China

This is Part 2 of a 2-part report. Part 1: ASMPT: Business segments which buoyed 2022 profit after 2021 supercycle year

Below are excerpts from a Q&A session during ASMPT's FY2022 results briefing this week (results announcement here). The answers point to a positive near-term and mid-term outlook for ASMPT in terms of orderbook and gross margins as it navigates the current semiconductor downcycle. 

• Robin Ng, CEO, ASMPT:
We expect group Q-o-Q bookings to increase by maybe 10 to 20%, so Q1 will be higher than Q4 by 10 to 20%. 

This is largely in line with seasonality trends where Q1 bookings tend to be higher than Q4.

We see strength still in certain segments like automotive. Likewise I think for industrial segment and advanced packaging.

The whole industry is hopeful that China will start to recover after lifting its COVID-19 restrictions. We do see some pockets of buying interest so far in Q1 from certain China customers -- for high-end smartphone applications and also automotive. But this is not a sign of a broad-based China recovery.

We do a lot of channel checking -- with our customer base -- and also look at how industry watchers or independent research houses look at where the semiconductor industry will go from here.

Feedback from our customers and generally the industry view is that the recovery could begin in the second-half of 2023. And many, many customers of ours who have announced their result also cited that one possible tail wind for this to happen is the positive effect of the Chinese economy from the lifting of the COVID-19 restrictions.

• Katie Xu, CFO, ASMPT:
As we have communicated in previous quarters, and as you pointed out, we have increased our price during the supercycle year in a very sensible way, in a very targeted way, and so far we have been able to sustain that pricing level.

Now of course it's a competitive market and especially for our orders quoted in U.S. dollars because of the US dollar strengthening last year, we had some headwind on the FX side.

But for equipment sale, pricing is determined by manufacturers, right?

And the customers do consider our solutions, our strong relationship, our leading technology and our after sales services in a combined way.  The short answer to your question -- from the gross margin performance you can tell that we have been able to sustain the pricing level.

• Katie Xu, CFO, ASMPT:
The group delivered another very solid gross margin quarter, making the 7th consecutive quarter of the margin above 40%.

To put this into perspective, in the last downcycle, the group's gross margin level was hovering around 35 to 38%. So, we believe there is a step change.

Now in terms of the sustainability of gross margin, I'd like to look at the drivers of the solid performance, so far. There are three layers:

One is both semi and SMT gross margins have improved year over year.

Second, the product mix -- the auto, industrial and AP momentum -- have contributed. Their revenue has become very sizable compared to the group revenue and margins from those end markets and solutions are relatively accretive to the gross margin of the company. 

Also, I want to point out as we were coming into the downturn, the group has reacted quite timely in terms of cost control measures.

The measures include, especially on the SEMI side, the sensible hiring only for very critical positions, flexible workforce reduction, and some prioritization of strategic investment, etc. 

All that, we believe, will be sustainable.

Having said that, I want to put a pretty large caveat out there. The group's margin is influenced definitely by volume and also the segment mix between SMT and SEMI and lastly, product mix if the mainstream products rebound in a big way.

I hope I have given you enough color on the gross margin going forward.

(Q&A content has been edited for brevity and clarity)

This is part 1 of a 2-part report. Part 2 is: ASMPT: Q&A on 40% gross margin, semicon recovery

Reflecting different business cycles, the SEMI segment's revenue fell 25.2% y-o-y while SMT segment grew 9.8%.Regarding ASMPT's unique and broad-based portfolio, the Group’s SMT segment delivered record revenue in 2022, fuelled by strong demand from the Automotive and Industrial end-markets.

The SMT segment also recorded its highest ever share of contribution to Group bookings in 2022.

"These developments clearly reflect the resilience of our business model even in a semiconductor downcycle."

As for the end-markets, with macroeconomic uncertainties and dampened consumer sentiments, the Consumer, Communication and Computer end-markets were weak in 2022.

However, the Automotive and Advanced Packaging end-markets did well, delivering an aggregate of about 40% of Group revenue for 2022: 

Heading into 2023, Automotive and Advanced Packaging set ASMPT's orderbook up well, boosting the total backlog to US$1.15 billion. Most of it will be delivered this year. 

The Group expects revenue for first quarter of 2023 to be between US$455 million to US$525 million. At mid-point of guidance, this will be a decline of 11.4% quarter-on-quarter.  

For more on the results, see the Powerpoint deck here. 

Ming, who retired in 2015 from an accounting-related career, contributed this article to NextInsight. His investment in Best World International's shares has done exceedingly well: The stock, $2.62 currently, has surged an astonishing 100% this year, lifting its market cap to S$1.4 billion.

Considering the historical performance of the business and assuring words from the management in the financial results announcements, I formed a view that the setback was temporary, and the business was on course to be a great growth business.

It’s one year since, and the market has moved up and down a lot during that time but my confidence in the business has grown. 

As a value investor, I will hold Best World for the long term, and have no intention to trade the share.

In my one year of being a shareholder, Best World has gone through milestones such as:

1. In Feb 2018, company reported that its profit for FY17 surged 61%.
   
   
2. 1Q 2018 results fell 40% due to a change in its business model in China and the accounting treatment. But the underlying business fundamentals continued to be strong. This could be seen in its “other income”.
   
   
3. Institutional investors sold down Best World after the 1Q results, as reported in Business Times which relied on Singapore Exchange data:
   
   

With a market cap of S$750M during the trading period, institutional investors were buying high at about $1.60 to $1.50 during the first few months of 2018 and selling at $1.40 to $1.28 after the release of Q1 results.

In total, institutional investors sold down about 5% of Best World after its Q1 results.

4. As a show of confidence, the management of Best World and as well as the company bought the shares. (May 16 to Jun 25)
   
   
5. During the Q2 results’ briefing, the management conveyed their conviction that the business performance in China was strong.
   
   
6. Just before the release of Q3 results, RHB Research initiated coverage of Best World with a buy rating, which triggered the start of a recovery of the stock price.
   
   
7. Speculators and traders playing the shares have missed the best profits if they sold too early.
   
   As we can see from the table below, institutional investors started buying back aggressively from Oct 22 till presently.
   
   
   

The average retail investor took profit as the share price increased, probably missing the big move to fair valuation.

In my view, the recent run-up in the share price is a move toward the fair value of a high growth business.

Peter Lynch’s book has highlighted the power of compounding growth. I have put together a table to show how Best World’s stock price can surge if the business grows at 20% a year:

Best World’s business is very scalable and with its franchise model in China growing to cover 10 provinces, the upside is expected to continue for many more years.

There was a write-up (click here) on a 100-bagger called MTY Food Group, which is listed in Toronto.

As the writer noted: “… the company only grew earnings by 12.4x, how did the stock grow 100x? The answer lies in the price to earnings multiple expansion. Investors in MTY went from paying roughly 3.5x earning when it was left for dead in 2003 to a more optimistic 26x earning in 2013.”

(By the way, MTY has gone on to become a 300-bagger currently!)

So, again, you need huge growth in earnings. The combination of rising earnings and a higher multiple on those earnings is what really drives explosive stock price returns over the long-term.

This is the twin engine of growth.

As Best World’s market cap grows bigger (currently about S$1.4 billion) and the stock has more liquidity, bigger institutional investors will be attracted to it as some of them have in-house rules that set the minimum size of stocks they can invest in.

We could be sitting on a golden goose called Best World.

The Group recorded 9MFY2023 net profit after tax of S$1.3 million compared to S$3.3 million a year ago, mainly due to lower receipt of government grants, higher operations expenses and increased finance expenses amid higher interest rates.

Net asset value per share amounted to 16.4 Singapore cents as at 31 December 2022 compared to 16.7 Singapore cents as at 31 March 2022.

With the PRC’s recent lifting of COVID-related restrictions, the Group expects mid-term business recovery as projects resume.  Operating costs remain a challenge.

While this may potentially be driving a slowdown in economic activities, it will push companies to accelerate their strategic shift to mitigate this risk through re-shoring and decentralizing their manufacturing footprint globally, presenting business opportunities for the Group’s Specialist Relocation and 3PL business segments.

• Specialist Relocation segment: The Group will continue to diversify into the semiconductor and automotive industries, while seeking opportunities within the PRC’s display panel sector as it transitions from TFT LCD screens to OLED technology.

Chasen also plans to secure new projects from semiconductor and equipment manufacturers in Malaysia and Singapore, as well as electronics and PV solar module players in Vietnam and India.

• 3PL: The Group broadly sees the demand for its cross-border transportation services peaking as pandemic-related disruption eases.

However, business will remain resilient as customers, who switched from air and sea freight to the Group’s 3PL services during the pandemic, have seen value in Chasen’s outstanding service quality, which has been further enhanced with the recent integration of railway as an alternative mode of transport.

In addition, business activities on warehousing, freight-forwarding and local/long-haul trucking was significantly higher and are expected to offset any potential decline in cross-border transportation services.

Demand for warehouse service is expected to increase in the quarters ahead. In response, the Group will offer its local transportation services, adding value to customers, and lifting revenue.

The Group is also participating in “SG Arrival Card” Cargo, a seamless clearance initiative that would greatly speed up the time required for the Group’s container truck drivers to clear the Singapore land checkpoints to less than five minutes, compared to manual paper clearance, which would take 10-15 minutes.

• T&E segment: The Group will build its pipeline of solar panel installation projects in Singapore and improve its component and parts manufacturing capabilities, with the aim to capture projects within emerging core technologies such as 5G, Internet of Things, MedTech and the automotive sector.

The T&E business segment will focus on improving its bottom line significantly as it capitalizes on post-COVID economic recovery to grow the Group’s top line across the region.

Justin Low, MD of Chasen Holdings.Mr Low Weng Fatt, Chasen’s MD and CEO, said, “Chasen’s diversified business and geographical spread has allowed us to remain broadly resilient as well as capitalized on opportunities arising from our customers’ re-shoring, de-centralising production locations and adjusting their inventory strategies. "The lifting of all COVID restrictions in the PRC is positive news for the resumption of projects and a return to normalcy in the medium term."

THE CONTEXT • There are 2 Cs that are coming back: China and construction. Well, actually they are not related --  Chinese people are travelling more and the construction industry in Singapore and Malaysia are in an upcycle. There are 2 stocks related to the 2Cs which look under-appreciated but each has upside of ~30%, according to CGS-International in a recent report. Interestingly, the report delved into industry efforts to "make the Singapore market great again" as well as pointed to a bunch of value stocks. •  First was China Aviation Oil, which is experiencing tailwinds in the form of higher Chinese travel. It has a cash-rich balance sheet that can translate into higher dividends. Moreover, there's a push from the Chinese government for its listed state-owned enterprises to return excess capital to shareholders through higher dividend payouts. • CAO staged a recovery in profit in 2023 and is set to extend the trend in 2024, according to analysts (see chart).  CAO stock currently trades at 4X PE after excluding its large cash balance. • The second stock highlighted by CGS was Hong Leong Asia. As part of the Hong Leong Group, HLA has 2 core businesses: Powertrains and Building Materials.  • Read more what CGS says below....

Excerpts from CGS International's report

In addition to earnings, we believe dividends could remain elevated in FY24-25F.

CAO has historically maintained a dividend payout ratio of c.30%, in line with its official dividend policy; we believe CAO could potentially announce special dividends in FY24F (similar to FY23) in view of its solid earnings growth, which translates into an elevated payout ratio of c.40%.

In its latest results, CAO’s 1H24 core PATMI was a beat at US$42m (+61% hoh, +115% yoy), driven by elevated GPM (+0.15% pts yoy) from higher-margin jet fuel transactions and strong trading volume recovery.

International outbound flights from China have recovered to c.85% of pre-Covid19 levels as at end-Sep 2024 (vs. c.77% at start of Jan 2024).

We expect further recovery in outbound China flight traffic to directly drive gross profit (core jet fuel business) and associate profit growth (via 33%-owned refueling associate based at Shanghai Pudong International Airport).

Our TP of S$1.20 is based on 9.5x CY25F P/E (2010-19 average).

Re-rating catalysts include a strong recovery in outbound China flight volumes, strong and sustained GPM improvement, and favourable government policies spurring travel demand.

Key downside risks include a global economic slowdown impacting China outbound flight volumes, and gross profit margin weakness from inability to source and execute higher-margin transactions.

Hong Leong Asia (HLA SP, Add, TP: S$1.20) We believe Hong Leong Asia is an underappreciated proxy for the Singapore and Malaysia construction industry upcycle. Excluding listed subsidiaries/associates, HLA’s building materials unit segment (c.60% of 1H24 PATMI before corporate costs) has an implied valuation of S$172m (2x 12M-trailing P/E), based on latest market cap. We also note a slew of corporate actions by Hong Leong Asia to improve shareholder value YTD, including 1) its resumption of interim dividend (last declared in FY15), 2) its subsidiary China Yuchai’s (CYD US, Add, TP: US$13.20) launch of US$40m share buyback plan (announced in Jun 2024; US$38.5m utilised as of Aug 2024), and 3) China Yuchai’s introduction of equity incentive plans in respect of equity interests in subsidiary Guangxi Yuchai Marine and Genset Power (MGP), which has grown rapidly with strong profitability in the past few years. We see potential for MGP to pursue an IPO in the next 5 years. An independent valuation by Zhongming Valuer as at Dec 2023 estimated MGP’s fair value at c.Rmb2bn. As at end-FY23, MGP had a net asset value of Rmb1.3bn, vs. CYD’s Rmb12bn. For its latest results, Hong Leong Asia beat expectations by delivering 1H24 PATMI of S$50m (+61% yoy), which formed 66% of our FY24F forecasts. Both HLA’s core segments performed strongly in 1H24, with yoy PAT growth of 29% at its powertrain solutions segment and 35% at building materials segment. Reiterate Add on HLA as we expect strong PATMI growth in FY24F as HLA fires on all cylinders, benefiting from stronger construction activity levels and volume recovery of its diesel engine unit, with an SOP-based TP of S$1.20.

Full report here. 

Excerpts from OCBC Investment Research's 16-page initiation report
Analyst: Ada Lim

Investment thesis 

China Aviation Oil (CAO) is the largest physical jet fuel  trader in the Asia Pacific (APAC) region. A key supplier  of imported jet fuel in the civil aviation industry in the People’s Republic of China (PRC), CAO is a strong proxy to the growing Chinese aviation industry.

Although CAO’s financial performance has been battered in  recent years by the pandemic and an extended period of lockdowns due to China’s zero-Covid policy, it is well positioned to capture the recovery in jet fuel demand with China’s reopening, given its entrenched presence in China and status as a market leader in the region. 

Beyond this immediate catalyst, the increasing affluence of the APAC region and burgeoning middle class in China will support the long-term growth of the regional aviation fuel market, making CAO an attractive multi-year investment story. 

Investment summary 

China’s aviation industry hit rock bottom in 2022– CAO’s FY22 results were in line with consensus expectations. Total revenue fell 6.7% to USD16.4b on  the back of a 40.6% decline in total supply and  trading volume.

Share of results from associates also fell 24% to USD17.9m, mainly due to a 17.2% decline in contributions from Shanghai-Pudong International Airport Aviation Fuel Supply Company (SPIA), which struggled with lower refuelling volumes during  protracted lockdowns in Shanghai.

Total expenses rose 37.8%, driven by a USD2.8m increase in staff costs following the consolidation of CNAF Hong Kong Refueling Limited as a subsidiary.

Altogether, CAO reported a net profit of USD33.2m, down 17.8% from USD40.4m in FY21.

It has proposed a final dividend of 1.6 cents per share (versus 1.9 cents per share in FY21). 

China’s reopening should support near-term  recovery… – With the relaxation of China’s zero- Covid policy, the release of pent-up demand for  airline travel should translate to a significant rebound  in the demand for jet fuel.

We expect recovery of air  travel in China to be led by domestic flights in 1Q23, while international travel sees a meaningful rebound  from late 2Q23 or 2H23.

At the same time, recovery in the broader APAC region remains supportive.

This will benefit CAO, whose top line is primarily dependent on its trading volume.

SPIA will be a key oil-related  asset to watch out for, as it is the exclusive supplier of jet fuel and refuelling services at Shanghai Pudong International Airport (Pudong Airport), and contributed to ~59% of CAO’s net profits in FY2019.  

   … while structural tailwinds support long-term growth– (i) APAC is expected to lead the growth of the  global aviation fuel market, with higher airline travel demand underpinned by the presence of many increasingly affluent developing countries in the region, as well as a burgeoning middle class in China.

  CAO’s status as a market leader in the region positions it well to capture this growth over the next  few years.

(ii) Airlines are increasingly transitioning towards sustainable aviation fuel (SAF), which is expected to contribute to 65% of the reduction in carbon emissions needed by the aviation industry to reach net-zero by 2050.

CAO is already looking to incorporate SAF into its product mix, which could potentially lend CAO a first mover advantage to capture demand from airlines in APAC. 

Potential to deploy cash to augment growth– CAO  has historically maintained a strong balance sheet  and a healthy net cash position.

Given a slow but  steady track record of acquisitions, we see potential for the company to deploy cash either to acquire new, synergistic oil-related business assets, or to expand its current operations in a manner that will be accretive to the company’s earnings – thereby unlocking further value for shareholders. 

Potential catalysts 

• Faster and stronger than expected recovery in Chinese air travel 
• Deployment of cash through accretive acquisitions 
• Introduction of initiatives to improve profitability

Investment risks 

• Slower than expected reopening of China’s  borders, or a reinstatement of zero-Covid policies 
• Geopolitical tensions
• Regulatory risks 

Screenshot of a section of CAO's cashflow statement for 2023. The cashpile of US$373 m is the equivalent of S$505 million, or 64% of its current market cap (stock price: 91.5 cents).


Excerpts from Phillip Securities' report
Analyst: Peggy Mak

The Positives

• Gross profit per metric ton jumped to US$2.53 in FY23 (FY22 US$1.75/mt). The margin in 2H23 was 145% higher YoY at US$3.78/mt.

This was achieved through engaging in more end-to-end sales, sourcing products from refinery for delivery to the airline customers.


This is compared to the typical low-margin back to back oil trading transaction. Higher volume also helps to lower unit fixed cost.

• Contributions from 33%-owned associate Shanghai Pudong International Airport Aviation Fuel Supply Co Ltd (SPIA) grew 61% to US$31mn.

SPIA also paid US$23mn to CAO in FY23, 9.5% higher YoY.

We expect a higher payout in FY24e after the strong FY23.  

The Negative

•Provided for impairment of US$12mn for goodwill (US$3.4mn) and investment in an associate (US$8.7mn), thus lowering net profit.
 

Peggy Mak, research manager, Phillip SecuritiesOutlook Volume is expected to continue to improve as China further restores bilateral flights that were cut during the pandemic. Its US jet fuel supply operation would also benefit from resumption of US-China flights to 100 round-trips at end March. Maintain BUY and raised DCF-derived TP to S$1.05 (WACC 15%, terminal growth 1%). We have also lifted our FY24e net profit estimates by 17% to account for a higher profit per ton.

Full report here. 

Screenshot of a section of CAO's cashflow statement for 1H23. The cashpile of US$534.3 m is the equivalent of S$711 million, or 96% of its current market cap.


Excerpts from Phillip Securities' 11-page initiation report
Analyst: Peggy Mak

Hightlights 

• China air travel demand rebounded after borders re-opened in early 2023. Air travel volume surged by 80% YoY in the first eight months of 2023, after the lifting of Covid mobility restrictions, thereby pushing up consumption of jet fuel.

The recovery is led by domestic travel. International flights are still at 20-30% of pre-Covid levels.

As more international flights are restored, we expect jet fuel demand at the major international airports in China to return to pre-Covid levels by FY25e. About 60% of petroleum and refined products are imported.


2023 profit forecast by Phillip Securities. Translates to a 1.7 S'pore cent/share first & final dividend pay-out. CAO has a dividend policy to pay out 30% of the Group’s annual consolidated net profits attributable to shareholders.• CAO could potentially supply jet fuel to more international airports in China. China’s jet fuel consumption has risen at a 10-year CAGR of 8.4% from 2011-2021, and 9.7% if year 2020 were excluded, mirroring the growth in air travel demand.

Correspondingly, China has been adding airports at a CAGR of 3.4% over the last 10 years.

CAO mainly supplies to the five key international airports currently, but we think it has potential to expand its footprint to international airports in other Chinese cities.

• The three major Chinese carriers plan to grow their fleet by 6-18.5% in the next three years. Air China, China Eastern Air and China Southern Airlines together account for twothirds of China air transport volume.

We think the fleet expansion plan signals optimism that rising affluence and mobility and increased urbanization will underpin demand for air transport.

Peggy Mak, research manager, Phillip SecuritiesInitiate coverage with a Buy recommendation and TP of S$1.01.Our TP is based on the discounted cash flow model. Its operations are asset-light. The balance sheet comprises mainly cash (as at Dec 22: S$0.49/share), investments in associates and working capital. We expect ROIC to rise to 10% in FY23e and 14.4% in FY24e(FY22: 5.6%).

Full report here. 

THE CONTEXT • China today (24 Sept) unveiled fresh stimulus to boost its economy, sending Shanghai and HK stocks on a rally. Interest rate cuts and measures to revive the local stock markets could lead to increased consumer spending, including on travel and tourism. • On the Singapore Exchange, China Aviation Oil (CAO) is one of the possible beneficiaries of a recovery in Chinese consumption and, specifically, aviation travel. • The Covid pandemic dealt a blow to its business. With domestic and international travel picking up pace, but still below pandemic levels, CAO’s supply of jet fuel should rise accordingly. • CAO staged a recovery in profit in 2023 and is set to extend the trend in 2024 (see chart).  CAO stock currently trades at 3.6X PE after excluding its large cash balance. • While CAO's profits have been recovering, its stock price has continued to languish. Chart: ReutersPhillip Securities and Lim & Tan Securities have target prices of $1.05 and $1.24, respectively. CAO's business is low in capex and high in cash generation, leading to a US$354 million cashpile (zero debt) which is about 62% of its current market cap (S$735 m). • However, margins are thin as this is a volume game: Gross margins are merely 0.4%! CAO operates a cost-plus model whereby it earns a margin for every unit of fuel it supplies. Volatile oil prices, among other things, pose a risk. Read more what Phillip Securities says below....

Excerpts from Phillip Securities' report
Analyst: Liu Miaomiao

• 2024e earnings supported by the recovery in international air traffic in China, which we anticipate will reach c.90% of pre-pandemic levels (currently 25% below pre-COVID levels).

We are positive on CAO as the largest physical importer in China and associate SPIA, the sole jet fuel supplier for international flights at Shanghai airport.

We maintain our FY24e earnings forecast and BUY recommendation with an unchanged DCF-TP of S$1.05.

Outlook
CAO is diversifying its geographical presence outside of China, although revenue from the PRC still accounts for 75% of its total income. 

We expect higher contributions from other regions as several partnerships, particularly in Korea and the US (+30%YoY), are progressing well.

We believe there is an good opportunity for CAO to increase its payout ratio or announce a special dividend, given its current cash-rich position of US$353mn.

In addition State Owned Enterprises have been encouraged to raise dividends.

Liu Miaomiao, analystMaintain BUY with an unchanged TP of S$1.05 Earnings will be supported by a recovery in international air traffic in China, which we expect to reach c.90% of pre-pandemic levels (currently around 25% below pre-COVID levels). We maintain our BUY recommendation with an unchanged DCF-TP of S$1.05.

Full report here. 

Excerpts from OCBC Investment Research report

Photo: Shutterstock
To recap, Alibaba (9988 HK / BABA US) has signalled that it will spend about 50% of free cash flow on buybacks.

Tencent’s (700 HK) management has also indicated that more free cash flow could be used for buybacks.

Among the large caps, Meituan (3690 HK, Fair value HKD252) has been a laggard owing to the near-term technical overhang, which is expected to last till end of March in light of the share distribution by Tencent (700 HK).

Looking beyond the near-term technical overhang and concerns over increasing competition from Douyin’s venture into food delivery service, the expected solid recovery trend, supported by demand recovery and solid execution, could shift the focus back to its strength in fundamentals.

The upcoming 4Q22 results announcement in end-March and management guidance could offer earnings upgrade opportunities.

We maintain our preference for Tencent (700 HK, Fair value HKD480) on the back of a normalisation of the games approval process and a broader economic recovery that could drive average revenue per user (ARPU) growth and its leading position in overseas market expansion.

Overall domestic games revenue is expected to recover to 6-7% this year (after declining by about 7% last year).

Among sub-sectors within internet and platform plays, the travel sub-sector has seen profit-taking over the past week after CNY. High frequency data highlighted demand recovery continued after CNY but at a modest pace.

We maintain our preference for Trip.com (9961 HK / TCOM US, Fair value HKD314 / USD40) in light of supportive margin trend and recovery momentum, and we believe improving visibility of growth beyond 2019-level would be one of the positive catalysts.

We recommend accumulating on pull back.

We also prefer China Tourism Group Duty Free Corp Ltd (CTGDF, 1880 HK / 601888 CH, Fair value HKD290 /CNY278).

Despite its 4Q22 results pre-announcement highlighting that the bottom line would come in below consensus estimates, we believe the Hainan government’s robust duty-free sales target, the rebound in airport duty-free business and potentially more favourable downtown duty-free policies would be positive catalysts
to watch out for.

We maintain our preference for the cyclical recovery reopening theme, which primarily focuses on consumption related companies and industries, but we expect rotation to continue as the results season approaches.

We view recent market pull backs could offer opportunities to accumulate for earning recovery later this year. We prefer AIA (1299 HK, Fair value HKD110), Anta (2020 HK, Fair value HKD128.37) and Mengniu (2319 HK, Fair value HKD49.16).

In light of increasing mobility, regulatory guidance aimed at normalisation and a focus of economic development, it sets the stage for markets to focus more on the fundamentals of companies. We believe the market will start to re-engage in structural themes that are aligned with the policy directions and would benefit
from policy tailwinds.

The upcoming NPC in March would shed more light as the new leadership and economic teams will reveal plans to reset the economy for the next five years. We believe structural themes, such as, “Common Prosperity” (e.g. consumers), decarbonisation (e.g. renewables, NEV and its supply chain), industrial automation and technology upgrades will stay as key policy priorities in the medium- and longer-
term.

In the NEV supply chain, we prefer the upstream plays given rising competition among NEV makers. We have added CATL (300750 CH, Fair value CNY517) to the focus list as EV battery offers a more stable market structure and CATL has a dominant market share with cost competitive advantage.

The stock is trading at 26x 2023 P/E vs. 79x for LG Energy Solution (373220 KS) and 31x for its global peers.

We have removed the following stocks from the focus list given their share prices have outperformed, leaving relatively limited upside potential in the near-term: China Telecom (728 HK, Fair value HKD3.96), Pinduoduo (PDD US, Fair value USD90.0), Samsonite (1910 HK, Fair value HKD23.47), Shenzhou International (2313 HK, Fair value HKD96.2).

Excerpts from CGS-CIMB report
Analysts: Kenneth Tan & Ong Khang Chuen, CFA

China Sunsine’s 3Q23 net profit of Rmb65m (-49% qoq/yoy) was below our expectations, with 9M23 net profit forming 64% of our FY23F forecast. 

The miss was likely due to a weaker-than-expected GPM (undisclosed), which we estimate at 19% (-8% pts yoy), as intense industry competition weighed on profitability.

Revenue of Rmb875m (+1% qoq, - 5% yoy) was in line, as record high sales volumes (+16% yoy) were offset by declining ASPs (-18% yoy, likely due to falling raw material costs and greater price competition).

According to sci99.com (commodity information service provider), rubber accelerator prices rose strongly in Sep/Oct, with average prices rising 17%/18% (vs. end-Aug prices), before tapering in Nov.

While we note Aniline prices have begun to rise over the past week (likely attributed to plant repairs from industry players and winter seasonality), we think Sunsine was able to lock in strong ASPs at the start of 4Q23F with its major customers, resulting in a slight qoq improvement in 4Q23F GPM to c.21% (4Q22: 24%), with ASP growth likely outpacing that of input costs, in our view.

We believe Sunsine should see healthy volume growth in FY24F (+c.5% yoy), supported by

Although Sunsine expects near-term competitive pressures to stay intense given incoming industry supply, the company reiterated that its dominant market leadership and strong balance sheet positions (3Q net cash at c.75% of current market cap) are wide economic moats.

We cut our FY23-25F EPS by 3-18% as we factor in the weak 3Q results and bake in larger-than-expected GPM pressure ahead.

Full report here

Excerpts from CGS-CIMB report
Analyst: Ong Khang Chuen, CFA

China Sunsine Chemical Holdings’ 2H22 net profit of Rmb215m (-50% hoh, -11% yoy) was in line with our expectations.

FY22 net profit of Rmb642m (+27% yoy) formed 99%/100% of our/Bloomberg consensus’ forecasts.

Sales volume rose 6% hoh due to stronger sales of insoluble sulfer and antioxidants (capacity expansion-driven), which offset weaker rubber accelerator sales.

However, weaker downstream demand compressed Sunsine’s profit spread; GP per tonne fell 36% hoh in 2H22.

Sunsine proposed a higher FY22 DPS of 3 Scts (FY21: 2.0 Scts), implying a 6.1% dividend yield.

With China’s pivot from its zero-Covid stance, we expect recovery in domestic downstream demand, supported by recovery of economic activities and potential stimulus measures by the government.

However, we are more cautious on export sales; major tyre manufacturer Bridgestone put out a guarded 2023 outlook during its recent results brief, as it notes that demand for replacement tyres in 4Q22 was hit by economic woes in the US and Europe.

Overall, we expect a slight 3% yoy sales volume growth for FY23F.

According to sci99.com, a Chinese commodity market information service provider, both rubber accelerator and aniline prices remained weak through Dec 22-Jan 23, before showing some recovery in Feb.

Aniline spiked to Rmb12k/ton in mid-Feb (vs. Jan's Rmb10k/ton), driven by plant maintenance activities conducted by key manufacturers.

Given that Sunsine typically locks in quarterly pricing for its rubber accelerator products with major customers, while taking spot prices for raw materials, we expect near-term weakness in profit spreads for 1Q23F.

Profit spread expansion in quarters ahead will be dependent on the pace of downstream demand recovery, in our view.

Full report here

Excerpts from CGS-CIMB report
Analyst: Kenneth Tan & Ong Khang Chuen, CFA

China Sunsine’s (Sunsine) 1H24 core net profit of Rmb189m (+6% hoh, -8% yoy) was largely in line at 50% of our FY24F estimate.

Rubber chemical sales volumes came in healthy (+6% yoy), mostly led by strong rubber accelerator demand from tyre manufacturers based in Southeast Asia, partially offset by weaker domestic demand. 

GPM surprised positively at 24.8% (+1% pt yoy), which we attribute to higher-margin sales mix.

However, tax expenses jumped substantially (+91% yoy) due to expiry of the group’s hightech enterprise status (accords lower concessionary taxes).

According to commodity market information service provider sci99.com, average rubber accelerator ASPs in Jul-Aug 24 were flat to slightly lower compared to average ASPs in 2Q24.

Average aniline prices in Jul-Aug 24 were down c.10% compared to 2Q24 average prices.

We think GPM should sustain yoy in 2H24F at c.22%, as risks from intensifying industry competition are offset by cost savings achieved from ramp-up of new MBT products in 3Q24F.

We believe Sunsine should maintain healthy sales volume growth ahead, underpinned by

As shared in its 1H24 outlook statement, management still sees stiff competition persisting in China and continues to implement flexible pricing strategy to defend its market share.

Balance sheet remains healthy, with net cash rising to Rmb1.7bn (c.90% of current market cap) at end-2Q24.

Full report here

See also: CHINA SUNSINE: This stock's 5 key metrics have grown 6-8X in 15 years

THE CONTEXT Background photo: Control room which monitors operational and production systems at China Sunsine. • China Sunsine stock (75 cents) has risen 69% year-to-date, a long awaited rerating for its shareholders. The business' enduring robustness and strong cashflow have been key attractions for them.  You can see that in the company's growing cashpile through the years even as it spent on R&D and regularly expanded its production capacity for chemicals that go into tyre manufacturing.  • On top of that, it has been paying dividends, distributing more than RMB 1 billion since its 2007 listing on the SGX, which raised RMB 264 million.    YEAR '19 '20 '21 '22 '23 '24 1H25 Dividend (SG cents) 1 1 2 3 2.5 3 0.5 • Check out this chart (and story): • China Sunsine operates in a competitive industry with volatile prices for input raw materials, which have weeded out a number of players, leaving behind just a few sizeable Chinese peers. That explains why as the world's largest producer of rubber chemicals used in tyre manufacturing, China Sunsine has seen its profitability cruise higher in some years, and lose altitude in others. • See excerpts below of an 18 Aug report by UOB KH, the only broker covering the stock currently...

 

Excerpts from UOB Kay Hian report
Analysts: Heidi Mo & John Cheong

China Sunsine Chemical (CSSC SP) 

RESULTS
• Earnings beat on lower R&D. China Sunsine Chemical (Sunsine)’s 1H25 revenue of Rmb1,690 (-3% yoy) and earnings of Rmb243m (+29% yoy) formed 48% and 56% of our full-year forecasts respectively.
 

The earnings outperformance was mainly due to a sharp reduction in R&D expenses to Rmb4.6m (vs Rmb69.9m in 1H24), alongside a record-high sales volume which helped offset softer ASPs.

• Record sales volume. Sales reached a new half-year high of 109,695 tonnes (+4% yoy), with growth across all product categories: rubber accelerators (+1% yoy), insoluble sulphur (+16% yoy), and anti-oxidants (+2% yoy).

Both domestic and export volumes rose 4% yoy, driven by proactive market share capture in China and stronger demand from Chinese tyre makers in Southeast Asia. 

Fortress balance sheet

"Sunsine remains debt-free with Rmb2,234m (approximately S$398m) in cash as at 30 Jun 25. Net assets per share stood at Rmb451.3 cents (approximately S$0.80), with net cash per share at S$0.42. Current ratio remains robust at 7.5x, highlighting solid financial flexibility." - UOB KH

• Margins remain resilient. Despite the 7% decline in ASPs to Rmb15,195/tonne, gross profit slipped only 4% yoy to Rmb416m, with the gross margin holding steady at 24.6% (-0.2ppt yoy).

This reflects stable profitability amid the competitive pricing environment.

• Special dividend declared. To commemorate its 30th anniversary, the board declared a special interim dividend of 0.5 S cent/share.

STOCK IMPACT
• Challenging backdrop, steady demand. Sunsine expects trade uncertainties, geopolitical risks and persistent overcapacity to continue to weigh on ASPs.

However, China’s economy remains robust, with 1H25 GDP yoy growth of 5.3% and auto sales up 11.4% yoy.

Replacement tyre demand also continues to be strong at 70% of total consumption, while government measures to curb low-price competition and phase out outdated capacity should support healthier long-term industry conditions.

• Capacity ramp-up to drive growth. Sunsine’s ongoing projects include a 30,000 tonnes/annum insoluble sulphur expansion (commercial production expected by 4Q25), two solvent-based Mercaptobenzothiazole (MBT) projects at Hengshun and Weifang (trial runs by end-25 and early-26 respectively), and the conversion of rubber accelerator lines at Shandong Sunsine (early-26).

By 2026, total capacity is set to rise 7% to 272,000 tonnes, with innovations such as solvent-based MBT production enhancing green manufacturing, improving operational efficiency, and strengthening its competitive advantages.

EARNINGS REVISION/RISK
• We have revised our 2026-27 earnings forecasts upward by around 2-3%, after factoring in Sunsine’s planned capacity expansion.

We expect the additional output from the new facilities and conversion of accelerator lines to support stronger sales volumes.

VALUATION/RECOMMENDATION Heidi Mo, analyst• Maintain BUY with a 19% higher target price of S$0.75 (S$0.63 previously),after rolling over our valuation base year to 2026 and applying a higher valuation multiple of 9.4x 2026F earnings (+1.5SD to mean PE), vs the previous 7.5x 2025F earnings (+1SD to mean PE). The higher multiple captures Sunsine’s stronger earnings visibility from upcoming capacity expansions. At the current price, the stock trades at an attractive 3x 2026F ex-cash PE while offering a decent 4.4% 2026 yield. SHARE PRICE CATALYST • New manufacturing capacities commencing production. • Higher ASPs for rubber chemicals. • Higher-than-expected utilisation rates

Full report here. 

•  Few -- very few -- S-chips have the longevity, as a listco, of China Sunsine. It's been 17 years since its listing on the Singapore Exchange. And unlike China Sunsine, few S-chips have won a Most Transparent Company award from the Securities Investors Association of Singapore.  • Few of these China-origin listcos have increasingly focused on shareholder returns. But on top of frequent share buybacks, China Sunsine has been upping its dividend payouts in recent years:  CHINA SUNSINE FY18 FY19 FY20 FY21 FY22 FY23 Dividend/share (SG cents) 5.5 1 1 2 3 2.5 Note: In FY19, China Sunsine carried out a share split where 1 share became 2. • The share buybacks and dividends look sustainable given the company's strong cash generation and cashpile, as shown below. Its net cash level is 81% of its current market cap. • China Sunsine's 2023 net profit tumbled y-o-y. Yes, selling prices of its specialty chemicals for the global tyre manufacturing industry can be volatile and margins can be compressed. Read what CGS-CIMB has to say below.....

Excerpts from CGS-CIMB report
Analyst: Kenneth Tan & Ong Khang Chuen, CFA

China Sunsine Chemical Holdings’ 2H23 net profit of Rmb178m (-9% hoh, -17% yoy) was a beat, with FY23 net profit of Rmb372m (-42% yoy) at 13% above our forecast.

The beat was driven by resilient GPM of 22% (-4.1% pts yoy), as we had expected a steeper decline in gross profit per tonne in view of intense domestic competition.

Rubber chemical sales volumes hit a record high in 2H23 (+8% hoh, +12% yoy) on recovering tyre demand and ramp-up of newer production lines (commenced in 1H22).

Sunsine proposed a final DPS of 1.5 Scts and special DPS of 1.0 Sct, above our expectation of 1.2 Scts.

Recall that Sunsine typically locks in rubber accelerator prices with major customers at the start of the quarter, while taking spot prices for raw materials (aniline).

According to data provider sci99.com, rubber accelerator ASPs at the start of Jan 24 were c.19% lower vs. end-Sep 23 prices, while average aniline prices in Jan-Feb 24 were c.7% lower vs. average 4Q23 prices.

In comparison, rubber accelerator ASPs started off high in Oct 23 (+37% vs. end-Jun 23), while average 4Q23 aniline prices were c.2% higher vs. 3Q23 average.

We believe pricing trends could indicate qoq softness in Sunsine’s 1Q24F GPM.

We think competition should stay elevated in FY24F on the back of capacity expansion projects by peers; we hence expect FY24-25F GPM to remain dampened at c.22% on continued pricing pressure.

Nevertheless, we believe FY24F volume growth should remain healthy (+c.5% yoy), premised on:
1) rising tyre manufacturer utilisation rates, and
2) further ramp-up in newer lines.

Despite the tough operating environment, we believe Sunsine could maintain its DPS at 2.5 Scts in FY24F (6.5% yield) given its elevated net cash position and strong operating cash flow generation.

Full report here

See also: CHINA SUNSINE: This stock's 5 key metrics have grown 6-8X in 15 years

Excerpts from UOB KH report
Analysts: Heidi Mo & John Cheong

China Sunsine Chemical (CSSC SP)

RESULTS

China Sunsine Chemical’s (Sunsine) 2H22 net profit fell by 11% yoy to Rmb214.9m, bringing 2022 core profit to 95% of our full-year estimates.

2H22 performance came on the back of lower revenue of Rmb1,802.5m (-8.4% yoy) due to both a decline in sales volume to 95,731 tonnes (-6.4% yoy) and a 2% yoy decrease in ASPs of rubber accelerators to Rmb18,532/tonne.

For 2022, overall ASP increased by 8% yoy to Rmb20,237/tonne, as Sunsine was able to pass on the increase in raw material prices to customers.

This drove the 2.7% yoy rise in 2022 revenue, offset by the 5% lower sales volume.

 2022 core profit of Rmb606.3m (+11.8% yoy) excludes a Rmb36.1m tax refund received in 1H22 for the overpayment of 2021 tax expenses.

Due to lower recorded revenue, gross profit fell by 4.9% yoy to Rmb469.9m in 2H22. 

However, 2H22 gross margin expanded 1.0ppt yoy to 26.1% (2H21: 25.1%, 1H22: 34.3%), with a more favourable sales mix comprising a higher proportion of antioxidant products.

Full-year gross and core profit margins also improved by 2.3ppt yoy to 30.4% and by 1.3ppt yoy to 15.9% respectively.

Management has proposed to pay out S$0.025/share, consisting of a final DPS of S$0.01/share and a special DPS of S$0.015/share (2021: S$0.01/share).

In Oct 22, Sunsine commenced the construction of a project with a 20,000 tonnes/year capacity for an intermediate material used to produce many kinds of accelerators.

Construction of Phase 2 of an insoluble sulphur project will also increase insoluble sulphur capacity by 50% to 90,000 tonnes/year.

These projects are expected to be completed by end-23, and are likely to lift sales volume when operational.

STOCK IMPACT

As of end-22, total cash and bank balances stood at Rmb1,364.9m with no debt outstanding, which equates to Rmb1.41/share (S$0.27/share).

Additionally, free cash flow generated in 2022 remained positive at Rmb122m (2021: Rmb163m) despite capacity expansion efforts.

Correspondingly, net cash per share is estimated to increase from Rmb0.86/share (S$0.16/share) to Rmb1.06/share (S$0.20/share) and Rmb1.21/share (S$0.23/share) in 2023 and 2024 respectively.

• Due to lower expectations for crude oil price according to US Energy Information Administration (EIA), we have tweaked our 2023 and 2024 gross margin assumptions from 30.0% to 29.0% and 30.0% to 29.1% respectively.

• Accordingly, we have raised earnings estimates for 2023/24 by 6%/7% to Rmb491m/Rmb575m respectively.

SHARE PRICE CATALYST
• China’s reopening leading to higher consumption.
• Production commencement for new capacities.

Full report here. 

THE CONTEXT • The large cashpile perhaps was hard to ignore. Or maybe it's the recent news of Chinese economic stimulus. Whichever, China Sunsine received kudos from UOB Kay Hian in a report today, which raised its target price from 46 cents to 58 cents. • It has been a most under-appreciated fact that China Sunsine, despite an ambition to continually expand production capacity, had a growing cashpile that often was nearly equal to its market cap. Check out this chart (and story) we put out in Aug 2024 when the stock was 37 cents: • China Sunsine, whose stock has recently risen to 48 cents, operates in a very competitive industry that has weeded out a number of players, leaving behind just a few sizeable Chinese peers. As the world's largest producer of rubber chemicals used in tyre manufacturing, China Sunsine has seen its profitability cruise some years, lose altitude in others, or just soar on tailwinds (see chart). Certainly, compared to 17 years ago when it listed on the Singapore Exchange, its pre-tax profit has soared as much as 10x as the chart above shows: • See excerpts of UOB KH's take below...

 
Excerpts from UOB Kay Hian report
Analysts: Heidi Mo & John Cheong

China Sunsine Chemical (CSSC SP) 

WHAT’S NEW
• Potential improvement in demand and ASPs from stronger Chinese economy and oil prices. China’s latest stimulus measures have improved investor sentiment and may boost consumer confidence.

In addition, oil prices have risen due to the Middle East conflict.

In turn, China Sunsine Chemical’s (Sunsine) demand could see an uptick in the coming months on the back of stronger demand for vehicles as well as better ASPs as Sunsine’s product is a derivative of petroleum products.

During Jul-Sep 24, ASPs have been flattish on the back of stable raw material prices. Meanwhile, China’s GDP grew 5% in 1H24.

• Good dividend yield of around 5% backed by strong balance sheet. Sunsine provides an attractive yield of around 5%, supported by its robust cash balance of Rmb1,751m (+4% hoh) as of 1H24.

This translates to Rmb1.82/share (S$0.34/share) or around 70% of its market cap.

This provides ample room for Sunsine to potentially raise its dividend and continue to perform share buybacks. Sunsine has bought back 3.8m shares for 2024 since the start of its 2024 share buyback plan on 26 Apr 24.

• Expect steady volume growth on the back of strong demand. Sunsine achieved stronger rubber chemical sales volume (+6% yoy) in 1H24. This was driven by higher international sales volume (+20% yoy) from increased capacity utilisation rates for tyre manufacturers based in Southeast Asia, partially offset by lower domestic demand (-2% yoy).

As more Chinese tyre manufacturers look to Southeast Asia to beef up production, we expect international sales volume to grow further.

Moreover, automakers reported a 6% yoy increase in auto sales in China, while new energy vehicles saw a 32% yoy surge in 1H24. We therefore expect sales volume growth to remain steady for 2024.

• 1H24 results within expectations. Sunsine reported 1H24 earnings of Rmb189m (-3% yoy), which accounted for 49% of our full-year forecast and is largely in line with our expectation.

"(Cash balance) provides ample room for Sunsine to potentially raise its dividend and continue to perform share buybacks. Sunsine has bought back 3.8m shares for 2024 since the start of its 2024 share buyback plan on 26 Apr 24." - UOB KH

Revenue was flattish yoy at Rmb1,749m, as the higher sales volume (+6% yoy) was offset by a 4% yoy decrease in ASPs.

Sunsine continues to adopt a flexible pricing strategy to maintain price competitiveness. Gross margin improved more than expected at 24.8% (+1ppt yoy), but net margin fell 0.5ppt.

STOCK IMPACT
• Continuing to dominate the accelerator market. Management shared that they have successfully maintained their position as the world’s largest accelerator producer, with its market share growing from 22% in 2022 to 23% in 2023. In China, they have also grown their market-leading share from 33% to 35% in 2023.

With the largest accelerator capacity globally at 117,000 tonnes, Sunsine is poised to grow its strong customer base of over 1,000, which includes more than 75% of the global top 75 tyre makers including Bridgestone, Goodyear and Michelin.

• Expansion projects underway for 2025 growth. Phase 1 of a high-quality intermediate material project of 20,000 tonnes/year capacity is expected to commence production in 4Q24, while Phase 2 of an insoluble sulphur project of 30,000 tonnes/year capacity is expected to be completed by end-24.

These projects will increase capacity and allow Sunsine to meet customers’ requirements, pointing toward higher sales volume in 2025.

EARNINGS REVISION/RISK
• We have raised our 2024/25 gross margin assumptions from 23%/24% to 24%/25% respectively while adding 2026 forecasts, as raw material costs continue to moderate.

However, we have doubled our tax rate forecasts as Sunsine’s main subsidiary, Shandong Sunsine, no longer enjoys the 15% concessionary tax rate.

We note that Sunsine is still conducting an internal assessment on whether to re-apply for the High-Tech Enterprise status of Shandong Sunsine, which previously expired in Dec 23.

• As a result, we have lowered our 2024/25 earnings estimates by 3%/5% to Rmb374m/Rmb402m respectively (from Rmb388m/Rmb426m previously). 

VALUATION/RECOMMENDATION Heidi Mo, analyst• Maintain BUY with a 26% higher target price of S$0.58 (S$0.46 previously), after raising our valuation multiple to +1SD above mean PE of 7.5x 2025F earnings, up from its mean PE of 6x 2024F earnings previously to capture the potential demand and ASPs recovery in 2025. The stock trades at an attractive valuation of 2x ex-cash 2024F PE. SHARE PRICE CATALYST •New manufacturing capacities commencing production. • Higher ASPs for rubber chemicals. • Higher-than-expected utilisation rates.

Full report here. 

Company Profile
China Sunsine Chemical (CSSC) is a leading specialty chemical producer selling rubber accelerators, anti-oxidants, and vulcanizing agents. It is the world’s largest rubber accelerators producer, and China’s largest rubber chemicals enterprise, serving more than two thirds of the top 75 tyre makers in the word, including Bridgestone, Michelin, Goodyear, and Pirelli.

Excerpts from RHB report (TOP SINGAPORE SMALL CAP COMPANIES -- 20 JEWELS 2023 EDITION)
Analyst: Alfie Yeo

Investment Merits Report dated 16 May 2023 Worldwide market leader in rubber accelerators, reopening of China’s economy is expected to drive recovery  Indirect longer-term exposure to EV manufacturing and growth in China  Valuation attractive at <5x (<2x ex-cash) FY22 P/E, with >70% of market cap in net cash

Highlights

China has been a leader in global consumer tyre production since 2005.

According to management consulting firm TechSci Research, China’s tyre market was valued at USD44.5bn, and is expected to grow by 11% CAGR to USD82.5bn from 2023 to 2027, driven by the expected increase in vehicle sales.

As a leading supplier of rubber accelerators to major tyre manufacturers in China, with c.117k tonnes of rubber accelerators, c.60k tonnes of insoluble Sulphur, and c.77k tonnes of anti-oxidant manufacturing capacity, CSSC is well positioned to ride on the growth of tyre manufacturing in China.

Margins are normally defendable as manufacturers are usually less sensitive to price increases, as the rubber accelerator component as a proportion of tyre manufacturing costs is very small at <10%.

 
We expect to see the post-zero-COVID policy impact of improving demand and manufacturing activities in China.

PMI has already jumped to 52.6 and 51.9 in Feb and Mar 2023, indicating an expansion in its manufacturing sector. Indirect exposure to EV manufacturing.

As a producer of chemical inputs to tyre production in China, CSSC is indirectly exposed to the longer-term growth of China’s EV production and manufacturing, on the back of new and replacement car demand.

According to research from market intelligence and advisory firm Mordor Intelligence, China’s EV market was valued at USD124bn in 2022, and is expected to register a 5-year CAGR of 30.1% from 2023 to 2028.

The growth of EV is expected to support new tyre demand over the longer term. The China Passenger Car Association expects 8.4m new EV units to be delivered in 2023, up from last year’s 6.4m units (+31% YoY).

Company Report Card

 
Revenue for FY22 grew 3% YoY to CNY3.8bn while earnings grew 27% YoY to CNY642m. While 1H22 revenue grew, 2H22 saw a sales decline of 8% YoY.

This was led by a 2% decrease in ASPs, in response to weaker demand and competition as well as lower volumes on TBBS accelerator sales for trucks and heavy vehicle tyres, due to China’s COVID-19 control measures.

Gross margins, however, grew 2.3ppts to 30.4% on a better sales mix of anti-oxidant products.

Net margin rose 3.2ppts to 16.8% despite a slight YoY net margin decline of -0.3ppts to 11.9% in 2H22 due to lower utilisation, higher operating costs (freight, port charges, sales incentives etc), and more downtime during the Lunar New Year.

A final dividend of 1.0 SG cent and a special dividend of 1.5 SG cents were declared, bringing total dividends for FY22 to 3 SG cents, amounting to a 23% payout ratio.

CSSC is in a net cash position of CNY1.3bn (or approximately 28 SG cents per share) and has no debt.

The business is cash generative, with operating cash flow between CNY200-700m over the last five years.

It remained profitable and continued to generate positive operating cash flow throughout the COVID-19 period.

CSSC has been paying out dividends historically due to its strong balance sheet and cash generative business.

Dividend payout ratio has been 19-23% over the past three years, even throughout the COVID-19 restrictions.

With a strong balance sheet, we expect dividend payout to continue.

CSSC is led by Mr. Xu Chang Qiu, executive chairman, since 1998, via the MBO of CSSC’s subsidiary’s predecessor Shanxian Chemical. He is supported by two key executive directors (including his elder son Mr. Xu Jun), and five other key executives in CFO, First Deputy GM, Chief Engineer, Deputy GM, and GM assistant (occupied by his younger son Mr. Xu Chi). Mr. Xu Cheng Qiu’s interest is well aligned with shareholders, as the executive chairman owns c.61% of CSSC.

THE CONTEXT • What a dramatic fall the Hang Seng Index suffered over the last 2 days. On Tuesday, it plummeted nearly 10% in its worst single-day performance since the 2008 financial crisis. Then yesterday, it fell by 1.4%. • The sharp drops were attributed to investor disappointment over the lack of new stimulus measures from Chinese officials and profit-taking after a recent robust rally. • There was significant trading activity, of course, and that's good news for stock brokerages. That's why their stocks may make a good play on the market in turbulent times.  • DBS Research's report yesterday said: "Brokers are typically front-runners during bull markets and heavily speculated by market participants." The report recommended a "buy" on the following HK- and US-listed stocks with exposure to the Chinese investor (chart): • See excerpts of DBS's take below...

 
Excerpts from DBS Research report
Analysts: Ken Shih & Edmond Fok

•Strong retail investing momentum set to last. Compared to Jul 23, we see

With social media magnifying the FOMO sentiment, we expect momentum rather than mean reversion.

We estimate >Rmb4tn (5% of A-share free float) of potential new funds flowing into stock market via public funds, due to wealth re-allocation from cash and fixed income to equities.

Earnings outlook substantially improved. We forecast A-share ADT from now to FY25F of Rmb1.25tn, assuming a further 10% growth in the average market cap and turnover rate of 1.5%, slightly higher than the 10-year average (1.42%).

Our blue sky scenario assumes a turnover rate of 2.0% (FY15: 2.5%), suggesting a further 30% earnings upside and showcasing brokers’ high earnings elasticity.

Online brokers like Futu and Up Fintech are key beneficiaries too, as c.80% of their client trading volume comes from HK/China clients, per our estimate. 

Full report here. 

THE CONTEXT • Thanks to China's new stimulus measures to boost its economy, Chinese and HK stocks have been roaring loudly. UOB KH has just put out its alpha picks for the Greater China markets. • One of them is notable: Plover Bay Technologies, which boasts high gross margins (~55%), is asset light and is on a growth trajectory. A key aspect of its business is being an authorised technology provider of Starlink, which belongs to Elon Musk's SpaceX. Starlink is a satellite internet constellation designed to provide high-speed, low-latency broadband internet across the globe, particularly in remote and underserved areas. Starlink's network consists of thousands of small satellites in low Earth orbit, which allows it to offer reliable internet services.  • So what does Plover Bay do? Among other things, through its brand Peplink, it creates devices and software that can combine multiple internet connections, including Starlink's, to make them faster and more reliable. This is especially useful for businesses and people on the move, like those on ships or in remote locations. (For more, see this investor's analysis -- and UOB KH's take below).

 
Excerpts from UOB Kay Hian report
Analyst: Greater China Research Team

ACTION
• Add CATL (300750 CH) to our BUY list due to the strong growth in monthly EV battery shipments and drop in lithium carbonate prices which will lead to better 3Q24 earnings.

• Add Geely (175 HK) to our BUY list due to its upbeat monthly sales.

• Add Plover Bay (1523 HK) to our BUY list as its growth momentum has continued into 8M24, with revenue growth in July and August further accelerating from 28% yoy in 1H24, mainly driven by strong demand in the US and Australia.

• Take profit on COLI (688 HK), Desay (002920 CH) and KE Holdings (2423 HK).

• Cut losses on Li Auto (2015 HK) and Xpeng (9868 HK).

• Maintain BUY on AIA (1299 HK), Crystal (2232 HK), Galaxy (27 HK), Meituan (3690 HK), Ping An (2318 HK), Sunny Optical (2382 HK), Trip.com (9961 HK), Tencent (700 HK) and The United Lab (3933 HK).

Plover Bay Technologies (1523 HK) (Analyst: Kate Luang) We held an update call with Plover Bay. Its solid growth momentum continued into 8M24 with revenue growth in July and August further accelerating from 28% yoy in 1H24, mainly driven by strong demand in the US and Australia. Management expects full-year 2024 revenue to grow by 25% yoy despite a relatively high base in 2H23.  The company is positive on achieving a high gross margin in 2H24 (1H24: 55.4%), thanks to stable raw material costs and a favourable product mix. We expect Plover Bay’s full-year gross margin to reach 56.5% in 2024, vs 54.0% in 2023.  We are seeing increased deployment of Peplink routers in the maritime vertical. Following the deployment of Peplink routers on their cruise ships, Royal Caribbean Group also debuted Starlink Internet in communities in Alaska in late-August (where their cruise ships make stops at) so that passengers can remain online while onshore.  We maintain BUY and raise target price to HK$6.10. We increase our 2024-26 revenue forecasts by 1%/1%/1% respectively to reflect stronger growth momentum, and raise our 2024-26 net profit forecasts by 8%/8%/9% respectively to factor in higher gross margins. We believe the 19% share price pullback since late-July provides windows to accumulate shares as the company is trading at attractive valuations of 11.2x 2025F PE and 7.8%/8.5% dividend yield in 2024-25 respectively.  Catalyst: Further collaboration(s) with Starlink announced.  Valuation: Trading at 11.8x one-year forward PE, which is slightly below its historical mean of 12.6x in 2018-24.

Full report here.