Excerpts from UOB KH report

Analysts: Heidi Mo & John Cheong

CHINA SUNSINE Chemical (CSSC SP)
Cautious Outlook As ASPs Trend Downwards

Sales volume is falling as a result of lower consumer confidence, amid lower ASPs for rubber accelerators expected in the coming term. However, capacity expansion efforts are still ongoing by Sunsine.

China Sunsine

Share price: 
40 c

Target: 
45.3 c

We have lowered earnings expectations for 2022-23, due to the macroeconomic uncertainties.

Maintain BUY with a lower target price of S$0.453.

plantmodel info9.14

WHAT’S NEW
Sales volumes fell amid economic slowdown. Due to the rising interest rate environment and unprecedented European energy crisis, the economy is slowing down, leading to lower demand for tyres.


This is worsened by China’s zero-COVID policy, which has impacted most Chinese tyre manufacturers’ production utilisation rates as well as consumer confidence. 

According to McKinsey & Co, optimism about China’s economy has dwindled to below 50% on China’s COVID-19 control measures, and consumers are spending more conservatively. This is in line with the fall in sales volume in 3Q22 to 48,268 tonnes (-6% yoy).

Lower ASPs expected in the near term. While higher ASPs fuelled better-than-expected 9M22 performance, ASPs are declining in 4Q22. China Sunsine Chemical’s (Sunsine) 9M22 net profit rose 52% yoy to Rmb555m, as a result of higher revenue of Rmb2.94b (+11% yoy).

"As of 1H22, total cash and bank balances stood at Rmb1,206.4m with no debt outstanding, which equates to approximately Rmb1.42/share (S$0.28/share)."

This is attributable to the elevated ASP of rubber accelerators, Sunsine’s key product, which increased by 11% yoy to Rmb18,858/tonne as per Sublime China Information (SCI). The better-than-expected ASP was from the higher prices of aniline, the major feedstock for rubber accelerators, stemming from rising oil prices in the same period.

However, the reduced demand for tyres will likely drive down prices of Sunsine’s rubber accelerator products. This will negatively impact the group’s earnings going forward.

Continuous expansion projects undertaken during the year. In Oct 22, Sunsine had commenced the construction of an additional 20,000 tonnes/year (+17.1%) from Phase 1 of a project for the intermediate rubber accelerator material, bringing total annual capacity to 137,000 tonnes/year.

Sunsine has also embarked on the construction of Phase 2 of an insoluble sulphur project, which increases capacity by 50% to 90,000 tonnes/year. These projects are expected to be completed by end-23, and are likely to lift sales volume upon commencement of production.

STOCK IMPACT
Balance sheet remains robust; special dividend proposed. As of 1H22, total cash and bank balances stood at Rmb1,206.4m with no debt outstanding, which equates to approximately Rmb1.42/share (S$0.28/share).

Despite capacity expansion efforts, where the total budget of the two new projects in Oct 22 amounted to Rmb300m, Sunsine’s financial position remains healthy. Additionally, the group declared a special one-tier dividend of 0.5 S cents/share in 1H22.

Compression of margins expected. Sunsine adopts quarterly pricing for major customers, resulting in roughly one quarter of time-lag for pricing in the change in raw material prices.

Therefore, the predicted price increase in raw materials will outpace any increase in ASPs, leading to a dip in 4Q22 gross margin.

Coupled with supply chain disruptions in China, low production utilisation rate for Chinese tyre makers and the ongoing geopolitical tensions, margins are expected to be significantly impacted.

EARNINGS REVISION/RISK
Due to better-than-expected 9M22 performance, we have raised our 2022 earnings estimate by 21% to Rmb639.4m. As for 2023 and 2024 earnings estimates, we have reduced them by 19% and 10% to Rmb464.7m and Rmb534.8m respectively, due to lower expectations for ASPs in the future.

VALUATION/RECOMMENDATION
Maintain BUY with a 35% lower target price of S$0.453 (from S$0.695). We have lowered our valuation peg from 6.4x to 4.9x (-0.5SD below mean) 2023F PE, in line with its historical five-year average, on the back of macroeconomic uncertainties.


SHARE PRICE CATALYST
• Production commencement for new capacities.

Full report here


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