China Sunsine Chemical - CGS-CIMB Research 2021-08-17: Solid Execution

SGinvestors.io

CHINA SUNSINE CHEM HLDGS LTD (SGX:QES)

China Sunsine Chemical - Solid Execution

• China Sunsine’s 1H21 net profit of RMB265m (+94% q-o-q, +222% y-o-y) was above expectations, mainly due to stronger than expected GPM.
• The 2H outlook could be more muted; we expect profit spread to narrow on the back of weaker downstream demand.
• Valuation remains cheap at 3x FY22F P/E (ex-cash). We reiterate our ADD call for China Sunsine with a higher target price of S$0.68.

China Sunsine reported strong 1H21 results

• China Sunsine (SGX:QES) reported 2Q21 net profit of RMB140m (+12% q-o-q, +186% y-o-y), riding on continued tailwinds of robust downstream demand. 1H21 net profit came in at RMB265m (+94% h-o-h, +222% y-o-y), above expectations at 73%/75% of our/Bloomberg consensus FY21F forecast.
• While sales volume was slightly down on a q-o-q basis in 2Q21, we understand that ASPs trended higher due to the lag effect of pricing adjustment – this resulted in higher per tonne profitability for CSSC in 2Q21.

Weaker downstream demand for 2H21F

• Post a strong 1H21, we turn more cautious on China Sunsine’s 2H21F outlook.
• Downstream demand could trend weaker on
  1. lower truck sales post implementation of new China VI- a diesel engine standard in Jul 21 (which led to strong pre-buying in 1H21), and
  2. continued component shortage impacting vehicle production.
• We note that China’s tyre production in Jun 21 has already fallen ~9% from Apr 21’s peak volume, though it remains 6% higher y-o-y. Export sales could also be potentially impacted by the spread of Delta variant globally.
• Nevertheless, we believe that China Sunsine can continue to record healthy utilisation rate of ~92% in 2H21F, as it continues to grab market share from smaller players by capitalising on its strong brand reputation and product quality.

Narrower spread for 2H21; FY21 net profit still set to rise 82% y-o-y

• In view of the weaker downstream demand, we expect a lower profit spread for Sunsine, with a forecast of RMB4.2k gross profit per tonne in 2H21F (1H21: RMB5.9k/tonne; 2H20: RMB3.8k/tonne). Despite this, given the strong performance year-to-date, China Sunsine is set to achieve FY21F net profit growth of 81.6% y-o-y to RMB397m.

Reiterate ADD on China Sunsine with a higher target price

• We keep our ADD call for China Sunsine. Valuation is attractive at 3x FY22F P/E (ex-cash). We raise our FY21-23F EPS forecasts by 0.2-8.7% to reflect higher GPM assumptions. Our target price rises to S$0.68, still based on 1.05x FY21F P/BV (0.5 standard deviation above its 10-year historical mean).
• See
  • China Sunsine's Share Price,
  • China Sunsine's Target Price,
  • China Sunsine's Analyst Reports,
  • China Sunsine's Dividend History,
  • China Sunsine's Announcements,
  • China Sunsine's Latest News.
• Potential re-rating catalyst is stronger-than-expected profit spread.
• Key downside risks include worse than expected pricing competition and resurgence of COVID-19 cases, impacting demand.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-08-17

SGX Stock Analyst Report ADD MAINTAIN ADD 0.68 UP 0.660