Excerpts from CGS-CIMB report
Analyst: ONG Khang Chuen, CFA
■ We determine S$0.265 as a trough price for China Sunsine. Upgrade to Add from Hold on a valuation basis; accumulate for long-term.
■ Near-term outlook remains challenging, but we believe CSSC could emerge stronger from this crisis given its more robust balance sheet vs. peers.
|Upgrade to Add on valuation basis|
We determine S$0.265 as a trough point for CSSC, based on our bear-case FY20F BVPS forecast of Rmb2.67/share; pegged to CSSC’s historical trough P/BV of 0.52x.
Target: 38 c
Downside risk is cushioned by its FY20F net cash of S$0.21/share.
We believe that CSSC’s near-term challenging outlook has been more than priced in by the market, and recommend long-term investors accumulate at this level.
We upgrade CSSC from Hold to Add on a valuation basis.
We cut FY20-22F EPS forecasts (base case) by 21.8-36.5% to factor in lower ASP and margin assumptions; our lower TP of S$0.38 is based on 0.72x FY20F P/BV (-0.75 s.d. of historical mean).
|What are you buying into?|
CSSC supplies two-thirds of the global top 75 global tyre makers including Bridgestone, Michelin, Goodyear and Pirelli.
Since its IPO in 2007, CSSC has consistently been profitable, with a positive operating cash flow.
CSSC is the largest producer of rubber accelerators in the world and the largest producer of insoluble sulphur in the PRC, according to the company’s 2018 annual report.
|Why was it previously a Hold?|
We see a challenging near-term outlook for CSSC. Specifically, we see continued ASP weakness for CSSC in 1H20, as the company plans to prioritise sales volume over margins.
Downstream demand is expected to remain weak as Chinese tyre manufacturers run at low utilisation rates, given
|1) continued global macro uncertainties impacting auto demand, and
2) Covid-19 temporarily impacting supply chains in China.
Meanwhile on the supply side, we are also observing intensifying competition as several competitors invest in new capacity.
Nevertheless, with a more robust balance sheet vs. peers, we believe CSSC is in a good position to tide through the near-term industry weakness, and emerge stronger post the Covid-19 crisis.
|Re-rating catalysts/Key risks|
Re-rating catalyst is a recovery of CSSC’s margin spreads. Key risks include prolonged macro weakness and worse-than-expected pricing competition.
Full report on pages 18-26 here.