Excerpts from UOB KH report
Analyst: Clement Ho
Past investments to raise production levels are now bearing fruit, as demand for vehicle sales in China is expected to be sustained by the improving economy.
Maintain BUY with a target price of S$0.695.
• Strong 1H21 results a show of strong demand. China Sunsine Chemical’s (Sunsine) 1H21 net profit spiked 221.8% yoy to Rmb265.2m, as revenue jumped to Rmb1,757.5m (+68.6% yoy) due to both increased sales volume of 93,162 tonnes (+22.1%) and higher ASPs of rubber accelerators by 37% yoy to Rmb18,642/tonne.
The better-than-expected ASP was due to:
|1) the increase in price of aniline- the major feedstock for rubber accelerators;
2) higher production utilisation rates of Chinese tyre manufacturing companies; and
3) a shift in market dynamics to favour large rubber chemical players such as Sunsine.
• Bottom-line lifted by improved operating leverage. 1H21 gross margin expanded 8.2ppt to 31.4% yoy (2H20: 27.8%, 1H20: 23.2%). This resulted in improved operating leverage, with a 221.8% spike in net profit to Rmb265.2m, and a 7.2ppt yoy expansion in net margin to 15.1%.
• Gaining ground from higher capacity and elevated ASPs. The good set of 1h21 results was attributed to management’s perseverance with the continued investments to expand capacity over the past few years, despite the downward trend in rubber accelerator prices.
The move is now paying off, with market share for Sunsine more entrenched, alongside the strong recovery in the China economy as negative impacts from the COVID-19 pandemic subsides. Furthermore, higher crude oil prices have resulted in the similar rise of ASP for its derivatives, including rubber accelerators.
• Vehicle numbers growth in China outweighs global auto chip shortage. In Jun 21, trade group China Association of Automobile Manufacturers (CAAM) revised its 2021 growth forecast from 6.5% to 9.5% for the delivery of 22.1m new light vehicles in China, after contracting in 2018-20. The upward revision came despite production cuts in the global auto market due to the chip shortage situation.
• Good proxy to the recovering China auto sector. Sunsine derives the bulk of sales from China (1H21: 60.7%, 2020: 69%, 2019: 61%), which has been on an uptrend due to the strengthening economy since Mar 20, as well as government efforts to stimulate the automobile industry through subsidies.
• We have lowered our revenue estimates for 2021 and 2022 by 5.7% and 10.2% to Rmb3,596.9m and Rmb3,760.0m respectively. This is to account for the delay in commercial production for the Phase 1 30,000-tonne per annum insoluble sulphur (IS) project and the 30,000-tonne per annum anti-oxidant (TMQ) project, both initially slated to begin in 3Q21.
• On the flip side, we have raised our 2021 gross margin assumption from 22.8% to 28.5%, owing to the higher-than-expected profitability of 31.4% in 1H21 due to the elevated crude oil prices. 2022 gross margin assumption of 27.5% is maintained, in line with expectations for a 4% dip yoy in brent crude price in 2022.
• Accordingly, earnings estimates for 2021 have risen 48.4% to Rmb444.9m, while earnings estimates for 2022 have been reduced 14.6% to Rmb407.6m. This implies an anticipated 8.4% slip yoy in net profit.
• Maintain BUY with a target price of S$0.695. We have re-based our valuation year to 2022F, and value Sunsine at 8.4x PE, or +1SD above its historical 3-year average.
At the current price, Sunsine is attractively valued at 6.1x 2022F PE relative to its closest peer Shandong Yanggu Huatai (Not Rated, 300121 CH), which trades at 8.5x forward PE.
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• ASPs for rubber accelerators remain elevated.
Full report here.