Excerpts from UOB KH report
Analyst: Clement Ho
Upgrade to BUY after raising the valuation peg to 2.5x EV/EBITDA.
The new target price of S$0.48 implies a 2021F PE of 8.0x and ex-cash of 3.5x.
• ASPs of rubber accelerators seeing recovery. The selling prices of rubber accelerators, the main earnings driver for China Sunsine Chemical Holdings (Sunsine), are showing signs of a recovery, backed by the uptick in automobile sales in China.
On a monthly sequential basis, average price of aniline improved 1.4% and 7.9% in Aug 20 and Sep 20, to Rmb4,330/tonne and Rmb4,673/tonne respectively.
This compares with an ASP of Rmb7,937/ tonne in Oct 19.
Previously, we erred on conservatism given that the rubber chemicals industry remains in consolidation and we were not optimistic on a recovery in ASPs, but data has shown otherwise.
• Rise in vehicle sales looks to be sustainable. China’s vehicle sales have risen for the fifth consecutive month in Aug 20 (+11.6% yoy; +3.5% mom).
This proves that the domestic economy has fully recovered, largely helped by government stimulus measures to provide a jolt to domestic consumption as the country recovers from the pandemic.
We believe the measures to encourage vehicle purchases, such as more vehicle permits in major cities, will continue in the mid-term, driving recovery towards a more normalised level.
Furthermore, growth in vehicle sales is anticipated to continue in the foreseeable future given China’s relatively low penetration and expanding middle class.
• Auto recovery play. Sunsine is a proxy to the ongoing “auto-recovery theme”, following expectations for the global economy to restart after being severely impacted by COVID-19 lockdown measures early in 2020.
The uptick in vehicle sales in China, which Sunsine sells primarily to (61% of FY19 sales), will benefit the group given the higher demand for tyres.
• 48% net profit growth in 2021F. The estimated net profit of Rmb198.5m for 2021 (+48%) will be driven by a jump in revenue to Rmb2,668m (+43%), largely attributable to higher sales volume of 221,750 tonnes (+30%) arising from Sunsine’s expanded production capacity.
Furthermore, higher vehicle sales is expected to drive increased demand for tyres, hence leading to a potential 10% rise in the ASP of rubbers chemicals from a low base in 9M20.
• Assume higher ASPs going forward. We have raised our assumptions for ASPs by 12%/23%/21% for 2020/21/22F respectively, on the basis that the growing vehicle population in China will lead to higher demand for new and replacement tyres, thereby driving up ASPs of rubber chemicals.
• We raise our net profit forecasts by 52%/125% for 2020/21F respectively. The driving factor for the change in earnings is due to higher ASPs and estimated factory utilisation rates. We now expect overall utilisation rate to come in at 94% and 100% for 2020F and 2021F respectively, compared with 83% and 98% previously.
• Upgrade to BUY with new target price of S$0.48. We have raised the valuation peg to Sunsine’s 5-year average EV/EBITDA of 2.5x.
Previously marked at -1SD of 1.5x, we believe the upgrade is justified given that the industry has bottomed out and ASPs are on the recovery trend.
The target price implies a 2021F PE of 8.0x and ex-cash of 3.5x.
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• Higher ASPs for rubber chemicals.
• Higher-than-expected utilisation rates.
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