tyres

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. 

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.