A plunge in the prices of raw material could turn in favour of China Sunsine if the producer of rubber chemicals manages to maintain average selling prices (ASPs) for its rubber accelerators, resulting in better gross margins.
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According to industry sources, the price of aniline, a key raw material for Sunsine’s chemical products, plunged from RMB10,260/ton ($2,109.23/ton) as at May 30 to RMB7,400/ton as at Jun 28.
The drop was due to weak demand resulting in an oversupply of aniline as several chemical factories in the downstream industry were shut down in May amid tighter anti-pollution policies in China.
Given that the price index for rubber accelerators in China have held steady in recent months at RMB19,800-21,300 per ton over the April to June period.
But even if ASPs were to decline correspondingly instead, analyst CGS-CIMB analyst Colin Tan says China Sunsine’s 2H18 should still be able to come in line with its earnings forecasts.
Tan says rubber accelerators producers could adjust ASPs accordingly with lower raw material costs in order to sustain cordial relations with international tyre makers and other key customers if tight supply of accelerator conditions are easing off.
In addition, Sunsine could also be a beneficiary of rising US$ against renminbi. As at end FY17, Sunsine had a net asset exposure of RMB424 million in US$, with about 70% in cash. About one third of its products are exported and international sales accounted for 36% of its 1Q18 revenue at RMB307 million.
Sunsine’s closest peer, Yanggu Huatai, released its 2Q18F guidance on June 29, forecasting a 155-185% y-o-y growth in net profit to RMB206.2-230.5 million as new capacity kicked in.
“We think Sunsine could likewise chalk up another record set of earnings for 2Q18F and extend its record profit streak,” says Tan.
CGS-CIMB is maintaining “add” with target price of $1.87, pegged to 9.8x CY19F at 19% discount to peer average.
As at 2.49pm, shares in China Sunsine are down 2 cents at $1.53 or 8.1x CY19F earnings and 33% discount to peer average of 12.1x.
