China Sunsine Chemical Holdings - CGS-CIMB Research 2020-04-01: Valuation Play

CHINA SUNSINE CHEM HLDGS LTD (SGX:QES)

China Sunsine Chemical Holdings - Valuation Play

We determine S$0.265 as a trough price for China Sunsine (SGX:QES). Upgrade to ADD from Hold on a valuation basis; accumulate for long-term.
China Sunsine is a global leader in the supply of rubber accelerators, and has been consistently profitable, with positive operating cash flow since IPO in 2007.

Near-term outlook remains challenging, but we believe China Sunsine could emerge stronger from this crisis given its more robust balance sheet vs. peers.

China Sunsine is the largest producer of rubber accelerators in the world and the largest producer of insoluble sulphur in the PRC, according to the company’s 2018 annual report. China Sunsine supplies two-thirds of the global top 75 global tyre makers including Bridgestone, Michelin, Goodyear and Pirelli.
Since its IPO in 2007, China Sunsine has consistently been profitable, with a positive operating cash flow.

We determine S$0.265 as a trough point for China Sunsine, based on our bear-case FY20F BVPS forecast of Rmb2.67/share; pegged to China Sunsine’s historical trough P/BV of 0.52x.
Downside risk is cushioned by its FY20F net cash of S$0.21/share.
We believe that China Sunsine’s near-term challenging outlook has been more than priced in by the market, and recommend long-term investors accumulate at this level. We upgrade China Sunsine from Hold to ADD on a valuation basis.
We cut FY20-22F EPS forecasts (base case) by 21.8-36.5% to factor in lower ASP and margin assumptions; our lower Target Price of S$0.38 is based on 0.72x FY20F P/BV (-0.75 s.d. of historical mean).

We see a challenging near-term outlook for China Sunsine. Specifically, 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 global macro uncertainties impacting auto demand, and
2. Covid-19 temporarily impacting supply chains in China.
Meanwhile on the supply side, we are also observing intensifying competition as several competitors invest in new capacity.
Nevertheless, with a more robust balance sheet vs. peers, we believe China Sunsine is in a good position to tide through the near-term industry weakness, and emerge stronger post the Covid-19 crisis.
See China Sunsine Share Price; China Sunsine Target Price; China Sunsine Analyst Reports; China Sunsine Dividend History; China Sunsine Announcements; China Sunsine Latest News.

Re-rating catalyst is a recovery of China Sunsine’s margin spreads.
Key risks include prolonged macro weakness and worse-than-expected pricing competition.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-01

SGX Stock Analyst Report ADD UPGRADE HOLD 0.38 DOWN 0.420