China Sunsine Chemical Holdings - CGS-CIMB Research 2018-11-07: Improving Outlook On Stabilising ASPs


China Sunsine Chemical Holdings - Improving Outlook On Stabilising ASPs

  • China Sunsine Chemical's 3Q18 results were slightly above expectations, with 9MFY18 net profit accounting for 86% of our full-year forecast.
  • Re-rating catalysts include a rebound in ASPs and approval received for the planned capacity upgrade.
  • Upgrade from Hold to ADD amid stabilising ASPs.

3Q18 results slightly above expectations despite declining ASPs

  • China Sunsine Chemical's 3Q18 core net profit was Rmb143m (+85%yoy, -25%qoq) on the back of RMb776m in revenue.
  • 9M18 net profit formed 86% of our full-year forecast, slightly above expectations as we anticipate declining ASPs and eroding gross margins into 4Q18F.
  • The quarter also saw a FX gains of Rmb19.3m as Sunsine benefitted from the stronger US$ against the Rmb.

Signs of ASPs stabilising in October offer some respite

  • Sunsine saw lower q-o-q gross margins (32.7% in 3Q18 vs. 36.7% in 2Q18) largely due to lower overall ASPs for its rubber chemical products (-11% q-o-q).
  • On a positive note, ASP for rubber chemicals have shown signs of stabilisation in Oct and management expressed optimism that gross margin could sustain above 30% for 4Q18F.

ASPs could receive further boost from auto demand holding up

  • While the decline in ASPs may have resulted from weaker demand from China tyre makers amid declining auto sales, the Chinese government is seeking to rev up the automobile market by halving taxes on car purchases. This could potentially boost demand from tyre makers that could indirectly support ASPs of rubber chemicals.

Closer to getting approval for 13% expansion in capacity

  • Management cited during the results briefing today that it is close to getting approval for the planned capacity expansion after obtaining necessary certifications pertaining to fire safety controls for the new 20,000-ton production lines.
  • The new lines will expand Sunsine’s annual capacity to 172,000 tons and would provide an additional boost to sales volume for FY19F as Sunsine is already running at c.98% capacity utilisation.

Upgrade from Hold to ADD with unchanged Target Price of S$1.41

  • We think the negatives have been priced in following the c.30% decline in China Sunsine's share price over the last 3 months. We thus upgrade our call to ADD as we see declines in ASPs could possibly slow down ahead.
  • Our Target Price remains unchanged at S$1.41, pegged to 7.7x FY19F P/E.
  • China Sunsine is currently trading at 5.7x FY19F P/E, c.30% discount to its rubber chemical peers. Re-rating catalysts could come from ASPs rebounding.
  • Key risks include a sharper fall in ASPs and production halts amid stringent environmental inspections from authorities.

Gross margins rely on ASPs of rubber chemicals

  • Sunsine’s phenomenal earnings growth in 9M18 was largely due to a surge in ASPs of rubber chemicals resulting from supply constraints amid the pollution clampdown on the chemical sector in China. Recent declines in ASPs could have resulted from softer demand from tyre makers as auto sales in China have weakened over the last few months.
  • With possible intervention from the Chinese government to rev up the auto sector via tax cuts on car purchases and possible other measures, we think this could help shore up demand for car tyres and ultimately support ASPs of rubber chemicals ahead. This could lead to Sunsine sustaining its gross margin above the c.30% range and further earnings growth would be delivered from the expansion of its capacity ahead.

Colin TAN CGS-CIMB Research | 2018-11-07
SGX Stock Analyst Report ADD UPGRADE HOLD 1.410 SAME 1.410