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

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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

• We reiterate our HOLD call as China Sunsine’s ASP outlook remains challenging. We cut our FY20-21F EPS forecasts by 23-34% due to lower GPM assumptions, and now expect China Sunsine to record EPS decline of 14% y-o-y in FY20F.
• Our Target Price is lowered to S$0.42, still pegged at 5.5x FY21F P/E, or 0.25 s.d. below China Sunsine’s 5-year historical average.
• See China Sunsine Share Price; China Sunsine Target Price; China Sunsine Analyst Reports; China Sunsine Dividend History; China Sunsine Announcements; China Sunsine Latest News.
• Key support is net cash of S$0.26/share as of end-Dec 2019.
• Upside risks include earlier-than-expected recovery in downstream demand.
• Key downside risks include intensifying pricing competition.

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