China Sunsine Chemical Holdings - CIMB Research 2018-04-26: Another Sizzling Set Of Quarterly Results

China Sunsine Chemical Holdings - CIMB Research 2018-04-26: Another Sizzling Set Of Quarterly Results CHINA SUNSINE CHEM HLDGS LTD. CH8.SI

China Sunsine Chemical Holdings - Another Sizzling Set Of Quarterly Results

  • China Sunsine Chemical's 1Q18 net profit rose 161% y-o-y to Rmb150m, above expectations at 40%/39% of our/consensus’ full-year forecasts.
  • Benefitted from lower concessionary tax of 15% after attaining “High-tech Enterprise” status that is valid for three years.
  • Still pending for trial-run of new 20,000-ton capacity expansion; we now expect commercial production to kick in by end-3Q18F.
  • We raise our FY18-20F earnings forecasts by 7-45%, anticipating a more gradual normalisation in ASPs in FY18F and lower effective tax rate ahead.
  • Maintain ADD with a higher Target Price of S$1.87, pegged to 9.8x CY19F P/E.

Another record set of earnings in 1Q18

  • China Sunsine Chemical's net profit surged 161% y-o-y to Rmb150m in 1Q18, accounting for 40%/39% of our/Bloomberg consensus’ estimates. This came on the back of a surge in revenue amid rising ASP and better-than-expected gross margin, which improved by 10.5% pts to 34.9% in 1Q18. 
  • The quarter also witnessed a significant increase of over 3,000 tons in rubber chemicals output to c.36,800 tons compared to 1Q17, mainly due to higher sales volume of anti-oxidants.

Now a high-tech enterprise, enjoying lower 15% tax rate

  • Effective tax rate in 1Q18 was lowered to 18% as compared to 32% in 1Q17 after its main subsidiary, Shandong Sunsine Chemical Co, was granted “High-tech Enterprise” status from the authorities. 
  • List of qualifying criteria includes having R&D expenditure (c.Rmb22m incurred in 1Q18) accounting for over 3% of revenue over the last three years. The status is valid for three years and renewable every three years. We now factor in recurring R&D costs in our forecast period.

Trial-run approval for 20,000-ton capacity expansion still pending

  • Sunsine is still awaiting approval from relevant authorities for the trial-run of the two new production lines – a 10,000-ton TBBS production line and 10,000-ton insoluble sulphur production line without much progress being made since the last quarter. 
  • Management is hopeful of starting the trial-run by end-2Q18F and we now think the commercial production could commence by end-3Q18F. The expansion will add 20,000 tons to its 87,000-ton production capacity.

Anticipate a more gradual normalisation in ASPs in FY18F

  • Our channel checks reveal that prices of most rubber accelerators, apart from its high- grade TBBS accelerator, have started to dip in Mar 18, albeit at a slow steady pace. We expect a more gradual normalisation in rubber accelerator ASPs for Sunsine for the rest of FY18F, forecasting a blended ASP of c.Rmb21,600/ton (compared to c.Rmb19,400/ton in FY17) for rubber chemicals products. Prices of TBBS have remained firm (c.Rmb40,000/ton) as only a handful are capable of producing it, in our view.

Maintain ADD with a higher Target Price of S$1.87

  • We lift our FY18-20F EPS by 7-45% to reflect a more gradual normalisation in ASPs and lower tax rate ahead. We could possibly expect another positive earnings alert in 2Q18F. Our target price is revised to S$1.87 accordingly, pegged to 9.8x CY19F at c.18% discount to peers’ average of 12.1x. The stock is trading at 7.8x CY19F P/E. 
  • We maintain our ADD call. 
  • Catalysts include stronger-than-expected earnings growth. 
  • Key risks include weaker gross margins and delays in capacity expansion.

Colin TAN CIMB Research | 2018-04-26
SGX Stock Analyst Report ADD Maintain ADD 1.87 Up 1.620