Excerpts from UOB KH report
Analyst: Clement Ho
CHINA SUNSINE Chemical (CSSC SP)
ASPs of two key products, rubber accelerators and anti-oxidants, are on the rise again after correcting during May-Aug 21.
We believe the following trends should drive ASP strength in the medium term:
• Rising ASPs of rubber accelerators and anti-oxidants support our positive view. Data from Sublime China Information (SCI) shows that ASPs of two of China Sunsine Chemical’s (Sunsine) key products, rubber accelerators and anti-oxidants, are on the rise again after correcting from May-Aug 21.
The increase in ASP is mainly attributable to reduced production supply in the industry due to tight environmental regulations and higher raw material ASPs for rubber accelerators and anti-oxidants.
The positive ASPs support our positive view on Sunsine’s 103% yoy EPS growth for 2021.
• Positive trends driving increase in ASPs in medium term to benefit Sunsine. We believe the following trends should drive ASP strength in the medium term:
a) With a tighter production supply due to more stringent environmental regulations, Sunsine should be the main beneficiary given its strong emphasis on and substantial investments in minimising waste emissions over the years.
To recap, Sunsine was able to capture supernormal earnings in 2018 when China’s government ordered an industry-wide shutdown of manufacturing plants to reduce air pollution.
b) The elevated ASP of aniline, the key raw material for rubber accelerators, will enable Sunsine to enjoy better earnings as it makes a profit on a cost-plus basis. c) There is growing demand from global tyre makers, with replacement tyres accounting for around 70% of the tyre demand.
|• Not affected by power crunch. Sunsine is not impacted by the current power supply crunch in China, which is triggering blackouts for households and forcing factories to cut production.
This is because its production facilities in Shanxian, Weifang and Dingtao in Shandong Province are relatively further away from the populated areas.
The main production base in Shanxian has its own heating plant, which supplies about 60% of the group's energy consumed.
• 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 its 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 maintain our earnings forecast.
• Maintain BUY with and target price of S$0.695. We value Sunsine at 8.4x 2022F 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.
SHARE PRICE CATALYST
• ASPs for rubber accelerators remain elevated.
• Better-than-expected earnings and dividend.
• Potential takeover or privatisation given the high cash per share of S$0.28/share.
Full report here.