Excerpts from KGI Securities' report

Analyst: Colin Tan

Deep Value; Robust Growth; Solid Moat

Event

We were recently hosted by management on a site visit to China Sunsine‚Äôs plants in Shanxian and Dingtao in Shandong Province, China. Sunsine is a leading producer of rubber accelerators and is riding on the uptrend in rubber tyre consumption.

visit10.17dScale model of China Sunsine's sprawling production facilities in Shanxian in the Shandong province. Photo by Saw Wei Jie


Impact
Early investments towards environmental protection helped placed Sunsine ahead of the competition. Increasing environmental pressures by authorities have impacted total production of rubber chemicals in China, leading to declines in total output of rubber accelerators and anti-oxidants as productions from non-compliant firms were stopped or shut down.

Sunsine, on the other hand, 
has seen minimal impact to its production output due to early infrastructure investment to adhere to stringent environmental standards.

Valuation
We valued Sunsine at a target price of S$1.39, pegged to FY18F P/E of 10x which
is still below that of its peers and other tyre manufacturers. 
Upside catalysts would probably include stronger-than-expected earnings
growth in the coming third quarter results and new dividend policy that
stipulates higher payout ratio (ideally > 30%) from the current 20% (which is far
too conservative in our view).

-- Colin Tan, 
Analyst, KGI Securities

Building a solid moat through its competitive strengths. Sunsine has several competitive advantages that would help sustain its leading position in its competitive market from our observations. These include large untapped land which could facilitate further expansion in production capacity and strong engineering capabilities needed not only to boost productivity yield but also necessary to minimise safety incident risks in the rubber chemical facilities.

Given its large land use that it has, Sunsine could ramp up production capacity in rubber accelerators and insoluble sulphur to 150,000 tons (72% increase from current capacity) and 70,000 tons (250% increase from current), according to the management.

China Sunsine

Share price:
99 c

Target: 
$1.39

Valuation & Action
We like Sunsine for its robust growth potential and its competitive strengths that could sustain its long-term growth potential. We recommend a BUY on the stock and ascribe a fair value of S$1.39, pegged to 10x FY18F P/E.

Note that the 
implied P/E multiple is still well below that of its peer, Yanggu Huatai (300121 CH), which is trading at 18x forward P/E, as well as that of other tire manufacturers on a simple average basis.

PE
(x)

P/B
(x)

Div yield (%)

Company

Last Price

Market Cap (S$ m)

ROE (%)

Last FY

FY+1

Last FY

FY+1

Last FY

FY+1

Gearing (%)
Current

China Sunsine

SGD 0.97

474

19.5

9.9

7.5

0.8

  1.3

2.1

2.7

0

Shandong Yanggu Huatai Che-A

CNY 14.12

836

27.8

32.6

18.8

7.8

4.8

0.5

0.7

40.8

Lanxess Ag

EUR 67.92

9,975

6.1

29.7

17.7

2.2

2.3

1.1

1.3

48.2

Eastman Chemical

USD 90.47

17,832

20.2

11.1

12.3

2.4

2.6

2.5

2.3

58.4

Simple Average

18.1

24.5

16.3

4.2

3.2

1.4

1.4

49.1


Risks
Mainly regulatory risks in China; slowdown in rubber tyre consumption.

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