China Sunsine Chemical Holdings - CIMB Research 2018-04-25: Now A High-Tech Enterprise With Lower Tax Rate

China Sunsine Chemical Holdings - CIMB Research 2018-04-25: Now A High-tech Enterprise With Lower Tax Rate CHINA SUNSINE CHEM HLDGS LTD. CH8.SI

China Sunsine Chemical Holdings - Now A High-tech Enterprise With Lower Tax Rate

  • China Sunsine enjoys concessionary tax rate of 15% compared to normal tax rate of 25% after attaining “High-tech Enterprise” status in China.
  • Results above expectations with 1Q18 net profit forming 40%/39% of our/consensus full-year forecasts. Expect upward momentum in share price post 1Q18 results.
  • Maintain ADD and Target Price S$1.62 for now, pending further updates from results briefing tomorrow morning.

Another record earnings in 1Q18; exceeds expectations

  • China Sunsine's 1Q18 net profit of Rmb150m formed 40%/39% of our/consensus full-year forecasts.
  • Revenue grew 49% y-o-y mainly on higher ASP as well as higher overall sales volume during the quarter.
  • Gross margin expanded 10.5% pts to 34.9% in 1Q18 due to increased ASP.

Enjoys concessionary 15% tax rate as a high-tech enterprise

  • The main subsidiary, Shandong Sunsine Chemical Co. Ltd, was granted “High-tech Enterprise” status by the authorities.
  • It now enjoys a preferred tax rate of 15%, as compared to the normal tax rate of 25%. The status is valid for three years
  • Assuming a lower effective tax of 18%, instead of 28%, would have adjusted our FY18-20F earnings forecasts by 13.9%.

Higher R&D expenses

  • List of criteria for qualifying high-tech enterprise include investing 3-6% of revenue on R&D and earning over 60% of revenue from new technology products and services.
  • Higher R&D expenses (c.Rmb20m-25m by our estimates) incurred during the quarter compared to previous year.

Our expectations on ASP normalising in 2H18 remains intact

  • Rubber accelerator prices seemed to have come off by c.3-5% as indicated by price index in Sublime China Information (SCI) website.
  • Management maintained its guidance on prices likely to normalise as some smaller players are resuming production.

Prices of high-grade TBBS rubber accelerator remain stable

  • Our channel checks reveal that prices of high-grade accelerator TBBS have remained fairly stable (c. Rmb40,000/ton). TBBS accounted for 29% of Sunsine’s 87,000-ton capacity in rubber accelerators in FY16.
  • TBBS will account for 36% after the addition of a new 10,000-ton TBBS production line that is expected to kick-start production in 2HFY18, which could offset the c.3% dip in ASP for rest of its rubber accelerators, by our estimates.

Maintain ADD with Target Price of S$1.62, pending updates from results brief

  • Sunsine currently trades at 8.6x FY19 P/E, representing a 28% discount below peers’ average of 12.0x.
  • Pending further updates from the results briefing on 26 April 18 morning, we maintain our ADD call and Target Price of S$1.62.

Colin TAN CIMB Research | 2018-04-25
SGX Stock Analyst Report ADD Maintain ADD 1.620 Same 1.620