China Sunsine

China Sunsine: ($0.42) Positive vibes from China plant visit; expect more follow-up coverage Earlier this week, China Sunsine organised a site visit to three of its production facilities in Shandong, China. The tour began at Sunsine’s headquarters in Shanxian in inland Shandong, then to a smaller facility in nearby Dingtao, before concluding at the Weifang facility. The latter is located in northeast Shandong, and mainly produces for export (~40% of group sales) via Qingdao port to the east. Attendees comprised a mix of private investors, five analysts and two journalists. Reactions were mostly positive, as management showcased new add-ons to cut costs and boost production, particularly in the antioxidant and insoluble sulphur product categories, which should provide another leg up for the group’s longer term growth. Key takeaways: - At Shanxian, Phase 1 of the new Guangshun heating plant will kick off operations next month. Constructed at a cost of ~Rmb115m, the plant will provide steam and electricity mainly for Sunsine’s use, and help the group achieve an estimated Rmb40m of cost savings annually. - In addition, Sunsine has achieved ~50% utilization for Phase 1 of its 6PPD antioxidant line (15k mt/yr output). Seeing strong product demand, management will bring forward its production target by a year, and is on track to commence Phase 2 production (15k mt) by early 2015 once the current test trials are completed. - At Weifang, the plant is prepping new lines that would potentially add capacity for DM accelerator (8k mt) and insoluble sulphur (10k mt). Meanwhile, we observed that Sunsine’s existing lines were mostly running at full capacity, and even the warehouses were low on stocks of finished products, reflective of the tight supply for rubber chemical products. Recall, a number of Sunsine’s peers were suspended or forced to shut down, in the wake of a government anti-pollution clamp down, particuarly in the Beijing-Tianjin-Hebei (BTH) hub. Management believes the supply-demand conditions will not normalize soon, as the BTH region supports an increasingly dense urban population and will likely seek to further reduce the presence of heavy industries over the longer term. Fortunately for Sunsine, its facilities are located in designated industrial zones, and the group is now reaping the rewards of its past investments in environmental protection equipment – representing roughly a third of capex spend. Such industry developments have caught the attention of the China analysts, resulting in a chorus of bullish calls being made on Sunsine’s closest peer, Shenzhen-listed Shandong Yanggu Huatai (YGHT), which is also viewed as a beneficiary. Yet, a language barrier has resulted in Sunsine being grossly overlooked by the street and local investors. Sunsine shares trade at just 3.9x annualized 2Q14 P/E - an undeserved 90% discount to YGHT’s 47x forward P/E. We do not rule out room for substantial price discovery once investor awareness improves, with analysts and the media likely to pick up coverage on Sunsine soon. Assuming an upward re-rating to the average 7x P/E for the Singapore-listed chemicals manufacturers, Sunsine would trade at $0.75 (~80% upside from current levels).