SINGAPORE (Jan 22): CIMB is starting coverage of China Sunsine Chemical with "add" and target price of $1.50 given the China largest rubber accelerator manufacturer is riding on the trend of industry consolidation and expanding its capacity.
China Sunsine is also one the recommended stocks in Tong's Value Investing Portfoiio.
See: Global portfolio up 6.8% in one month, outpacing the index
China Sunsine's net profit has grown from $77 million in FY13 to $222 million in FY16, driven by capacity expansion. For FY17, Tan expects net profit to grow by 31.2% y-o-y with RMB81.6 million ($16.8 million) in 4Q17.
"We forecast net profit growth of 14% in FY18 and 10% in FY19, building in the capacity expansion, as well a 4% p.a. increase in the ASP of rubber accelerators to RMB23,000/tonne ($4,746/tonne) and a 3% p.a. increase in insoluble sulphur ASP to RMB11,000/tonne by FY19," says analyst Colin Tan in a Monday report.
Since 2014, China's crackdown on pollution in China has choked output of chemicals and other materials in the country, resulting in the closure of small- to mid-sized competitors that failed to meet regulatory environmental standards.
Since 2008, Sunsine has consistently delivered gross margins of 26% with the exception of FY12 and FY13 when it reported gross margins of 18% due to lower average selling prices (ASP) and the hike in cost of raw materials.
In 2016, Sunsine accounted for 15% and 26% of the global and China rubber accelerator market. Its earnings have also tripled since FY13 and are expected to rise further.
Today, Sunsine’s customers include global tyremakers like Bridgestone, Michelin, Goodyear and Pirelli. In FY16, its top 5 customers accounted for 20% of total revenue.
In 9M177, rubber accelerators and insoluble sulphur (IS) accounted for 71% and 9% of its sales, generating gross margins of 25 and 40%, respectively.
Sunsine has added production lines for 10,000 tonnes of TBBS (a type of rubber accelerator) and 10,000 tonnes of IS, both pending trial-run approvals from the authorities.
"We expect these to start commercial production in 2H18. We project capacity expansion of 5,000 tonnes each in FY18 and 10,000 tonnes each in FY19," says Tan.
In 9M17, the company had a cash hoard of RM463 million ($155.3 million), or $0.19/share.
Management has said that due to the tightening credit outlook in China, it would have to rely on its internal cash resources to fund its capacity expansion without depending on bank borrowings.
It has adopted a formal dividend payout policy of 20% in Jun 2017.
As at 10.12am, shares in China Sunsine are trading 4 cents higher at $1.08 or 7.7x FY18 core earnings and at 48% discount to its Chinese rubber chemicals peer Shandong Yanggu Huatai Chemical.
