China Sunsine Chemical Holdings - CGS-CIMB Research 2020-08-13: Investing For The Long Run

CHINA SUNSINE CHEM HLDGS LTD (SGX:QES)

China Sunsine Chemical Holdings - Investing For The Long Run

China Sunsine's 1H20 net profit of Rmb82.4m (-33% h-o-h, -69% y-o-y) was below expectations, due to weaker ASP and narrower spreads.
We expect gradual recovery in 2H20F on the back of stronger sales volume. We forecast 2H20F net profit of Rmb95.5m (+15.9% h-o-h, -22.3% y-o-y).
Valuation is attractive as China Sunsine is backed by net cash of S$0.27/share.

China Sunsine (SGX:QES) reported 1H20 net profit of Rmb82.4m (-33% h-o-h, -69% y-o-y), below expectations at 41% of our previous full-year forecast.
Key disappointment was lower-than-expected ASP, which fell 21% y-o-y in 1H20 due to lower raw material prices and weaker downstream demand as a result of the lower production utilisation rate in the tyre manufacturing industry. The weaker ASP resulted in narrower spread, and China Sunsine’s 1H20 GPM contracted 11.3% pts y-o-y to 23.2%.

We forecast China Sunsine to report net profit of Rmb95.5m in 2H20F (+15.9% h-o-h, -22.3% y-o-y).
Since resuming production in Feb, its sales volume has recovered gradually, and management shared that current utilisation rate stands at c.80%. However, ASP weakness could continue into 2H20F, as raw material prices remain low and downstream demand remains lacklustre.

We think China Sunsine likely gained market share in 1H20 leveraging on its superior product quality, as management noted that smaller industry peers are operating at much lower utilisation rates.
China Sunsine plans to further invest in capacity expansion to consolidate its market leadership position. China Sunsine commissioned 20kt rubber accelerator production capacity in Jun, and plans to boost its production capacity for insoluble sulphur and anti-oxidant by 30kt each by FY21F.

We lower our China Sunsine's FY20-22F EPS forecasts by 10.9-11.6% to reflect lower ASP assumptions, but our Target Price remains unchanged at S$0.38, still based on 0.72x FY20F P/BV (-0.75 s.d. of historical mean since public listing). Maintain ADD, as we believe that China Sunsine’s near-term challenging outlook has been priced in by the market; we recommend that long-term investors accumulate at this level.
See China Sunsine Share Price; China Sunsine Target Price; China Sunsine Analyst Reports; China Sunsine Dividend History; China Sunsine Announcements; China Sunsine Latest News.
Downside risk is cushioned by its net cash of S$0.27/share.
Potential re-rating catalyst is a recovery of Sunsine’s margin spreads.
Key risks include prolonger macro weakness and worse-than-expected pricing competition.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-13

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