China Sunsine Chemical Holdings - CIMB Research 2018-04-04: Continued High Product Prices Amid Tight Supplies

China Sunsine Chemical Holdings - CIMB Research 2018-04-04: Continued High Product Prices Amid Tight Supplies CHINA SUNSINE CHEM HLDGS LTD. CH8.SI

China Sunsine Chemical Holdings - Continued High Product Prices Amid Tight Supplies

  • China Sunsine’s competitor Yanggu Huatai forecasts over 163% y-o-y growth in 1Q18F net profit, citing continued high product prices amid tight supplies of rubber chemicals.
  • Yanggu Huatai revealed that customers have moved away from pursuing low prices blindly to securing steady supplies of rubber auxiliaries.
  • We expect Sunsine’s record 4Q17 net margins of c.15% likely sustained in 1Q18F. 

Rubber chemical prices remain high amid tight supplies

  • Sunsine’s closest peer, Yanggu Huatai (300121 CH; Not Rated) released its 1Q18F guidance on 4 Apr 2018, forecasting 163%-178% y-o-y growth in net profit as high product prices of rubber chemicals have sustained. Yanggu revealed that supplies of rubber chemicals – accelerators, insoluble sulphur and anti-oxidant – remained tight amid increasing environmental regulations in China.
  • We expect product prices to remain stable in 1H18F, which likely led to continued earnings growth (c.90% y-o-y) and sustained net margins of c.15% in 1Q18F for Sunsine.

Better payment terms from customers ahead

  • In its 2017 annual report, Yanggu revealed that tyre companies have moved away from blindly pursuing low prices to placing more emphasis on securing steady supplies of rubber auxiliaries. We think this could lead to Sunsine also getting better payment terms from customers as smaller customers may need to make advance payments to secure stocks of rubber chemicals, thus improving Sunsine’s cash cycle.
  • Sunsine’s receivable days in 4Q17 showed a marked improvement to 75 days, down from a 3-year average of 102 days. This likely further improved in 1Q18F.

On track to add 20,000 tonnes to production capacity

  • Sunsine is slated to add a 10,000-tonne TBBS rubber accelerator production line and a 10,000-tonne insoluble sulphur line this year, expanding its capacity to capture future growth as utilisation rates are already at 100%.
  • We expect commercial production to start in 2H18F, expanding its production output to a conservative 148K tonnes in FY18F from 140K tonnes in FY17, based on our estimates.

Reiterate ADD and target price of S$1.62

  • Sunsine’s valuation remains relatively cheap at 8x FY19F P/E, representing a 33% discount to peers’ average of 12x. Sunsine’s share price is down c.10% from the high of S$1.49 on 16 Mar 18 and we think this represents a buying opportunity.
  • We reiterate our ADD call and target price of S$1.62, based on 9.8x CY19F P/E.
  • Further increases in ASPs and strong earnings guidance are potential re-rating catalysts. 
  • Downside risks are delays in capacity expansion and a drop in ASPs.

Colin TAN CIMB Research | 2018-04-04
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