China Sunsine Chemical (CSSC) is a leading specialty chemical producer selling rubber accelerators, anti-oxidants, and vulcanizing agents. It is the world’s largest rubber accelerators producer, and China’s largest rubber chemicals enterprise, serving more than two thirds of the top 75 tyre makers in the word, including Bridgestone, Michelin, Goodyear, and Pirelli.
Excerpts from RHB report (TOP SINGAPORE SMALL CAP COMPANIES -- 20 JEWELS 2023 EDITION)
Analyst: Alfie Yeo
Worldwide market leader in rubber accelerators, reopening of China’s economy is expected to drive recovery
Indirect longer-term exposure to EV manufacturing and growth in China
Valuation attractive at <5x (<2x ex-cash) FY22 P/E, with >70% of market cap in net cash
|China tyre market expected to grow by a 4-year CAGR of 11%
China has been a leader in global consumer tyre production since 2005.
According to management consulting firm TechSci Research, China’s tyre market was valued at USD44.5bn, and is expected to grow by 11% CAGR to USD82.5bn from 2023 to 2027, driven by the expected increase in vehicle sales.
As a leading supplier of rubber accelerators to major tyre manufacturers in China, with c.117k tonnes of rubber accelerators, c.60k tonnes of insoluble Sulphur, and c.77k tonnes of anti-oxidant manufacturing capacity, CSSC is well positioned to ride on the growth of tyre manufacturing in China.
Margins are normally defendable as manufacturers are usually less sensitive to price increases, as the rubber accelerator component as a proportion of tyre manufacturing costs is very small at <10%.
|Riding on the recovery of China’s post zero-COVID policy.
We expect to see the post-zero-COVID policy impact of improving demand and manufacturing activities in China.
PMI has already jumped to 52.6 and 51.9 in Feb and Mar 2023, indicating an expansion in its manufacturing sector. Indirect exposure to EV manufacturing.
As a producer of chemical inputs to tyre production in China, CSSC is indirectly exposed to the longer-term growth of China’s EV production and manufacturing, on the back of new and replacement car demand.
According to research from market intelligence and advisory firm Mordor Intelligence, China’s EV market was valued at USD124bn in 2022, and is expected to register a 5-year CAGR of 30.1% from 2023 to 2028.
The growth of EV is expected to support new tyre demand over the longer term. The China Passenger Car Association expects 8.4m new EV units to be delivered in 2023, up from last year’s 6.4m units (+31% YoY).
Company Report Card
Revenue for FY22 grew 3% YoY to CNY3.8bn while earnings grew 27% YoY to CNY642m. While 1H22 revenue grew, 2H22 saw a sales decline of 8% YoY.
This was led by a 2% decrease in ASPs, in response to weaker demand and competition as well as lower volumes on TBBS accelerator sales for trucks and heavy vehicle tyres, due to China’s COVID-19 control measures.
Gross margins, however, grew 2.3ppts to 30.4% on a better sales mix of anti-oxidant products.
Net margin rose 3.2ppts to 16.8% despite a slight YoY net margin decline of -0.3ppts to 11.9% in 2H22 due to lower utilisation, higher operating costs (freight, port charges, sales incentives etc), and more downtime during the Lunar New Year.
A final dividend of 1.0 SG cent and a special dividend of 1.5 SG cents were declared, bringing total dividends for FY22 to 3 SG cents, amounting to a 23% payout ratio.
|Balance sheet/cash flow.
“The business is cash generative, with operating cash flow between CNY200-700m over the last five years.”
CSSC is in a net cash position of CNY1.3bn (or approximately 28 SG cents per share) and has no debt.
The business is cash generative, with operating cash flow between CNY200-700m over the last five years.
It remained profitable and continued to generate positive operating cash flow throughout the COVID-19 period.
CSSC has been paying out dividends historically due to its strong balance sheet and cash generative business.
Dividend payout ratio has been 19-23% over the past three years, even throughout the COVID-19 restrictions.
With a strong balance sheet, we expect dividend payout to continue.
CSSC is led by Mr. Xu Chang Qiu, executive chairman, since 1998, via the MBO of CSSC’s subsidiary’s predecessor Shanxian Chemical. He is supported by two key executive directors (including his elder son Mr. Xu Jun), and five other key executives in CFO, First Deputy GM, Chief Engineer, Deputy GM, and GM assistant (occupied by his younger son Mr. Xu Chi). Mr. Xu Cheng Qiu’s interest is well aligned with shareholders, as the executive chairman owns c.61% of CSSC.
The stock is a China post COVID-19 recovery play, in anticipation of manufacturing activities picking up.
Growth outlook is premised on a recovery of China’s industrial production and post-COVID-19 reopening.