China Sunsine Chemical Holdings - CGS-CIMB Research 2019-11-08: Too Early To Call The Bottom


China Sunsine Chemical Holdings - Too Early To Call The Bottom

  • China Sunsine's 3Q19/9M19 core net profit of Rmb80m/320m (-44%/-34% y-o-y) below expectations; 9M19 at 67%/64% of our/Bloomberg consensus FY forecasts.
  • Margins could remain pressured, as industry ASP stays low due to weak downstream demand.
  • Maintain HOLD with a lower Target Price of S$1.08.

3Q19 results below expectations

  • CHINA SUNSINE CHEMICAL (SGX:CH8)’s 3Q19 topline declined 15.9% y-o-y due to weak ASP (-26% y-o-y; -8% q-o-q), partially offset by higher sales volume attributable to new production lines added earlier this year. See China Sunsine Announcements.
  • GPM narrowed 4.2% pts y-o-y to 28.5% due to the lower ASP. 3Q19/9M19 core net profit of Rmb80m/320m (-44.3%/-34.0% y-o-y) was below expectations; 9M19 core net profit at 67%/64% of our/Bloomberg consensus full-year forecasts.

Spreads are still narrowing; expect a weak 4Q19F

  • We forecast China Sunsine to report revenue/net profit decline of 10.2%/18.5% y-o-y for 4Q19F. This would mainly be due to a lower blended ASP (+3% q-o-q, -17% y-o-y) during the quarter, as we expect pricing pressure resulting from continued weakness in downstream demand.
  • The demand for rubber accelerators remained weak in 3Q19, with China rubber tyre industry production volume and rubber accelerator industry export volume both declining by 4.7% y-o-y in 9M19. An uptrend in the price of aniline (25-30% of Sunsine’s COGS) since Jul had not resulted in a corresponding increase in rubber accelerator prices; this could hurt margins, in our view.

Strong sales volume, but earnings recovery has to be ASP driven

  • Despite the lower output of tyre manufacturers, China Sunsine was able to sustain sales volume growth of 14% y-o-y in 3Q, likely due to gains in its customers’ wallet share.
  • However, China Sunsine is already operating near full capacity, and 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. We believe further earnings improvement will have to stem from ASP recovery.

Maintain Hold with lower Target Price of S$1.08

  • As China Sunsine’s ASP outlook remains challenging, our Hold rating remains unchanged. We cut our FY19-21F EPS forecasts by 5.2-14.6% due to lower GPM assumptions; our Target Price is lowered to S$1.08 as we roll forward our valuation to end-FY21F (still pegged at 5.5x P/E, 0.25 s.d. below China Sunsine’s 5-year historical average). See China Sunsine Share Price; China Sunsine Target Price; China Sunsine Dividend History.
  • China Sunsine’s net cash of S$0.50/share (end-Sep) could support share price, in our view.
  • Potential re-rating catalysts include earlier-than-expected recovery in downstream demand and higher dividend payout ratio FY19F.
  • Key downside risks include intensifying pricing competition.

ONG Khang Chuen CGS-CIMB Research | https://www.cgs-cimb.com 2019-11-08
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.08 DOWN 1.100