tyre production

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

•  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