China Sunsine Chemical Holdings - CGS-CIMB Research 2019-10-03: Key Takeaways From China Visit


China Sunsine Chemical Holdings - Key Takeaways From China Visit

  • We visited China Sunsine Chemical (SGX:CH8)’s production facilities last week, and were impressed by the high automation and environmental protection standards adopted.
  • Slight delay to planned 20kt rubber accelerator capacity expansion, but longer-term development plan intact with 680 mu land secured.
  • Near-term pressure remains, with 3Q19F results likely to be weak due to lower ASP.
  • Maintain HOLD and Target Price of S$1.10.

Plant visit in Shandong province, China

  • Earlier this year, China Sunsine added a rubber accelerator production line year, the first continuous, fully-automated production line in China’s rubber chemical industry. We believe this is a testament to China Sunsine’s active investments in R&D to enhance automation and increase yield in its production processes.
  • We also take comfort in the company’s focus on environmental protection and safety management.
  • See attached PDF report for detailed company visit notes and photos of facilities.

Capacity expansion plans to go ahead, albeit with a slight delay

  • We understand that the planned 20kt rubber accelerator capacity expansion will be delayed to 1H20F (original schedule: 2H19) due to near-term weakness in downstream demand.
  • Separately, Sunsine has been granted a piece of 680 mu land in Shanxian Chemical Zone for further development (price to be determined through open tender) by the local government. Construction for phase 1 development (30kt insoluble sulphur capacity) could commence in 2020, and we estimate relevant capex requirement (excluding land costs) to be c.Rmb400m.
  • We believe China Sunsine has a solid balance sheet to support its future growth, with Rmb1.17bn net cash as at end-Jun.

Near-term pressure remains; expect a weaker 3Q19F

  • We forecast China Sunsine to report revenue/net profit decline of 11.8%/16.3% y-o-y for 3Q19F. This would mainly be due to a lower blended ASP (-3% q-o-q, -22% y-o-y) during the quarter, as we expect pricing pressure resulting from continued weakness in downstream demand and raw material prices.
  • Demand for rubber accelerators likely remained weak in 3Q19F, with China rubber tyre industry production volume and rubber accelerator industry export volume declining 5.4% and 6.4% y-o-y respectively in 7M19.
  • A slight uptick of the price of aniline (25-30% of China Sunsine’s COGS) in Jul/Aug had not resulted in a corresponding increase in rubber accelerator prices; this could hurt margins, in our view.

Maintain HOLD with Target Price of S$1.10

  • As China Sunsine’s near term ASP outlook remains challenging, our HOLD rating and Target Price of S$1.10 (5.5x CY20F P/E, 0.25 s.d. below its 5-year historical P/E) remain unchanged.
  • Potential re-rating catalysts include earlier-than-expected recovery in downstream ey downside risks include intensifying pricing competition.

ONG Khang Chuen CGS-CIMB Research | 2019-10-03
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.100 SAME 1.100