"Money Plant" contributed this article to NextInsight. She is a retail investor who says she is still learning from the market everyday.

China Sunsine recently announced the sale of its 27.6m treasury shares through a private placement to institutional investors at S$0.646. This highlights the value that institutional investors see in the company as well as an investment with a good risk-reward ratio. If we assume a price floor of S$0.646, and have a TP of S$0.84-0.975, our risk reward ratio is 2.6-5.

weifang cbs9.14aRubber accelerators being produced in China Sunsine. NextInsight file photo.
China Sunsine is the largest rubber accelerator producer globally and the biggest insoluble sulphur producer in the PRC, serving more than 65% of the global top 75 tire manufacturers such as Bridgestone, Michelin, Goodyear. Its market share of accelerators in the PRC and global markets has grown to 31% and 18%, respectively. It is currently trading at about 3.3x EV/2016 EBITDA, 7.8x 2016 PE, and 5.9x ex-cash 2016 PE (after adjusting for treasury shares sale) - which is highly reasonable given the global scale of China Sunsine’s business.


-    Near-term price catalysts include a positive 2QFY17 result and potential dividend hikes.

-    In the medium to long term -- further earnings growth as new production capacity comes onstream.


1) Psychological price floor at S$0.646. With the placement at S$0.646, this is now a psychological price floor for the market. Institutional investors see merit in investing at S$0.646 (and given the size of their investment, it is unlikely they will and can settle for just a 20%-30% upside). In addition, if prices fall below S$0.646, it makes sense for China Sunsine to buy the shares from the market, since anything below S$0.646 is a profit to them. (and they have the cash now anyway)

2) Another strong quarter in 2QFY17? With the exception of 2010 and 2012, 2Q has typically been stronger than 1Q as the CNY period falls in the Jan-Mar period. With 1Q17 operating income already 20% higher than 2Q16, investors can look forward to a very positive yoy comparison in 2Q17. China Sunsine saw 1Q17 net profit surge 70% yoy on the back of a 29% rise in sales driven by both growth in volume and average selling price (ASP).

    1. 2Q16 may be a low bar to beat. 1Q17 sales rose 29% yoy (1Q16 sales rose only 3% yoy). Should the momentum continue in 2Q17, we should see very strong growth in 2Q17F as well (2Q16 sales dropped 1% yoy)

3) Potential for higher dividends for shareholders - According to Sunsine’s press release, the net sales proceeds will be retained for payment of dividends in future. After the placement, Sunsine’s net cash balance will rise to S$84.8m (add sales proceed to cash in 31 Mar 17). While China Sunsine has some expansionary capex plans (est RMB200-300m) for 2017, it has more than enough cash in the bank to finance it.

The last time China Sunsine raised its dividend was in 2014 from S$0.01 to S$0.015 (S$0.01 ordinary and S$0.005 special) when its profit surged more than 150%. With the strong profitability growth in 1Q17 (+70% yoy) and strong net cash balance,
China Sunsine is ready to hike its dividend.

4) TP at S$0.84-S$0.975 based on 3.5-4x EV/EBITDA – based on FY17F EBITDA (we assumed a 15% growth yoy from FY16)- which we think is reasonable given these scenarios:
    1. If we assume 1Q17 + 9M16 =FY17F EBITDA = 9.7% growth
    2. If we assume 1Q17 + 1.2x2Q16 (which suggest a flat EBITDA comparison to 1Q17- but typically 2Q has been stronger than 1Q) +2H16= 14% growth

* Assume 15% growth for FY17F EBITDA - which is reasonable - as we have assumed no growth for 3Q and 4Q. We have assumed 2Q to be same as 1Q17, although 2Q has typically been stronger than 1Q (due to 1Q resulted affected by CNY holidays).

 

EBITDA variability

 

 0.841

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

0.5

 0.249

 0.254

 0.258

 0.263

 0.268

 0.273

 0.278

 0.282

 0.287

1

 0.325

 0.335

 0.344

 0.354

 0.364

 0.373

 0.383

 0.392

 0.402

1.5

 0.402

 0.416

 0.430

 0.445

 0.459

 0.473

 0.488

 0.502

 0.516

2

 0.478

 0.497

 0.516

 0.536

 0.555

 0.574

 0.593

 0.612

 0.631

2.5

 0.555

 0.579

 0.602

 0.626

 0.650

 0.674

 0.698

 0.722

 0.746

3

 0.631

 0.660

 0.688

 0.717

 0.746

 0.774

 0.803

 0.832

 0.860

3.5

 0.708

 0.741

 0.774

 0.808

 0.841

 0.875

 0.908

 0.942

 0.975

4

 0.784

 0.822

 0.860

 0.899

 0.937

 0.975

 1.013

 1.052

 1.090

4.5

 0.860

 0.904

 0.947

 0.990

 1.033

 1.076

 1.119

 1.162

 1.205

5

 0.937

 0.985

 1.033

 1.080

 1.128

 1.176

 1.224

 1.271

 1.319

5.5

 1.013

 1.066

 1.119

 1.171

 1.224

 1.276

 1.329

 1.381

 1.434

6

 1.090

 1.147

 1.205

 1.262

 1.319

 1.377

 1.434

 1.491

 1.549

 


RMB m 
(EBITDA)

2017F

2016

yoy growth

1Q

109.4

71.1

53.9%

2Q

113.04

94.2

20.0%

3Q

115.5

115.5

4Q

115

115

452.9

395.8

14.4%

China Sunsine does not have any close peers, hence we compare it with listed manufacturing firms on SGX. Despite its size and manufacturing scale, it trades at a discount to its manufacturing peers (probably due to the discount investors place on S-chips).

Thus a TP based on 3.5-4x EV/EBITDA is reasonable – which is about a 20-30% discount to peers of a similar size (Valuetronics and Sunningdale), and still in line with its overall peers average of 4.3x EV/EBITDA. 

Mkt Cap US$m

Current Price (lcy)

Fiscal year end

PE

PE

PE

PE

2015

2016

2017

2018

Valuetronics 

219.8

0.81

03/2016

11.2

14.1

12.4

11.4

Sunningdale Tech

245.6

1.84

12/2016

8.3

9.0

11.5

10.4

Avi-tech Electronics 

52.2

0.43

06/2016

19.7

11.8

10.8

8.6

Fischer Tech

99.7

2.52

03/2016

18.4

10.6

Fu Yu Corp 

109.6

0.21

12/2016

11.0

14.6

14.6

10.3

Memtech Int'l

82.0

0.82

12/2016

9.7

12.9

9.9

8.8

Average

13.0

12.2

11.8

9.9

China Sunsine 

246.1

0.71

12/2016

8.2

7.2

7.9

7.2

EV/EBITDA

P/B

Dividend yield (%)

Net D/E (%)

2015

2016

2017

2018

Valuetronics

5.05

5.97

5.43

4.95

1.91

4.37

(81.64)

Sunningdale Tech

4.78

4.05

4.53

4.29

0.98

3.26

(3.94)

Avi-tech Electronics

9.65

6.75

5.48

5.12

1.57

4.65

(55.73)

Fischer Tech

5.11

4.52

1.37

3.17

(31.31)

Fu Yu Corp 

2.59

3.16

3.11

2.87

0.89

9.15

(56.07)

Memtech Int'l

3.65

4.24

3.11

2.68

0.73

3.05

(20.56)

Average

5.1

4.8

4.3

4.0

1.2

4.6

China Sunsine 

3.29

3.32

3.45

3.23

1.13

2.13

(20.26)

 
The good and the bad, in a nutshell: 

The good

The bad

A vote of confidence by insti investors with a psychological price floor now at S$0.646 – if the investors did not see growth potential of the company, they would not have purchased the stock.

● If prices fall below S$0.646, it also makes sense for China Sunsine to buy back the shares from the market, since anything below S$0.646 is a profit to them. (and they have the cash now anyway)

● Insti investors include:

Asdew Acquisitions; Island Asset Management; ICH Capital

EPS dilution to current shareholders


● While in school, we were taught that treasury shares will not dilute shareholders (as they are not new shares)


● But in reality, when co. buys back shares, in the minds of shareholders, we have already “cancelled” it. That is already reflected in the calculation of EPS.


● This is evident when 1Q17 EPS dropped from RMB 0.1232 to RMB 0.116 after the treasury share sale.


Increases the liquidity of the stock

Near-term pressure on share price

● This is evident on the first day of trading when prices dropped to a low of S$0.69 from previous closing S$0.725. Liquidity does not increase by insti investors getting the share placement and hogging on to the stocks. There is now an increase in supply of shares on the market (simple supply and demand dynamics)

● It does not necessarily mean insti investors would sell the shares immediately.

● For the size of the placement, it is unlikely insti investors can profit just by selling at current levels. 

Potential for higher dividends for shareholders - mentioned in press release the net sales proceeds will be retained for payment of dividends in future


● As at end of 31 Mar 17, Group has net cash of RMB336m (S$67.3m).


● After the placement, its net cash balance will rise to S$84.8m. While China Sunsine has some expansionary capex plans (est RMB200-300m) for 2017, it has more than enough cash to finance it.


● The last time China Sunsine raised its dividend was in 2014 from S$0.01 to S$0.015 (S$0.01 ordinary and S$0.005 special) when profit surged more than 150%.

● With the strong profitability growth in 1Q17 (+70% yoy) and strong net cash balance, China Sunsine is ready to hike its dividend for the coming year.

China Sunsine made a killing in the sale of treasury shares?

With its share price at a high since its IPO, the sale of treasury shares will enable it to book a huge “trading profit” – although I am not sure if that can be recognised in accounting.


● According to note 20b of AR2016, the implied cost of Sunsine’s treasury shares is only S$0.233. Implied profit from the sale of treasury shares is S$11m (177% profit)

Now getting away from all the corporate action and focusing on the fundamentals…

Expect another strong quarter in 2QFY17. With the exception of years 2010 and 2012, 2Q has typically been stronger than 1Q due to the CNY period in Jan-Mar. With 1Q17 operating income already 20% higher than 2Q16, investors can look forward to a very positive yoy comparison in 2Q17. China Sunsine saw 1Q17 net profit surge 70% yoy on the back of a 29% rise in sales driven by both growth in volume and average selling price (ASP). 

Operating
 income
(RMB m)

2011

2012

2013

2014

2015

2016

2017

1Q

45.2

25.7

19.9

34.4

67.4

47.0

84.9

2Q

50.9

22.2

38.5

89.3

71.2

70.4

3Q

46.4

16.0

43.9

115.8

74.6

91.3

4Q

33.3

6.5

34.5

79.9

74.5

90.2

2Q-1Q

5.7

-3.5

18.6

54.9

3.8

23.4

3Q-2Q

-4.5

-6.2

5.4

26.5

3.4

20.9

4Q-3Q

-13.1

-9.5

-9.4

-35.9

-0.1

-1.1

Source: Bloomberg

Still seeing growth ahead – as group increases capacity. Since its capacity increase in FY14, Sunsine has held its total production capacity constant for the last 3 years, as they ramp up utilisation, maintaining profitability through increased sales volume despite the fall in ASP. By end-FY17, Sunsine will add new production capacity for its accelerators and insoluble sulphur – suggesting it has outgrown its current capacity and the company’s vision of more demand and growth ahead?

Tons

FY2012

FY2013

FY2014

FY2015

FY2016

FY2017e

Accelerators

66,500

70,500

87,000

87,000

87,000

97,000

Insoluble Sulphur

10,000

20,000

20,000

20,000

20,000

30,000

Anti-Oxidant

25,000

25,000

45,000

45,000

45,000

45,000

Total

101,500  

115,500

152,000

152,000

152,000

172,000

Risks - potential further weakening in auto sales in the US and China may affect demand and sentiment of the stock.

-         Vehicle sales in China fell 2.2% to 2.1m in Apr 17, compared to a 4% rise in Mar 17. Auto sales growth in 4M17 is now at 4%, slower than the 5% growth forecast by CAAM for 2017. Nonetheless, China had targeted sales of 35m vehicles/year by 2025 with new energy vehicles making up at least 1/5 of that total (2016 China auto sales-28m).

-         US auto sales also slumped in April as it saw a 4.7% drop to 1.43m units.

 


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Riverstone1.0650.015
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Sunningdale Tech2.1300.010
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Sino Grandness0.205-
Straco0.850-
Sunpower0.620-
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