SINGAPORE (Apr 5): CIMB is reiterate its "add" on China Sunsine Chemical on sustained high selling prices, better payment terms and production expansion.
In its 1Q18 guidance release on Wednesday, Sunsine’s closest peer, Yanggu Huatai is forecasting 163%-178% y-o-y growth in net profit on sustained high product prices of rubber chemicals.
Yanggu revealed that supplies of rubber chemicals – accelerators, insoluble sulphur and anti-oxidant – have remained tight amid increasing environmental regulations in China.
"We expect product prices to remain stable in 1H18, which likely led to continued 90% y-o-y earnings growth and sustained net margins of about 15% in 1Q18 for Sunsine," says analyst Colin Tan in a Wednesday report.
In its 2017 annual report, Yanggu also revealed that tyre companies have moved away from blindly pursuing low prices to placing more emphasis on securing steady supplies of rubber auxiliaries.
Tan says this could lead to better payment terms from customers of Sunsine as smaller customers may need to make advance payments to secure stocks of rubber chemicals. This in turn would improve Sunsine’s cash cycle.
Already, Sunsine’s receivable days in 4Q17 showed a marked improvement to 75 days, down from a three-year average of 102 days. This will likely further improved in 1Q18.
Sunsine is slated to add a 10,000-tonne TBBS accelerator production line and a 10,000-tonne insoluble sulphur line this year, expanding its capacity as utilisation rates are already at 100%.
"We expect commercial production to start in 2H18, expanding its production output to a conservative 148,000 tonnes in FY18 from 140,000 tonnes in FY17, based on our estimates," says Tan.
CIMB has a target price of $1.62 at 8 times FY19 earnings, representing a 33% discount to peers’ average of 12 times.
As at 11.01am, shares in China Sunsine are up 9 cents at $1.34.
