China Sunsine Chemical - UOB Kay Hian 2021-02-26: 2H20 Profitability Ramping Up From Increased Capacity

CHINA SUNSINE CHEM HLDGS LTD (SGX:QES)

China Sunsine Chemical - 2H20 Profitability Ramping Up From Increased Capacity

China Sunsine saw a good 2H20, with net profit of RMB136.4m (+11% y-o-y) bringing full-year earnings to RMB218.8m (-44%), 7% higher than our estimate. This was helped mainly by increased capacity and uptake due to elevated demand for vehicle tyres in China.
Past investments to raise production levels are now bearing fruit, as demand from new vehicle sales in China see uplift from the improving economy.
Maintain BUY with target price of S$0.58.

China Sunsine Chemical (SGX:QES)’s 2H20 net profit rose 11% y-o-y to RMB136.4m, as revenue grew to RMB1,291m (+1%) mainly due to record sales volume of 93,556 tonnes (+9.6%), which helped offset the slip in ASPs (-9%) of rubber accelerators. See China Sunsine's announcements.
Bottom line benefitted from the expansion of gross profit margin to 27.8% (2H19: 22.9%, 1H20: 23.2%), as well as tight cost control measures. This brought China Sunsine's 2020 net profit to RMB218.8m (-43.9%), 7% above our estimate.
The final dividend of S$0.01 per share was kept. See China Sunsine's dividend history.

China Sunsine's good set of results was attributed to management’s perseverance with continued investments to expand capacity over the past few years, despite the downward trend in rubber accelerator prices. The move is now paying off, with market share for China Sunsine more entrenched, alongside rising demand for new vehicles in China.
Furthermore, ASP of rubber accelerators, the main earnings driver for China Sunsine, has continued to gain ground, in tandem with aniline, the major feedstock for rubber accelerators, due to higher crude oil prices. Average price of aniline has risen an estimated 17% quarter-to-date as at 25 Feb 21 to RMB8,372/tonne, a 29% sequential increase over the 4Q20 average.

China Sunsine derives the bulk of sales from China (2020: 69%, 2019: 61%), which has been strengthening since Mar 20. The Chinese economy is seeing robust growth due to government stimulus measures.

On 16 Feb 21, IHS Markit cited that nearly 1m vehicles worldwide will experience production delays in 1Q21 due to a chip shortage, vs its previous estimate of 672,000 units. Having said that, IHS Markit is maintaining its forecast for 2021 global light vehicle sales at 84.6m units (+10.6%), as it expects the industry to recover later in the year.
Historically, 30% of the tyre market is driven by new vehicle sales, while 70% comprises replacement tyres. Hence, overall demand is driven by the total vehicle population, rather than vehicle sales.
We believe the tyre industry is expected to return to normalcy in 2021 as traffic volume returns to pre-pandemic levels. Furthermore, as international borders remain shut, a shift towards domestic tourism could spur inter-city/state travel by car, thereby encouraging further demand for tyres.

Maintain BUY on China Sunsine with an unchanged target price of S$0.58. We kept our valuation peg at 3.5x EV/EBITDA, +1SD of its 5-year average. The target price implies a 2021F P/E of 9.6x and ex-cash of 4.1x. This represents a steep discount to larger peers, which are trading at 7.7x forward EV/EBITDA and 15.3x 2021F PE.
See China Sunsine Share Price; China Sunsine Target Price; China Sunsine Analyst Reports; China Sunsine Dividend History; China Sunsine Announcements; China Sunsine Latest News.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-26

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