China Sunsine Chemical Holdings - CGS-CIMB Research 2020-03-04: Volumes First, Margin Second

CHINA SUNSINE CHEM HLDGS LTD (SGX:QES) | SGinvestors.io CHINA SUNSINE CHEM HLDGS LTD (SGX:QES)

China Sunsine Chemical Holdings - Volumes First, Margin Second

  • China Sunsine's 4Q19 net profit of Rmb43m (-46% q-o-q, -60% y-o-y) was below expectations. Dividends declared were also lower than expected at 1 Scts.
  • Near term outlook remains challenging, with continued ASP weakness due to weak downstream demand and intensifying industry competition.
  • We forecast China Sunsine to record EPS decline of 14% y-o-y in FY20F. Reiterate HOLD call with a lower Target Price of S$0.42.



Weak 4Q19 results; dividends disappoint

  • China Sunsine (SGX:QES) reported 4Q19 net profit of Rmb43m (-46% q-o-q, -60% y-o-y). FY19 results came in below expectations, at only 89%/85% of our/Bloomberg consensus forecasts. Key drag came from lower GPM, which contracted 15.3% pts y-o-y to 17.1% in 4Q19.
  • The narrower spread came as ASP remained weak (-5% q-o-q, -24% y-o-y) despite a spike in raw material prices during the quarter.
  • China Sunsine also declared a lower-than-expected dividend of 1 Sct, translating into a dividend payout of 12% in FY19 (FY18: 21%).


Near term outlook remains challenging

  • We see continued ASP weakness for China Sunsine in 1H20, as the company plans to prioritise sales volume over margins.
  • Downstream demand is expected to remain weak as Chinese tyre manufacturers run at low utilisation rates, given
    1. continued macro uncertainties impacting auto demand, and
    2. Covid-19 temporarily impacting supply chain in China.
  • Meanwhile on the supply side, we are also observing intensifying competition as several competitors invest in new capacity.


FY20F a year of investment

  • Despite the tough operating environment, China Sunsine continued to operate near full capacity in 4Q19, likely due to gains in its customers’ wallet share.
  • Leveraging on its superior product quality and balance sheet strength, China Sunsine plans to further invest in capacity expansion this year to grab market share. Current plans include a 20kt rubber accelerator capacity expansion by 2H20F, and 30kt each of insoluble sulphur and anti-oxidant by FY21F.


Reiterate Hold with a lower Target Price of S$0.42






ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-04
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.42 DOWN 0.54



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