Excerpts from KGI Securities report
Analyst: Chen Guangzhi
|Accumulate at the trough
• We re-initiate with an OUTPERFORM rating. Our target price of S$1.40 is based on DCF model and an 11.6% required rate of return.
We observed that all the plants were running optimally.
Clean balance sheet with a strong net cash position.
Sunsine has managed to operate without debt since 4Q16. Moreover, its cash on hand reached RMB1.0bn in 2016, and most recently RMB1.17bn as of June 2019, equivalent to RMB2.39/share or S$0.46/share.
Sunsine’s strong net cash position is an additional competitive advantage, enabling the company to further gain market share by expanding its capacity at its own discretion, and mitigating any pressure from a potential liquidity crunch in the event of a market downturn.
Valuation & Action
“Sunsine is currently trading at 5.6x 2019E PE, which we believe undervalues the group’s dominant position and growth prospects.
Preparing for capacity expansion in the near term. The government has approved Sunsine’s plans to add to another 20k tonnes of TBBS (Phase II) production, which is expected to be installed by the end of 2020.
In addition, the company plans to acquire 680 mu of land, equivalent to 453.3k m2, in the Shanxian Chemical Zone for future expansion.
About 300 mu of this new land purchase, or an equivalent 200k m2, is scheduled for another 60k tonnes of insoluble sulphur production lines.
|Risks: Main risks come from:
1) prolonged environment of low ASPs for both raw materials and end products,
2) unexpected surge of industry capacity in the short-term, and
3) an environmental protection inspection at the company that could result in a temporary reduction of utilisation rates.
Full report here.