China Sunsine

China Sunsine: 1Q15 net profit more than doubled to Rmb47.4m, despite the China-based producer of rubber accelerators achieving just a 1% increase in revenue to Rmb432.1m.

The strong performance was driven by a 12.5ppt jump in gross margin to 31.7%, as the group benefitted from lower raw material costs, in particular, aniline, which is an oil by-product and the main ingredient in the production of rubber accelerators.

Top-line was led by a 6% rise in sales volume to 25,377 tons, but offset by a 5% drop in average selling price to Rmb17,009 per ton as cost savings were passed on to customers.

The quarter saw domestic sales volume increasing 16.2%, while international sales declined 9.8%, as the group rejected some low-priced overseas orders.

Bottom-line was weighed by a 63% rise in admin expenses to Rmb58.1m, due mainly to increase in staff salaries & bonus, increase in doubtful debt provisions, as well as higher R&D expenses.

Going forward, China Sunsine cautions that US anti-dumping and countervailing measures against China’s tyre makers, as well as the over-capacity and under-utilisation issues faced by the China tyre industry, may dampen demand for its rubber chemical products.

Additionally, its selling prices may increasingly come under pressure, given that international crude oil prices have remained depressed, which has resulted in the group’s main raw material prices remaining at low levels.

Furthermore, during the consolidation process in China’s tire industry, some tire makers may face higher insolvency risk, thus the group’s receivables may also face a higher risk of impairment.

At the current price, China Sunsine trades at an annualized 5.2x 1QFY15 P/E.

In light of the negative guidance and a lack of near-term catalysts going forward, Market Insight is removing China Sunsine from its growth portfolio, locking in attractive gains of 12.5% year-to-date and total of 48% since its inclusion into our model portfolio on Aug ’14.