China Sunsine Chemical - UOB Kay Hian 2021-08-23: 1H21 Higher-Than-Expected ASPs Drive Operating Leverage

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CHINA SUNSINE CHEM HLDGS LTD (SGX:QES)

China Sunsine Chemical - 1H21 Higher-Than-Expected ASPs Drive Operating Leverage

• China Sunsine recorded a strong 1H21 with net profit of RMB265.2m (+221.8% y-o-y), albeit on a low base effect. Production volume continues to hit record levels from capacity expansion efforts, amid elevated ASP for rubber accelerators owing to rising crude oil prices.
• Past investments to raise production levels are now bearing fruit, as demand for vehicle sales in China is expected to be sustained by the improving economy. Maintain BUY rating on China Sunsine with a target price of S$0.695.

China Sunsine's strong 1H21 results a show of strong demand.

• China Sunsine Chemical (SGX:QES)’s 1H21 net profit spiked 221.8% y-o-y to RMB265.2m, as revenue jumped to RMB1,757.5m (+68.6% y-o-y) due to both increased sales volume of 93,162 tonnes (+22.1%) and higher ASPs of rubber accelerators by 37% y-o-y to RMB18,642/tonne. The better-than-expected ASP was due to:
  1. the increase in price of aniline-the major feedstock for rubber accelerators;
  2. higher production utilisation rates of Chinese tyre manufacturing companies; and
  3. a shift in market dynamics to favour large rubber chemical players such as China Sunsine.

Bottom-line lifted by improved operating leverage.

• China Sunsine's 1H21 gross margin expanded 8.2ppt to 31.4% y-o-y (2H20: 27.8%, 1H20: 23.2%). This resulted in improved operating leverage, with a 221.8% spike in net profit to RMB265.2m, and a 7.2ppt y-o-y expansion in net margin to 15.1%.

Gaining ground from higher capacity and elevated ASPs.

• The good set of 1H21 results was attributed to management’s perseverance with the continued derivatives, including rubber accelerators.

STOCK IMPACT

• Vehicle numbers growth in China outweighs sector. China Sunsine derives the bulk of sales from China (1H21: 60.7%, 2020: 69%, 2019: 61%) subsidies.

EARNINGS REVISION/RISK

• We have lowered our dip y-o-y in brent crude price in 2022.
• Accordingly, earnings estimates for 2021 have risen 48.4% to RMB444.9m, while earnings estimates for 2022 have been reduced 14.6% to RMB407.6m. This implies an anticipated 8.4% slip y-o-y in net profit.

VALUATION/RECOMMENDATION

• Maintain BUY on China Sunsine with a target price of S$0.695. We have re-based our valuation year to 2022F, and value Sunsine at 8.4x P/E, or +1 standard deviation above its historical 3-year average.
• 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.
• At the current price, China Sunsine is attractively valued at 6.1x 2022F P/E relative to its closest peer Shandong Yanggu Huatai (300121 CH), which trades at 8.5x forward P/E.

SHARE PRICE CATALYST

• ASPs for rubber accelerators remain elevated.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-08-23

SGX Stock Analyst Report BUY MAINTAIN BUY 0.695 SAME 0.695