China Sunsine

China Sunsine: ($0.31) Blowout 2Q14; benefitting from policy-induced supply shortages Per earlier guidance, China Sunsine reported last week, 2Q14 net profit that tripled y/y to a record Rmb60.2m, as the rubber chemicals producer capitalized on the short supply of accelerator products in the market. Revenue swelled 28% to Rmb544.6m, driven by both higher sales volume and average selling price (ASP). Overall sales volume jumped 19% to a new quarterly high of 29,470 tons. Meanwhile, ASP for all products rose 7.2% to Rmb18,480 per ton, in particular due to the short supply of rubber accelerators in the market. The China government has been taking stricter measures on environmental protection, resulting in some players being forced to suspend production for failing to meet the relevant environmental standards. Consequently, Sunsine has been able to sell more products and raise its selling prices by leveraging on its market leadership position and production scale. This trend has been in place since the beginning of the year, and management is confident that the bigger and well-managed rubber chemical players will continue to gain market share as the industry consolidates. In 3Q14, the group expects to complete its new heating plant at Shanxian, which will place it on track to meet its FY14e production capacity target of 125,000 mt (+8.7% y/y). This is roughly similar to the 1H14 China auto market growth of 8.4% y/y. While the shortage in accelerators’ supply may ease gradually, management believes the Chinese auto market will continue to grow steadily, underpinning Sunsine’s growth outlook. Overall, management expects to achieve new record earnings for FY14. Sunsine’s balance sheet remains fairly healthy, backed by Rmb133.3m cash and net gearing of 21%. Supported by the blowout results and positive outlook, Sunsine’s valuations appear even more compelling at just under 3x annualized 2Q14 P/E and 0.8x P/B. The absence of rated coverage on this stock suggests that it has been overlooked, implying room for substantial price discovery once investor awareness improves. Description: Sunsine claims to be the largest producer of rubber accelerators in the world and has become the largest producer of insoluble sulphur in the PRC. The group serves more than 60% of the global top 75 tire manufacturers including: Bridgestone, Michelin, Goodyear, Pirelli, Sumitomo, Yokohama, Hankook, as well as several PRC Tire giants.