Friday, November 14, 2014

China Sunsine

China Sunsine: Sharp earnings acceleration in 3Q14; still a value play As per earlier guidance, China Sunsine posted another set of blowout results. 3Q14 net profit tripled y/y to an all-time high of Rmb83m (+38% q/q), mainly boosted by higher sales volume and ASPs. At 9M14, net profit of Rmb166m has already outstripped the FY10 full year earnings record of Rmb115m, indicating a very promising FY14. Having paid 1¢ DPS every year since its listing in 2008, management may be “seriously considering” to raise the dividend payout this year. Doing so would not only indicate Sunsine’s willingness to respect shareholders’ feedback, but also signal a higher standard of corporate governance relative to its S-chip peers, which could lend a big boost to investor confidence in the stock. With the final quarter traditionally seasonally weaker for rubber accelerator prices, we estimate that Sunsine could deliver ~Rmb50m net profit in 4Q14 (a tad below 2Q14’s Rmb60m net profit), implying FY14e EPS of Rmb0.46 (9.75¢). In fact, there could be upside surprise if Sunsine’s new 15,000 tpa of 6PPD antioxidant capacity ramps up faster than expected. Assuming that Sunsine re-rates to a mid-cycle 7.5x P/E multiple, this suggests a fair value of $0.73, representing 46% upside from the current price level. As such, Market Insight maintains the stock in the model Value portfolio. Key risk is the US anti-dumping measures against China tire makers, which took effect in Nov, and could lead to lower export demand for tires and hence rubber chemical products. Nevertheless, the industry has been discussing this issue for years, and key players would have had time to embrace the change. Key takeaways from the 3Q14 results: - Revenue grew 32% y/y to Rmb582m - Gross profit more than doubled to Rmb181m (+114%) - Net profit tripled to Rmb83m - Overall ASP jumped 16% to Rmb20,142/ton, as Sunsine was well positioned to capitalize on the industry supply shortage of rubber accelerator products - Sales volume continued to expand y/y, rising 14% to 28,905 tons - Demand underpinned by 17m auto units sold in China for 9M14 (+7% y/y) - Meanwhile, raw material costs have declined, as prices of base petrochemicals have dropped in tandem with the correction in crude oil price - Construction of its new heating plant at Shanxian has been completed, with production planned to commence by year end, which should reduce the group’s electricity costs significantly going forward. - BVPS expanded 20% year-to-date to Rmb2.055 ($0.43)

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