China Sunsine Chemical Holdings - CGS-CIMB Research 2019-03-01: Not Looking Exciting With ASP Trending Lower


China Sunsine Chemical Holdings - Not Looking Exciting With ASP Trending Lower

  • China Sunsine's results in line, with 4Q/FY18 core net profit forming 18%/101% of our full year forecast amid ASPs trending lower.
  • We lower our FY19-20F EPS by 11-14% in view of lower rawmat prices and returning competition that could add further downward pressure on ASPs.
  • Downgrade to HOLD from Add in view of limited upside in the absence of earnings catalysts and dividend yield support. Our Target Price is lowered to S$1.29.

4Q18 results in line

  • CHINA SUNSINE CHEM HLDGS LTD. (SGX:CH8) reported 4Q18 net profit of Rmb109m (-18% y-o-y, -24% q-o-q) on the back of Rmb770m revenue. This brings FY18 net profit to Rmb641m (inclusive of one-off Rmb48m tax credit), which met 101% of our full-year forecast.
  • Despite a 15% y-o-y drop in overall ASP, 4Q18 gross margin slid a mere 0.9% pts to 32.4% as Sunsine benefitted from lower rawmat prices compared to a year ago. A final DPS of 5.5 Scts was declared.

More bearish outlook compared to 3Q18

  • Management’s outlook has turned negative this time around, citing pricing pressures on ASPs from lower rawmat prices and more competition as competitors resumed operations after their suspension since late 2017 amid anti-pollution curbs.
  • With lower aniline prices at c.Rmb6,000/tonne in mid-Feb 19, we think overall ASP could decline to c.Rmb18,000/tonne in 1H19 – a level last seen in 1H17 (see Figure 2 in attached PDF report).

Hopes of sustaining DPS in FY19F not promising

  • During the results briefing, we sensed a lack of commitment from management to sustain DPS in FY19F, although the current dividend policy (20% payout) could be revisited for a possible revision this year.
  • We assume management would adopt a conservative approach of maintaining a 20% payout, and expect a lower FY19F dividend yield of 2.8%.

Saving cash for land purchase to support future expansion

  • As at end-Dec 18, China Sunsine had net cash of Rmb1,039m (33% of market cap), which we believe is reserved for working capital needs and land purchases to support future growth.
  • China Sunsine recently obtained approval from authorities for its newly-added 20,000- tonne production lines and is looking to add another 20,000-tonne capacity for rubber accelerators by year-end. Current capacity is now 172k tonnes, with 88% utilisation.

Downgrade to Hold with a lower Target Price of S$1.29

  • We lower our FY19-20F EPS by 11-14% to reflect further declines in ASP. Our Target Price is lowered to S$1.29, pegged to 7.7x FY20F P/E as we roll over to FY20F. At 7.5x CY20F P/E, China Sunsine is trading at a c.15% discount to peers.
  • A rebound in ASPs is a potential re-rating catalyst.
  • Key downside risks include sharper fall in ASPs and production halts amid stingent environmental checks from authorities.

Colin TAN CGS-CIMB Research | 2019-03-01
SGX Stock Analyst Report HOLD DOWNGRADE ADD 1.29 DOWN 1.410